<PAGE> 1
UNITED STATES
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 March 31, 2000
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 May 5, 2000: 199,068,428
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<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION NUMBER
<S> <C> <C>
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999.................................................. 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 ............................ 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999............................. 5
Notes to Condensed Consolidated Financial Statements................... 6
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 9
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk............. 14
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings...................................................... 15
ITEM 5: Other Information...................................................... 16
ITEM 6: Exhibits and Reports on Form 8-K....................................... 16
Signatures ................................................................ 17
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
ALTERA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 270,161 $ 164,257
Short-term investments 660,540 681,409
---------- ----------
Total cash, cash equivalents,
and short-term investments 930,701 845,666
Accounts receivable, net 119,334 90,101
Inventories 81,597 64,027
Deferred income taxes 101,360 84,747
Other current assets 17,379 22,344
---------- ----------
Total current assets 1,250,371 1,106,885
Property and equipment, net 163,375 155,217
Investments and other assets 175,903 177,497
---------- ----------
$1,589,649 $1,439,599
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,970 $ 32,272
Accrued liabilities 29,144 26,758
Accrued compensation 22,849 25,301
Deferred income on sales to distributors 259,696 227,760
Income taxes payable 17,583 9,435
---------- ----------
Total current liabilities 363,242 321,526
---------- ----------
Stockholders' equity:
Common stock 200 199
Capital in excess of par value 361,015 326,439
Retained earnings 866,589 791,435
Accumulated other comprehensive loss (1,397) -
---------- ----------
Total stockholders' equity 1,226,407 1,118,073
---------- ----------
$1,589,649 $1,439,599
========== ==========
</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)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Sales $272,781 $186,399
Costs & expenses:
Cost of sales 94,590 69,154
Research and development expenses 34,442 17,023
Selling, general and administrative expenses 43,378 32,320
-------- --------
Total costs and expenses 172,410 118,497
-------- --------
Income from operations 100,371 67,902
Interest and other income, net 10,548 4,618
-------- --------
Income before income taxes and equity investment 110,919 72,520
Provision for income taxes 34,386 23,569
-------- --------
Income before equity investment 76,533 48,951
Equity in loss of WaferTech, LLC (1,379) (1,976)
-------- --------
Net income $ 75,154 $ 46,975
======== ========
INCOME PER SHARE:
Basic $ 0.38 $ 0.24
======== ========
Diluted $ 0.36 $ 0.23
======== ========
WEIGHTED SHARES OUTSTANDING:
Basic 199,269 195,866
======== ========
Diluted 209,776 205,374
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ALTERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 75,154 $ 46,975
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in loss of WaferTech, LLC 1,379 1,976
Depreciation and amortization 7,721 7,448
Deferred income taxes (15,720) (1,000)
Changes in assets and liabilities:
Accounts receivable, net (29,233) 3,971
Inventories (17,931) (5,117)
Other assets 4,965 6,587
Accounts payable and accrued liabilities 1,632 (2,494)
Deferred income on sales to distributors 31,936 (15,540)
Income taxes payable 35,639 18,716
-------- --------
Cash provided by operating activities 95,542 61,522
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (15,487) (5,663)
Net change in short-term investments 18,579 36,062
Investment in WaferTech, LLC - (37,500)
-------- --------
Cash provided by (used for) investing activities 3,092 (7,101)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 7,270 6,276
Repurchase of common stock - (12,846)
-------- --------
Cash provided by (used for) financing activities 7,270 (6,570)
-------- --------
Net increase in cash and cash equivalents 105,904 47,851
Cash and cash equivalents at beginning of period 164,257 131,029
-------- --------
Cash and cash equivalents at end of period $270,161 $178,880
======== ========
Cash paid during the period for:
Income taxes $ 13,928 $ 976
</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 March 31, 2000 and for
the three month periods ended March 31, 2000 and 1999 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, 1999 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, 1999 included
in the Company's Annual Report and Form 10-K, as filed on March 24, 2000, with
the Securities and Exchange Commission. The results of operations for the three
months ended March 31, 2000 are not necessarily indicative of the results to be
expected for any future periods.
The Company has interim periods that end on the Friday nearest March 31st. For
presentation purposes, the interim financial statements and accompanying notes
refer to the Company's interim periods ending as of March 31st.
Note 2 - Balance Sheet Details (in thousands):
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<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Inventories:
Raw materials and work-in-process $ 56,553 $ 40,612
Finished goods 25,044 23,415
-------- --------
$ 81,597 $ 64,027
======== ========
Property and equipment:
Land $ 21,040 $ 20,753
Building 83,080 80,893
Equipment and software 140,175 130,016
Office furniture and fixtures 12,389 11,755
Leasehold improvements 1,699 1,623
-------- --------
258,383 245,040
Accumulated depreciation and amortization (95,008) (89,823)
-------- --------
$163,375 $155,217
======== ========
</TABLE>
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Note 3 - Comprehensive Income:
Comprehensive income, including net income and unrealized loss on
available-for-sale investments, was $73.8 million for the first quarter of 2000.
Comprehensive income approximated net income of $47.0 million for the same
quarter last year.
Accumulated other comprehensive loss of $1.4 million presented in the
accompanying condensed consolidated balance sheets consists of the accumulated
unrealized loss on available-for-sale investments of $2.3 million, net of income
taxes of $0.9 million.
Note 4 - Income Per Share:
Basic income 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 income per
share gives effect to all dilutive potential common shares outstanding during a
period. In computing diluted income 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 income per share is presented below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
2000 1999
---- ----
<S> <C> <C>
Basic:
Net income $ 75,154 $ 46,975
======== ========
Weighted average common shares outstanding 199,269 195,866
======== ========
Basic income per share $ 0.38 $ 0.24
======== ========
Diluted:
Net income $ 75,154 $ 46,975
======== ========
Weighted average common shares outstanding 199,269 195,866
Dilutive stock options 10,507 9,508
-------- --------
Weighted average common shares outstanding 209,776 205,374
======== ========
Diluted income per share $ 0.36 $ 0.23
======== ========
</TABLE>
Note 5 - Common Stock Repurchase:
In April 2000, the Company repurchased 1,415,000 shares of common stock for an
aggregate cost of $111.5 million. The repurchased shares were retired upon
acquisition. The Company did not repurchase any shares during the first quarter
of 2000. Since the inception of the repurchase program, the Company has
repurchased a total of 7,800,000 shares.
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Note 6 - New Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes standards for
accounting and reporting on derivative instruments for periods beginning after
June 15, 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 7 - Subsequent events:
During the second quarter of 2000, the Company acquired two privately-held
companies, DesignPRO Inc. ("DesignPRO") and Right Track CAD Inc. ("Right
Track"). DesignPRO, located in Nepean, Ontario, Canada, is a provider of
intellectual property (IP) cores and custom design solutions, specializing in
optical internetworking technologies. Right Track, located in Toronto, Ontario,
Canada, develops architectural and computer aided design (CAD) tools for
advanced programmable logic devices (PLDs). The acquisitions will be accounted
for as purchases. The aggregate purchase consideration includes amounts that
will be allocated to in-process research and development, which will be recorded
as a one-time charge in the second quarter, deferred compensation, which will be
amortized to research and development expense over two years for DesignPRO and
four years for Right Track, and other intangible assets, which will be amortized
to research and development expense over four years.
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ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Discussion and Analysis of Financial Condition 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 in this Report. 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, continued demand for the Company's
existing products, and general market conditions. Additional risk factors are
disclosed in the Company's 1999 Annual Report and Form 10-K on file with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
Sales
The Company classifies its products into the following categories. New
products 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, APEX 20K/20KE and ACEX 1K families.
Mainstream products include the MAX 7000S, MAX 9000 and FLEX 10K families.
Mature products consist of the Classic, MAX 7000 and FLEX 8000 families. Other
products include tools, FLASHlogic, configuration devices and MPLDs.
Sales during the first quarter of 2000 were $272.8 million, 46.3% higher
than the $186.4 million reported for the same period last year. Sales in the
first quarter of 2000 increased from the same period last year primarily due to
increases in unit sales of New and Mainstream products. The increase in sales
was partially offset by decreases in average unit selling prices as well as
lower unit sales of Mature products. Sales of New products during the first
quarter of 2000 were $114.8 million, 187.0% higher than the $40.0 million
reported for the same period last year. Sales of Mainstream products increased
to $90.1 million in the first quarter of 2000, a 28.7% increase from $69.9
million in the first quarter of 1999. During the same period, sales of Mature
products decreased 14.8% to $51.3 million from $60.2 million, while sales of
other products increased 2.3% to $16.6 million from $16.3 million. Management
expects that the decline in sales of the Mature products, which presently
comprise approximately 18.8% of the Company's revenue base, 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 of Mature product families. While management is optimistic that
New and Mainstream product sales will increase, there can be no assurances that
New and Mainstream product sales growth will offset the decline in sales of
Mature products.
Sales in North America, Europe and Asia Pacific increased, while sales in
Japan declined as a percentage of total sales during the first quarter of 2000
compared to the same period last year. Sales in North America increased 46.8% to
$154.5 million from $105.2 million, Europe increased 73.2% to $61.9 million from
$35.8 million and Asia Pacific increased 57.7% to $15.4 million from $9.7
million. Japan sales increased 14.8% to $41.0 million from $35.7 million, but
declined as a percentage of total sales.
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 family (a Mature product family) and its
equity interest in Cypress Semiconductor (Texas), Inc. Excluding the MAX 5000
product family, total sales during the first quarter of 2000 grew 48.9% over the
same period last year.
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Gross Margin
Gross Margin, as a percentage of sales, was 65.3% and 62.9% for the three
months ended March 31, 2000 and 1999, respectively. The increase in gross margin
was primarily attributable to cost reductions as a result of manufacturing
process improvements.
Yields on New products continued to improve for the first quarter ended
March 31, 2000. This includes improvements in the APEX 20K/20KE, FLEX 10KE and
FLEX 10KA product families. The Company continues to spend a significant amount
of financial 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 fourth quarter of 1999, process
control issues associated with WaferTech's volume ramp up resulted in low die
yields on FLEX 10KA and FLEX 10KE products leading to reduced product
availabilty in these families. As a result, the Company was unable to support
distributor stocking at desired levels and in some cases could not meet end
customer demand. 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 March 31,
2000 and 1999 were $34.4 million and $17.0 million, or 12.6% and 9.1% of sales,
respectively. Research and development expenditures include expenditures for
labor, prototype and developmental wafer supply costs, development of process
technology, development of software to support new products and design
environments, and development of new packages.
Research and development expenses in the first quarter of 2000 increased
$17.4 million from the same period last year. The increase in absolute dollars
was primarily a result of increased headcount, spending on masks, wafers,
package development and outside development services relating to the development
of new products including FLEX 10KE, MAX 7000A/7000B, APEX 20K/20KE and ACEX
1K/2K families, as well as development of the Company's 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 primarily due to the Company's efforts to develop new products.
The Company expects to continue to make significant investments in the
development of FLEX 10KA, MAX 7000A/7000B, APEX 20K/20KE, ACEX 1K/2K, Quartus
software and future products. During the first quarter of 1999, the Company
shipped a new family of devices, APEX 20K, and its new fourth generation
software design tool, Quartus. During the fourth quarter of 1999, the Company
began shipping its APEX 20KE family of devices. The APEX 20KE family offers
advanced features over the APEX 20K family including lower power consumption,
faster performance, expanded I/O support and smaller die sizes. APEX 20K/20KE
devices utilize a new architecture for programmable logic and address higher
density designs. APEX 20K/20KE devices are exclusively supported by the
Company's new software design tool, Quartus. Management expects both APEX
20K/20KE devices 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 20K/20KE devices 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.
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Selling, General and Administrative
Selling, general and administrative expenses for the three months ended
March 31, 2000 and 1999 were $43.4 million and $32.3 million, or 15.9% and 17.3%
of sales, respectively. Selling, general and administrative expenses include
salary expenses related to field sales, marketing and administrative personnel,
commissions and incentive expenses, advertising and promotional expenditures,
and legal expenses. Also included in selling, general and administrative
expenses are costs related to the direct sales force and field application
engineers who work in field sales offices worldwide and stimulate demand by
assisting customers in the use and proper selection of the Company's products.
Selling, general and administrative expenses in the first quarter of 2000
increased $11.1 million from the same period last year. The increase in absolute
dollars was mainly driven by increased personnel expenses for marketing and
administration, higher advertising and higher commission and incentive expenses
associated with higher sales.
Income from Operations
Income from operations for the three months ended March 31, 2000 and 1999
was $100.4 million and $67.9 million, or 36.8% and 36.4% of sales, respectively.
The year-to-year increase in operating income, as a percentage of sales, was
primarily due to improvements in gross margin partially offset by increased
research and development expenses as a percentage of sales.
Interest and Other Income
Interest and other income for the three months ended March 31, 2000 and
1999 was $10.5 million and $4.6 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 increase in
interest income related to higher cash balances available for investment and
higher interest rates.
Provision for Income Taxes
The Company's effective tax rate was 31.0% and 32.5% for the three months
ended March 31, 2000 and 1999, respectively. The reduction in effective tax rate
primarily resulted from the reinstitution of the research and development tax
credit and a change in the geographic mix of revenue.
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 obligations and rights to procure up to 27% of
the joint-venture'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%. This increased investment in WaferTech provides the Company with
additional obligations and rights to procure up to 35% of the joint-venture's
future output. 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 obligations and
rights for the procurement of the joint-venture'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 loss of WaferTech was $1.4 million and
$2.0 million for the three months ended March 31, 2000 and 1999, respectively.
WaferTech has experienced lower than forecast production yields resulting in
lower than forecast output. Although the Company expects future WaferTech
production volumes and yields to increase, the ramp up of WaferTech's production
has been slower than forecasted and has not met the targeted level to achieve
profitability.
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
11
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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 assemble, test and ship product 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 Hong Kong, Japan, Korea, Malaysia,
the Philippines and Taiwan. 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. Market demand
for silicon wafers increased significantly during the course of 1999 and through
the first quarter of 2000, 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 industry's 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 March 31, 2000, the Company had in its other current assets a deposit of
$8.4 million for future wafer allocations from TSMC which will be utilized
during the second quarter of 2000. However, 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 1999 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. 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. Production began at the WaferTech joint
venture in October 1998 and volume production was achieved in 1999. WaferTech
has yet to make a profit and has experienced lower than forecast production
yields resulting in lower than forecast output. Although the Company expects
future WaferTech production volumes and yields to increase, the ramp up of
WaferTech's production has been slower than forecasted and has not met the
targeted level to achieve 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. 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.
12
<PAGE> 13
Liquidity and Capital Resources
During the first quarter of 2000, cash, cash equivalents and short-term
investments increased by $85.0 million to $930.7 million from $845.7 million at
December 31, 1999. During the first three months of 2000, the Company's
operating activities generated net cash of $95.5 million. This cash flow was
primarily attributable to net income of $75.2 million, adjusted by non-cash
items including equity in the loss of WaferTech of $1.4 million, depreciation
and amortization of $7.7 million, an increase in deferred income on sales to
distributors and income taxes payable of $31.9 million and $35.6 million,
respectively. These items were partially offset by an increase in deferred
income taxes, accounts receivable and inventories of $15.7 million, $29.2
million and $17.9 million, respectively.
During the first three months of 2000, cash provided by investing
activities was $3.1 million. The Company invested $15.5 million primarily for
manufacturing and data processing equipment and software, and building
improvements in its headquarter's facility. The Company also sold $18.6 million
(net) of short-term investments. Cash provided by financing activities of $7.3
million for the first three months of 2000 represented proceeds from the
issuance of 1.2 million shares of common stock to employees through various
stock option and award plans.
Financial Condition
Since its inception, the Company has used a combination of equity and debt
financing and cash generated from operations to support its operating
activities.
As of March 31, 2000, the Company had $930.7 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,
capital expenditures and common stock repurchases for at least the next year.
Impact of Currency and Inflation
The Company purchases the majority of its materials and services in U.S.
dollars, and its foreign sales are transacted in U.S. dollars. The Company has,
in the past, entered into forward contracts to hedge against currency
fluctuations and to meet contractual commitments denominated in foreign
currencies. As of March 31, 2000, 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 the Company's financial
results have not been significant.
13
<PAGE> 14
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 2000 and 1999, the Company's investment portfolio consisted
of fixed income securities of $838.5 million and $528.7 million, respectively.
These securities, like all fixed income instruments, are subject to interest
rate risk and will decline in value if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10% from levels as
of March 31, 2000 and 1999, the decline in the fair value of the portfolio would
not be material. Additionally, the Company has the ability to hold its fixed
income investments until maturity and, therefore, the Company would not expect
to recognize such an adverse impact in income or cash flows.
The Company has international subsidiary operations and is, therefore,
subject to foreign currency rate exposure. To date, the exposure to the Company
related to exchange rate volatility has not been significant. If the foreign
currency rates fluctuate by 10% from rates at March 31, 2000 and 1999, the
effect on the Company's financial position and results of operations would not
be material. However, there can be no assurance that there will not be a
material impact in the future.
14
<PAGE> 15
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings
The Company is a party to lawsuits and may in the future become a party to
lawsuits involving various types of claims, including, but not limited to,
unfair competition and intellectual property matters. Legal proceedings tend to
be unpredictable and costly and may be affected by events outside the control of
the Company. There is no assurance that litigation will not have an adverse
effect on the Company's financial position or results of operations. The
Company's major litigation matters as of March 31, 2000 are described below.
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 - December
1999, the Court ruled on the motions. In the Xilinx suit, the Court ruled that
one of Xilinx's claims is invalid and another claim was withdrawn. The Court
also ruled that issues of infringement and validity on the remaining claims are
subject to trial which has been re-scheduled to begin October 5, 2000. In the
Company's suit, the Court granted that one of the Company's patents is invalid,
granted that one patent is not infringed, and granted another patent is not
literally infringed but denied non-infringement under doctrine of equivalence.
The Court also ordered that the parties engage in mediation, which began
February 24, 2000; although no substantial progress to resolution has been made,
mediation is continuing. 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 products, including but not limited to 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, the
Company believes that it has meritorious defenses to the claims asserted in the
Xilinx suit and intends to defend itself vigorously in this matter.
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, the Company 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 agreement with AMD which includes assuming both the
claims against the Company and the claims against AMD and has replaced AMD in
the suit with Vantis Corporation, a wholly owned subsidiary of Lattice. 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
Lattice will not succeed in obtaining significant monetary damages or an
injunction against the manufacture and sale of the Classic, MAX 7000, FLEX 8000,
MAX 9000 and FLEX 10K 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, the Company intends to defend itself vigorously in
the matter.
15
<PAGE> 16
In November 1999, the Company filed suit against Clear Logic Inc. ("Clear
Logic") alleging that Clear Logic is unlawfully appropriating the Company's
registered mask work technology in violation of the federal mask work statute
and that Clear Logic has unlawfully interfered with the Company's relationships
and contracts with its customers. The lawsuit seeks compensatory and punitive
damages and an injunction to stop Clear Logic from unlawfully using the
Company's mask work technology and from interfering with the Company's
customers. Clear Logic has answered the complaint by denying that it is
infringing the Company's mask work technology and denying that it has unlawfully
interfered with the Company's relationships and contracts with its customers.
Clear Logic has also filed a counterclaim against the Company for unfair
competition under California law alleging that the Company has made false
statements to its customers regarding Clear Logic. Due to the nature of the
litigation with Clear Logic and because the lawsuit is still in the pre-trial
stage, the Company's management cannot estimate the total expenses, the possible
loss, if any, or the range of loss that may ultimately be incurred in connection
with the counterclaim allegations. Although no assurances can be given as to the
results of this case, the Company intends to defend itself vigorously in the
matter.
ITEM 5: Other Information
During the second quarter of 2000, the Company acquired two privately-held
companies, DesignPRO Inc. ("DesignPRO") and Right Track CAD Inc. ("Right
Track"). DesignPRO, located in Nepean, Ontario, Canada, is a provider of
intellectual property (IP) cores and custom design solutions, specializing in
optical internetworking technologies. Right Track, located in Toronto, Ontario,
Canada, develops architectural and computer aided design (CAD) tools for
advanced programmable logic devices (PLDs). The acquisitions will be accounted
for as purchases. The aggregate purchase consideration includes amounts that
will be allocated to in-process research and development, which will be recorded
as a one-time charge in the second quarter, deferred compensation, which will be
amortized to research and development expense over two years for DesignPRO and
four years for Right Track, and other intangible assets, which will be amortized
to research and development expense over four years.
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule for the three months ended March 31,
2000.
(b) Reports on Form 8-K
None.
16
<PAGE> 17
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: May 12, 2000
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27.1 Financial Data Schedule for the three months ended March 31,
2000.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 270,161
<SECURITIES> 660,540
<RECEIVABLES> 119,334
<ALLOWANCES> 5,999
<INVENTORY> 81,597
<CURRENT-ASSETS> 1,250,371
<PP&E> 163,375
<DEPRECIATION> 95,008
<TOTAL-ASSETS> 1,589,649
<CURRENT-LIABILITIES> 363,242
<BONDS> 0
0
0
<COMMON> 200
<OTHER-SE> 1,226,207
<TOTAL-LIABILITY-AND-EQUITY> 1,589,649
<SALES> 272,781
<TOTAL-REVENUES> 272,781
<CGS> 94,590
<TOTAL-COSTS> 94,590
<OTHER-EXPENSES> 77,820
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 110,919
<INCOME-TAX> 34,386
<INCOME-CONTINUING> 75,154
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,154
<EPS-BASIC> 0.38<F1>
<EPS-DILUTED> 0.36
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
