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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 September 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)
DELAWARE 77-0016691
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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 November 5, 1999: 199,475,141
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<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION NUMBER
------
<S> <C>
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 ..................................................... 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998 ................... 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 ......................................................................... 18
ITEM 5: Other Information .......................................................................... 19
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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 175,038 $ 131,029
Short-term investments 611,131 448,077
---------- ----------
Total cash, cash equivalents,
and short-term investments 786,169 579,106
Accounts receivable, net 91,164 56,138
Inventories 58,835 69,869
Deferred income taxes 72,145 69,644
Other current assets 28,264 24,776
---------- ----------
Total current assets 1,036,577 799,533
Property and equipment, net 152,082 152,320
Investments and other assets 156,541 141,478
---------- ----------
$1,345,200 $1,093,331
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,689 $ 14,479
Accrued liabilities 15,281 16,615
Accrued compensation 19,548 19,356
Deferred income on sales to distributors 204,867 161,160
---------- ----------
Total current liabilities 259,385 211,610
---------- ----------
Stockholders' equity:
Common stock 199 98
Capital in excess of par value 364,550 314,182
Retained earnings 721,066 567,441
---------- ----------
Total stockholders' equity 1,085,815 881,721
---------- ----------
$1,345,200 $1,093,331
========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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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,
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 215,121 $ 164,218 $ 599,303 $ 481,910
Costs & expenses:
Cost of sales 76,707 62,511 218,129 184,292
Research and development 23,213 15,223 60,098 43,863
Selling, general and administrative 36,784 27,142 102,845 83,852
--------- --------- --------- ---------
Total costs and expenses 136,704 104,876 381,072 312,007
--------- --------- --------- ---------
Income from operations 78,417 59,342 218,231 169,903
Interest and other income, net 7,987 5,065 18,610 6,882
--------- --------- --------- ---------
Income before income taxes and equity investment 86,404 64,407 236,841 176,785
Provision for income taxes 28,081 20,931 76,973 57,451
--------- --------- --------- ---------
Income before equity investment 58,323 43,476 159,868 119,334
Equity in loss of WaferTech, LLC (2,751) (3,333) (6,243) (7,440)
--------- --------- --------- ---------
Net income $ 55,572 $ 40,143 $ 153,625 $ 111,894
========= ========= ========= =========
EARNINGS PER SHARE:
Basic $ 0.28 $ 0.21 $ 0.78 $ 0.61
========= ========= ========= =========
Diluted $ 0.27 $ 0.20 $ 0.74 $ 0.57
========= ========= ========= =========
WEIGHTED AVERAGE SHARES:
Basic 198,880 194,470 197,656 184,346
========= ========= ========= =========
Diluted 208,175 201,804 206,995 202,976
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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\
ALTERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 153,625 $ 111,894
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in loss of WaferTech 6,243 7,440
Depreciation and amortization 21,382 22,487
Deferred income taxes (2,501) (4,503)
Changes in assets and liabilities:
Accounts receivable, net (35,026) (9,416)
Inventories 10,878 28,844
Other assets 13,312 4,447
Accounts payable and accrued liabilities 3,908 (8,097)
Deferred income on sales to distributors 43,707 22,039
Income taxes payable 54,843 11,155
--------- ---------
Cash provided by operating activities 270,371 186,290
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (19,047) (18,363)
Net change in short-term investments (163,054) (51,636)
Investment in WaferTech, LLC (37,500) --
Net change in long-term investments (1,928) 552
--------- ---------
Cash used for investing activities (221,529) (69,447)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 22,296 9,153
Repurchase of common stock (27,129) (60,348)
--------- ---------
Cash used for financing activities (4,833) (51,195)
--------- ---------
Net increase in cash and cash equivalents 44,009 65,648
Cash and cash equivalents at beginning of period 131,029 22,761
--------- ---------
Cash and cash equivalents at end of period $ 175,038 $ 88,409
========= =========
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 $ 27,294 $ 48,421
Cash paid during the period for interest -- 6,568
See accompanying notes to condensed consolidated financial statements.
</TABLE>
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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 September 30, 1999 and
for the nine month periods ended September 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 nine
months ended September 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 September 30,
1999. For presentation purposes, the interim financial statements and
accompanying notes refer to the Company's interim period end as September 30th.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
Note 2 - Balance Sheet Details (in thousands):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Inventories:
Purchased parts and raw materials $ 75 $ 65
Work-in-process 38,840 46,207
Finished goods 19,920 23,597
--------- ---------
$ 58,835 $ 69,869
========= =========
Property and equipment:
Land $ 20,496 $ 20,496
Building 80,653 80,338
Equipment and software 126,500 115,332
Office furniture and fixtures 11,154 10,287
Leasehold improvements 1,370 1,183
--------- ---------
240,173 227,636
Accumulated depreciation and amortization (88,091) (75,316)
--------- ---------
$ 152,082 $ 152,320
========= =========
</TABLE>
6
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Note 3 - Common Stock Split:
On April 21, 1999, the Board of Directors of the Company approved 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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic:
Net income $ 55,572 $ 40,143 $153,625 $111,894
======== ======== ======== ========
Weighted average common shares outstanding 198,880 194,470 197,656 184,346
======== ======== ======== ========
Basic earnings per share $ 0.28 $ 0.21 $ 0.78 $ 0.61
======== ======== ======== ========
Diluted:
Net income $ 55,572 $ 40,143 $153,625 $111,894
Convertible notes interest, net of income taxes and
capitalized interest -- -- -- 4,039
-------- -------- -------- --------
$ 55,572 $ 40,143 $153,625 $115,933
======== ======== ======== ========
Weighted average common shares outstanding 198,880 194,470 197,656 184,346
Dilutive stock options 9,295 7,334 9,339 7,764
Assumed conversion of notes -- -- -- 10,866
-------- -------- -------- --------
Weighted average common shares outstanding 208,175 201,804 206,995 202,976
======== ======== ======== ========
Diluted earnings per share $ 0.27 $ 0.20 $ 0.74 $ 0.57
======== ======== ======== ========
</TABLE>
7
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Note 5 - Common Stock Repurchase:
In the first and third quarters of 1999, the Company repurchased 520,000 and
395,000 shares of common stock at an aggregate cost of $12.8 million and $14.3
million, respectively. The repurchased shares were retired upon acquisition. 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. 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.
Note 8 - Subsequent Events:
In October 1999, the Company sold to Cypress Semiconductor Corporation
("Cypress") the exclusive right to manufacture, market and sell its MAX 5000
Programmable Logic Device product line and its equity interest in Cypress
Semiconductor (Texas), Inc. The Company anticipates a one-time gain of
approximately $9 million on a pre-tax basis to be recorded in the fourth quarter
of 1999. The sale of the MAX 5000 family will not materially affect the
Company's future revenues.
In October 1999, the Company made an additional $23.0 million cash investment in
WaferTech. As a result of this additional cash investment, there were no changes
to the Company's ownership interest or rights and obligations for the
procurement of the factory's output.
8
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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 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 third quarter of 1999 were $215.1 million, or 31.0%
higher than the $164.2 million reported for the same period last year. Sales in
the third 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 decreases in average unit selling prices as well as lower unit sales
of Mature products. Sales of New products increased to $71.6 million or 205.0%
in the third quarter of 1999 from $23.5 million in the third quarter of 1998,
while sales of Mainstream products increased to $74.5 million or 26.8% from
$58.8 million. During the same periods, sales of Mature products decreased to
$55.2 million or 18.7% from $67.9 million. Sales during the nine months ended
September 30, 1999 were $599.3 million or 24.4% higher than the $481.9 million
reported for the same period last year. This increase is attributable primarily
to increases in unit sales of New and Mainstream products partially offset by
decreases in average unit selling prices as well as lower unit sales of Mature
products. Sales of New and Mainstream products increased $114.9 million and
$63.2 million or 235.1% and 40.7%, respectively, in the first nine months of
1999 compared to the first nine months of 1998. During the same periods, sales
of Mature products decreased $59.6 million or 25.6%. Management expects that the
decline in sales of the Mature products, which presently comprise approximately
25.6% of the Company's revenue base during the third quarter of 1999 and 29.0%
during the nine months ended September 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 in
sales
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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 3000A, MAX 7000A/7000B and
APEX families. Sales of New products represented 33.3% of total sales in the
third quarter of 1999 as compared to 14.3% in the third quarter of 1998.
Mainstream products now include the MAX 7000S, MAX 9000 and FLEX 10K families.
Sales of Mainstream products represented 34.7% of total sales in the third
quarter of 1999 and 35.8% in the third quarter of 1998. Mature products now
consist of the Classic, MAX 5000, MAX 7000 and FLEX 8000 families. Sales of
Mature products represented 25.6% of total sales in the third quarter of 1999
and 41.3% in the third quarter of 1998. Other products include Tools,
FLASHlogic, Configuration Devices, MPLDs, and FSPs. Other products represented
6.4% and 8.6% of total sales in the third 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 nine months of
1999 compared to the first nine months of 1998. Sales in North America increased
26.7% to $337.2 million from $266.0 million, Japan increased 32.1% to $114.9
million from $86.9 million and Asia Pacific increased 81.1% to $35.0 million
from $19.4 million. European sales increased 2.4% to $112.2 million from $109.6
million but declined as a percentage of total sales.
Gross Margin
Gross Margin for the three and nine months ended September 30, 1999
were $138.4 million or 64.3% of sales and $381.2 million or 63.6% of sales,
respectively. Gross margin for the comparable periods in 1998 were $101.7
million or 61.9% of sales and $297.6 million or 61.8% of sales, respectively.
The percentage increase was primarily attributable to cost reductions as a
result of manufacturing process improvements.
Yields on New products continued to improve for the nine months ended
September 30, 1999. This includes improvements in our APEX, FLEX 10KE and FLEX
10KA product families. The Company also achieved cost reductions on its FLEX
10KA and FLEX 10K families 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, difficulties in the manufacturing
process limited the availability of packaging material (piece parts) used in
certain of the Company's new and proprietary FineLine BGA ("Ball Grid Array")
packages causing limited production. This in turn limited shipments of the
Company's new FLEX 10KE product family. Management expects to continue to
introduce new and established products using new process technologies
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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
September 30, 1999 and 1998 were $23.2 million and $15.2 million, or 10.8% and
9.3% of sales, respectively. For the nine months ended September 30, 1999 and
1998, research and development expenses were $60.1 million and $43.9 million, or
10.0% and 9.1% 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 and will likely exceed ten percent of sales for at least the
next several quarters.
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. Management expects both APEX and
Quartus software to be successful in the market, however, the commercial success
of these products is dependent on the acceptance of the use of APEX in
high-density designs and the acceptance of the Quartus design software.
Management can give no assurances on the market acceptance of the Company's
products. 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.
11
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Selling, General and Administrative
Selling, general and administrative expenses for the three months ended
September 30, 1999 and 1998 were $36.8 million and $27.1 million, or 17.1% and
16.5% of sales, respectively. For the nine months ended September 30, 1999 and
1998, selling, general and administrative expenses were $102.8 million and $83.9
million, or 17.2% and 17.4% 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, and higher
commission and incentive expenses associated with higher sales.
Income from Operations
Income from operations for the third quarters of 1999 and 1998 were
$78.4 million and $59.3 million, or 36.5% and 36.1% of sales, respectively. For
the nine months ended September 30, 1999 and 1998, income from operations were
$218.2 million and $169.9 million, or 36.4% and 35.3% 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 September 30, 1999
and 1998 were $8.0 million and $5.1 million, respectively. For the nine months
ended September 30, 1999 and 1998, interest and other income were $18.6 million
and $6.9 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 $1.7 million charge attributed to the write-off
of an equity investment during 1999.
Provision for Income Taxes
The Company's effective tax rate was 32.5% for the three and nine
months ended September 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. In October 1999, the Company made an additional $23.0 million
cash investment in WaferTech. As a result of this additional cash investment,
there were no changes to the Company's ownership interest or rights and
obligations for the procurement of the factory's output. 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 $2.8 million
and $6.2 million for the three and nine months ended September 30, 1999,
respectively, as compared to $3.3 million and $7.4 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
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<PAGE> 14
adverse supply conditions arising from market conditions, political strife,
labor disruptions and other factors could have adverse consequences on the
Company's future results. Market demand for silicon wafers has increased
significantly during the course of 1999 while supply of such wafers has
increased at a much slower rate, resulting in a firmer pricing environment, less
responsiveness to requests for expedited delivery by wafer suppliers, and in
some cases, unsatisfied demand. In general, the lead time to increase market
wafer supply by building additional wafer fabrication facilities is
approximately two years and in periods where demand for wafers increases rapidly
for a prolonged period, market shortages tend to occur. Management believes that
for at least the next several quarters, demand will exceed the foundry
industries ability to supply silicon wafers and that certain companies that rely
on the foundry industry will not be successful in securing all of the wafers
that they desire, thereby constraining their revenues. The Company believes that
under such circumstances it is important to have close business relationships
with wafer suppliers in order to receive the desired quantity of product. The
Company believes that it enjoys close working relationships with its principal
wafer supplier, TSMC, and as of September 30, 1999, the Company had in its other
current assets a deposit of $16.8 million for future wafer allocations from TSMC
which will be utilized during 2000, but there can be no assurance the Company
will be successful in securing its total desired output from TSMC or that the
Company's future growth will not be impaired by the scarcity of silicon wafers.
Natural or man-made disasters, normal process fluctuations and
variances in manufacturing yields could have a severe negative impact on the
Company's operating capabilities. For example, in September of this year a major
earthquake struck Taiwan resulting in widespread physical damage and loss of
life. The earthquake halted wafer fabrication production at the Company's
primary vendor TSMC, for several days, and then only limited production began.
It was nearly two weeks before full production resumed and additionally some
portion of the inventory in the production process was scrapped as a result of
damage incurred during the earthquake. As a result, the Company will maintain
lower inventory levels in the near term than it would otherwise desire. While
the Company believes this reduction in inventories will have no material impact
on its ability to service demand, the Company may not be able to respond in a
timely fashion to certain market opportunities that might arise, and may lose
the opportunity to participate in those specific opportunities as a result. 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
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<PAGE> 15
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 nine months of 1999, cash, cash equivalents and
short-term investments increased by $207.1 million to $786.2 million from $579.1
million at December 31, 1998. During the first nine months of 1999, the
Company's operating activities generated net cash of $270.4 million. This cash
flow was primarily attributable to net income of $153.6 million, adjusted by
depreciation and amortization of $21.4 million, an increase in deferred income
on sales to distributors and income taxes payable of $43.7 million and $54.8
million, respectively, partially offset by an increase in accounts receivable of
$35.0 million. Cash used in investing activities of $221.5 million for the first
nine months of 1999 is primarily the result of net purchases of short-term
investments of $163.1 million, an additional investment in WaferTech, LLC of
$37.5 million and purchases of property, plant and equipment of $19.0 million.
Cash used in financing activities of $4.8 million for the first nine months of
1999 primarily from the repurchase of common stock of $27.1 million, offset by
proceeds from exercises of stock options of $22.3 million.
As of September 30, 1999, the Company had $786.2 million of cash, cash
equivalents and short-term investments available to finance future growth. The
Company believes the available sources of funds and 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. Effective
August 1, 1999, all purchase contracts for processed silicon wafers with Sharp
Corporation of Japan 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 third 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.
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<PAGE> 16
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. 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. During the quarter, the Company completed formal Y2K compliance
testing on its newest software product, Quartus. As a result of this testing,
the Company determined that Quartus version 1999.06 is not compliant due to a
two-digit, rather than four-digit, year displayed in a report window. The
Company has made available to its customers a special beta release of Quartus
1999.10, version 1999.10 EBI, which is certified to be compliant per DISC
PD-2000-1. 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 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
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<PAGE> 17
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 last
quarter of 1999.
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<PAGE> 18
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 counter-claimed 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. In October
1998, both parties filed motions for summary judgment with respect to certain
issues in the first two cases regarding infringement or non-infringement and
validity or invalidity of the patents at issue in the respective cases. In
October 1999, the Court ruled on the motions in the Xilinx suit, finding that
one of Xilinx's claims is invalid and denying that other claims are invalid. The
Court also denied the Company's motions that claims are not infringed and
Xilinx's motions that the Company's products do infringe the claims. As a
result, issues of infringement and validity remain subject to trial in the
Xilinx case. The Court also ruled on certain Xilinx motions in the Company's
suit, granting that one of the Company's patents is invalid, denying that the
Company's other asserted patents are invalid or unenforceable and granting that
one patent is not infringed. The Court has not yet ruled on Xilinx's other
motion of noninfringement. 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 other 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 the Company is not licensed to AMD's patents, and remanded
the case back to the District Court for further proceedings. In 1999, Lattice
Corporation entered into an
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<PAGE> 19
agreement with AMD which includes assuming both the claims against the Company
and the claims against AMD. Due to the nature of the litigation, 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.
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.
In October 1999, the Company sold to Cypress Semiconductor Corporation
("Cypress") the exclusive right to manufacture, market and sell its MAX 5000
Programmable Logic Device product line and its equity interest in Cypress
Semiconductor (Texas), Inc. The Company anticipates a one-time gain of
approximately $9 million on a pre-tax basis to be recorded in the fourth quarter
of 1999. The sale of the MAX 5000 family will not materially affect the
Company's future revenues.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule for the nine months ended
September 30, 1999.
(b) Reports on Form 8-K
None.
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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 15, 1999
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 175,038
<SECURITIES> 611,131
<RECEIVABLES> 91,164
<ALLOWANCES> 5,242
<INVENTORY> 58,835
<CURRENT-ASSETS> 1,036,577
<PP&E> 152,082
<DEPRECIATION> 88,091
<TOTAL-ASSETS> 1,345,200
<CURRENT-LIABILITIES> 259,385
<BONDS> 0
0
0
<COMMON> 199
<OTHER-SE> 1,085,616
<TOTAL-LIABILITY-AND-EQUITY> 1,345,200
<SALES> 599,303
<TOTAL-REVENUES> 599,303
<CGS> 218,129
<TOTAL-COSTS> 218,129
<OTHER-EXPENSES> 162,943
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 236,841
<INCOME-TAX> 76,973
<INCOME-CONTINUING> 153,625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 153,625
<EPS-BASIC> 0.78<F1>
<EPS-DILUTED> 0.74
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
