-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IdronMBzytEXWGWc8iOBLUJmGZdC8Wy11dyk7E6VOPB0KzL+FdRtY/uHvugUt6GI EpjLBCIcx2j+sFsrxlLovQ== 0000891618-99-003818.txt : 19990817 0000891618-99-003818.hdr.sgml : 19990817 ACCESSION NUMBER: 0000891618-99-003818 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALTERA CORP CENTRAL INDEX KEY: 0000768251 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770016691 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16617 FILM NUMBER: 99691248 BUSINESS ADDRESS: STREET 1: 101 INNOVATION DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4085448000 MAIL ADDRESS: STREET 1: 101 INNOVATION DR CITY: SAN JOSE STATE: CA ZIP: 95134 10-Q 1 FORM 10-Q FOR THE PERIOD ENDING 6/30/1999 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-16617 ALTERA CORPORATION (Exact name of registrant as specified in its charter) 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 August 6, 1999: 198,876,871 2
NUMBER PART I FINANCIAL INFORMATION ITEM 1: Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 ............................................ 3 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1999 and 1998................. 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 .......................... 5 Notes to Condensed Consolidated Financial Statements ................ 6 ITEM 2: Management's Discussion and Analysis of Financial Conditions and Results of Operations ........................................ 9 PART II OTHER INFORMATION ITEM 1: Legal Proceedings.................................................... 17 ITEM 4: Submission of Matters to a Vote of Security Holders.................. 18 ITEM 5: Other Information ................................................... 18 ITEM 6: Exhibits and Reports on Form 8-K..................................... 19 Signatures.................................................................... 20
2 3 PART I FINANCIAL INFORMATION ITEM 1: Financial Statements ALTERA CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands)
June 30, December 31, 1999 1998 ---------- ------------ ASSETS Current assets: Cash and cash equivalents $ 182,796 $ 131,029 Short-term investments 492,974 448,077 ---------- ---------- Total cash, cash equivalents, and short-term investments 675,770 579,106 Accounts receivable, net 77,908 56,138 Inventories 65,861 69,869 Deferred income taxes 71,394 69,644 Other current assets 22,552 24,776 ---------- ---------- Total current assets 913,485 799,533 Property and equipment, net 150,621 152,320 Investments and other assets 161,869 141,478 ---------- ---------- $1,225,975 $1,093,331 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,549 $ 14,479 Accrued liabilities 14,470 16,615 Accrued compensation 12,767 19,356 Deferred income on sales to distributors 166,308 161,160 ---------- ---------- Total current liabilities 201,094 211,610 ---------- ---------- Stockholders' equity: Common stock 199 98 Capital in excess of par value 359,188 314,182 Retained earnings 665,494 567,441 ---------- ---------- Total stockholders' equity 1,024,881 881,721 ---------- ---------- $1,225,975 $1,093,331 ========== ==========
See accompanying notes to condensed consolidated financial statements. 3 4 ALTERA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Sales $ 197,783 $ 160,476 $ 384,182 $ 317,692 Costs & expenses: Cost of sales 72,268 61,691 141,422 121,781 Research and development 19,862 14,233 36,885 28,640 Selling, general and administrative 33,741 28,572 66,061 56,710 --------- --------- --------- --------- Total costs and expenses 125,871 104,496 244,368 207,131 --------- --------- --------- --------- Income from operations 71,912 55,980 139,814 110,561 Interest and other income, net 6,005 1,665 10,623 1,817 --------- --------- --------- --------- Income before income taxes and equity investment 77,917 57,645 150,437 112,378 Provision for income taxes 25,323 18,733 48,892 36,520 --------- --------- --------- --------- Income before equity investment 52,594 38,912 101,545 75,858 Equity in loss of WaferTech, LLC (1,516) (2,296) (3,492) (4,107) --------- --------- --------- --------- Net income $ 51,078 $ 36,616 $ 98,053 $ 71,751 ========= ========= ========= ========= EARNINGS PER SHARE: Basic $ 0.26 $ 0.20 $ 0.50 $ 0.40 ========= ========= ========= ========= Diluted $ 0.25 $ 0.19 $ 0.48 $ 0.37 ========= ========= ========= ========= WEIGHTED AVERAGE SHARES: Basic 197,533 180,622 196,699 179,202 ========= ========= ========= ========= Diluted 206,748 203,224 206,060 203,570 ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements. 4 5 ALTERA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)
Six Months Ended June 30, ------------------------- 1999 1998 --------- --------- Cash Flows from Operating Activities: Net income $ 98,053 $ 71,751 Adjustments to reconcile net income to net cash provided by operating activities: Equity in loss of WaferTech 3,492 4,107 Depreciation and amortization 13,948 15,213 Deferred income taxes (1,750) (3,000) Changes in assets and liabilities: Accounts receivable, net (21,770) (5,540) Inventories 3,367 21,647 Other assets 17,685 101 Accounts payable and accrued liabilities (15,824) (5,154) Deferred income on sales to distributors 5,148 15,733 Income taxes payable 38,763 6,533 --------- --------- Cash provided by operating activities 141,112 121,391 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (10,953) (11,999) Net change in short-term investments (44,897) (25,071) Investment in WaferTech, LLC (37,500) -- Net change in long-term investments (588) 1,126 --------- --------- Cash used for investing activities (93,938) (35,944) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 17,439 7,435 Repurchase of common stock (12,846) (51,766) --------- --------- Cash provided by (used for) financing activities 4,593 (44,331) --------- --------- Net increase in cash and cash equivalents 51,767 41,116 Cash and cash equivalents at beginning of period 131,029 22,761 --------- --------- Cash and cash equivalents at end of period $ 182,796 $ 63,877 ========= ========= Supplemental disclosure of non-cash items: Conversion of subordinated debt into common stock $ -- $ 226,787 Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $ 14,540 $ 30,361 Cash paid during the period for interest -- 6,568
See accompanying notes to condensed consolidated financial statements. 5 6 ALTERA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Organization and Basis of Presentation: The condensed consolidated financial information as of June 30, 1999 and for the six month periods ended June 30, 1999 and 1998 included herein is unaudited and has been prepared by the Company in accordance with generally accepted accounting principles and reflects all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to state fairly the Company's financial position, results of operations, and cash flows for the periods presented. The December 31, 1998 balance sheet was derived from audited financial statements on that date. All significant intercompany transactions and balances have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reporting period. Actual results will differ from those estimates, and such differences may be material to the financial statements. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1998 included in the Company's Annual Report on Form 10-K, as filed on March 30, 1999, with the Securities and Exchange Commission. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of the results to be expected for any future periods. The Company has an interim period that ends on the Friday nearest June 30, 1999. For presentation purposes, the interim financial statements and accompanying notes refer to the Company's interim period end as June 30th. Certain prior year amounts have been reclassified to conform to the current year's presentation. Note 2 - Balance Sheet Details (in thousands):
June 30, December 31, 1999 1998 --------- ------------ Inventories: Purchased parts and raw materials $ 57 $ 65 Work-in-process 45,990 46,207 Finished goods 19,814 23,597 --------- --------- $ 65,861 $ 69,869 ========= ========= Property and equipment: Land $ 20,496 $ 20,496 Building 80,583 80,338 Equipment and software 121,181 115,332 Office furniture and fixtures 10,674 10,287 Leasehold improvements 1,293 1,183 --------- --------- 234,227 227,636 Accumulated depreciation and amortization (83,606) (75,316) --------- --------- $ 150,621 $ 152,320 ========= =========
6 7 Note 3 - Common Stock Split: On April 21, 1999, the Company declared a two-for-one stock split in the form of a 100 percent stock dividend to holders of record of the Company's common stock on May 4, 1999. The dividend shares were distributed to stockholders on May 19, 1999. All share and per share data has been retroactively restated to reflect the two-for-one stock split for all periods presented. Note 4 - Earnings Per Share: Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period and excludes the dilutive effect of stock options. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during a period. In computing diluted earnings per share, the tax benefit resulting from employee stock transactions and the average stock price for the period are used in determining the number of shares assumed to be purchased from exercise of stock options. A reconciliation of basic and diluted earnings per share is presented below (in thousands, except per share amounts):
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Basic: Net income $ 51,078 $ 36,616 $ 98,053 $ 71,751 ========= ========= ========= ========= Weighted average common shares outstanding 197,533 180,622 196,699 179,202 ========= ========= ========= ========= Basic earnings per share $ 0.26 $ 0.20 $ 0.50 $ 0.40 ========= ========= ========= ========= Diluted: Net income $ 51,078 $ 36,616 $ 98,053 $ 71,751 Convertible notes interest, net of income taxes and capitalized interest -- 1,807 -- 4,039 --------- --------- --------- --------- $ 51,078 $ 38,423 $ 98,053 $ 75,790 ========= ========= ========= ========= Weighted average common shares outstanding 197,533 180,622 196,699 179,202 Dilutive stock options 9,215 7,786 9,361 7,980 Assumed conversion of notes -- 14,816 -- 16,388 --------- --------- --------- --------- Weighted average common shares outstanding 206,748 203,224 206,060 203,570 ========= ========= ========= ========= Diluted earnings per share $ 0.25 $ 0.19 $ 0.48 $ 0.37 ========= ========= ========= =========
7 8 Note 5 - Common Stock Repurchase: In March, July and August of 1999, the Company repurchased 520,000, 275,000 and 120,000 shares of common stock for an aggregate cost of $12.8 million, $10.0 million and $4.3 million, respectively. The repurchased shares were retired upon acquisition. Since the inception of the repurchase program, the Company has repurchased a total of 5,135,000 shares. Note 6 - Convertible Subordinated Notes: In June 1995, the Company issued $230.0 million of convertible subordinated notes (the "Notes") due in June 2002 and bearing an interest rate of 5.75%, payable semiannually. The Notes were convertible into shares of the Company's common stock at a price of $25.59 per share. On May 15, 1998, the Company called for the redemption of the Notes effective June 16, 1998. As a result, substantially all of the Notes were converted into 8,988,649 shares of common stock with the remaining Notes redeemed at a price of $1,033.06 per $1,000 principal amount of the Notes. Total semi-annual interest paid on the Notes during 1998 was $6.5 million. The unamortized debt issuance costs as of the redemption date of approximately $3.1 million was recorded as a reduction to additional paid-in-capital. Note 7 - New Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes standards for accounting and reporting on derivative instruments for periods beginning after June 15, 2000 and early adoption is permitted. SFAS No. 133 requires that all derivative instruments be recognized in the balance sheet as either assets or liabilities and measured at fair value. Furthermore, SFAS No. 133 requires current recognition in earnings of changes in the fair value of derivative instruments depending on the intended use of the derivative and the resulting designation. The Company expects that its adoption of SFAS No. 133, which will become effective in fiscal year 2001, will not have a material effect on the Company's financial statements. 8 9 ITEM 2: Management's Discussion and Analysis of Financial Conditions and Results of Operations The following Discussion and Analysis of Financial Conditions and Results of Operations contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements are generally written in the future tense and/or are preceded by words such as "expects," "suggests," "believes," "anticipates," or "intends." The Company's future results of operations and the other forward looking statements contained in this Report involve a number of risks and uncertainties, many of which are outside the Company's control. Some of these risks and uncertainties are described in proximity to forward looking statements. Factors that could cause actual results to differ materially from projected results include but are not limited to risks associated with the Company's ability to achieve continued cost reductions and maintain gross margins, the Company's ability to continue to achieve die size reductions, the Company's ability to achieve and maintain appropriate inventory mix and levels and respond successfully to changes in product demand, the ability of price reductions to increase demand and strengthen the Company's market share over the long term, successful development and subsequent introduction of new products through investment in research and development and application of new process technologies to old and new product lines, market acceptance of the Company's new products and continued demand for the Company's existing products, the Company's ability to finance its operations and expenditures, the ability of Third Parties to be Y2K compliant, and general market conditions. Additional risk factors are disclosed in the Company's 1998 Annual Report on Form 10-K on file with the Securities and Exchange Commission. RESULTS OF OPERATIONS Sales Sales during the second quarter of 1999 were $197.8 million, or 23.2% higher than the $160.5 million reported for the same period last year. Sales in the second quarter of 1999 increased from the same period last year primarily due to increases in unit sales of New and Mainstream products, which were partially offset by lower unit sales of Mature products. Sales of New products increased to $52.2 million or 216.2% in the second quarter of 1999 from $16.5 million in the second quarter of 1998, while sales of Mainstream products increased to $73.9 million or 38.7% from $53.3 million. During the same periods, sales of Mature products decreased to $58.2 million or 22.5% from $75.0 million. Sales during the six months ended June 30, 1999 were $384.2 million or 20.9% higher than the $317.7 million reported for the same period last year. This increase is attributable primarily to the increase in unit sales of New and Mainstream products partially offset by a decrease in unit sales of Mature products. Sales of New and Mainstream products increased $66.8 million and $47.4 million or 262.8% and 49.1%, respectively, in the first six months of 1999 compared to the first six months of 1998. During the same periods, sales of Mature products decreased $46.9 million or 28.4%. Management expects that the decline in sales of the Mature products, which presently comprise approximately 29.4% of the Company's revenue base during the second quarter of 1999 and 30.8% during the six months ended June 30, 1999, will continue. The Company's ability to maintain or increase sales in the future is dependent on sales of New and Mainstream product families increasing more rapidly than the decline 9 10 in sales of Mature product families. While management is optimistic that New and Mainstream product sales will increase, there can be no assurances that New and Mainstream product sales growth will offset the decline in sales of Mature products. In the third quarter of 1998, the composition of the Company's product categories was changed and prior data reported here have been restated to reflect those changes. New products now consist of the Company's 3.3-volt (or lower) families, are manufactured on a 0.35-micron (or finer) geometry and are made up of the FLEX 10KA/10KE, FLEX 6000/6000A, MAX 7000A/7000B and APEX families. Sales of New products represented 26.4% of total sales in the second quarter of 1999 as compared to 10.3% in the second quarter of 1998. Mainstream products now include the MAX 7000S, MAX 9000 and FLEX 10K families. Sales of Mainstream products represented 37.4% of total sales in the second quarter of 1999 and 33.2% in the second quarter of 1998. Mature products now consist of the Classic, MAX 5000, MAX 7000 and FLEX 8000 families. Sales of Mature products represented 29.4% of total sales in the second quarter of 1999 and 46.8% in the second quarter of 1998. Other products include Tools, FLASHlogic, Configuration Devices, MPLDs, and FSPs. Other products represented 6.8% and 9.7% of total sales in the second quarters of 1999 and 1998, respectively. Sales in North America, Japan and Asia Pacific increased, while sales in Europe declined as a percentage of total sales in the first six months of 1999 compared to the first six months of 1998. Sales in North America increased 22.7% to $215.4 million from $175.6 million, Japan increased 28.7% to $75.1 million from $58.3 million and Asia Pacific increased 74.6% to $21.8 million from $12.5 million. European sales remained flat at approximately $71.0 million for each of the respective periods. Gross Margin Gross Margin for the three and six months ended June 30, 1999 were $125.5 million or 63.5% of sales and $242.8 million or 63.2% of sales, respectively. Gross margin for the comparable periods in 1998 were $98.8 million or 61.6% of sales and $195.9 million or 61.7% of sales, respectively. The increase was primarily attributable to cost reductions as a result of manufacturing process improvements. Yields measured as a total for all product families increased slightly in the six months ended June 30, 1999 over the same period a year ago primarily due to improved yields on FLEX 10K and FLEX 10KA products, partially offset by yield reduction on FLEX 10KE products. The Company achieved additional cost reductions on its FLEX 10KA family through new wafer process technologies (die shrinks). The Company continues to spend significant research and development resources to improve production yields on both new and established products. Difficulties in production yields can often occur when the Company is beginning production of new products or transitioning to new processes. These difficulties can potentially result in significantly higher costs and lower product availability. For example, in the second quarter of 1999, limited availability of packaging material (piece parts) used in certain of the Company's new and proprietary FineLine BGA ("Ball Grid Array") packages limited production. This in turn limited shipments of the Company's new 10 11 FLEX 10KE product family. Management expects to continue to introduce new and established products using new process technologies and may encounter similar start-up difficulties during the transition to such process technologies. Further, production throughput times vary considerably among the Company's wafer suppliers, and the Company may experience delays from time to time in processing some of its products which also may result in higher costs and lower product availability. Research and Development Research and development expenditures for the three months ended June 30, 1999 and 1998 were $19.9 million and $14.2 million, or 10.0% and 8.9% of sales, respectively. For the six months ended June 30, 1999 and 1998, research and development expenses were $36.9 million and $28.6 million, or 9.6% and 9.0% of sales, respectively. Research and development expenditures include expenditures for labor, prototype and pre-production costs, development of process technology, development of software to support new products and design environments, and development of new packages. In absolute dollars, expenses increased primarily as a result of increased headcount, spending on masks, wafers, package development and outside development services. This increased spending relates to the development of new products including FLEX 10KA/10KE, MAX 3000A, MAX 7000A/7000B and APEX, as well as the Quartus software. Historically, the level of research and development expenditures as a percentage of sales has fluctuated in part due to the timing of the purchase of masks and wafers used in development and prototyping of new products. The Company expects that, in the long term, research and development expenses will increase in absolute dollars but may fluctuate as a percentage of sales. The Company expects to continue to make significant investments in the development of FLEX 10KA/10KE, MAX 3000A, MAX 7000A/7000B, APEX and Quartus software. During the first quarter of 1999, the Company shipped its newest family of devices, APEX, and its new fourth generation software design tool, Quartus. APEX devices utilize a new architecture for programmable logic and address higher density designs. APEX devices are exclusively supported by the Company's new software design tool, Quartus. The commercial success of the APEX family is dependent on the acceptance of its use in high-density designs and the successful introduction and acceptance of the Quartus design software. Management expects both products to be successful in the market, however, it can give no assurances that this will be the case. The Company also continues to focus its efforts on the development of new programmable logic chips, related development software and hardware, and advanced semiconductor wafer fabrication processes. However, there can be no assurance that the Company will accomplish its goals in the development and subsequent introduction of new products and manufacturing processes. Furthermore, there is no assurance that these products will achieve market acceptance, that the new manufacturing processes will be successful, or that the suppliers will provide the Company with the quality or quantity of wafers and materials that the Company requires. The Company must continue to develop and introduce new products in a timely manner to help counter the industry's historical trend of declining prices as products mature. 11 12 Selling, General and Administrative Selling, general and administrative expenses for the three months ended June 30, 1999 and 1998 were $33.7 million and $28.6 million, or 17.1% and 17.8% of sales, respectively. For the six months ended June 30, 1999 and 1998, selling, general and administrative expenses were $66.1 million and $56.7 million, or 17.2% and 17.9% of sales, respectively. Selling, general, and administrative expenses include commission and incentive expenses, advertising and promotional expenditures, legal expenses and salary expenses related to field sales, marketing and administrative personnel. In absolute dollars, the increase in selling, general and administrative expenses was mainly driven by increased personnel expenses for marketing and administration, higher commission and incentive expenses associated with higher sales. Income from Operations Income from operations for the second quarters of 1999 and 1998 were $71.9 million and $56.0 million, or 36.4% and 34.9% of sales, respectively. For the six months ended June 30, 1999 and 1998, income from operations were $139.8 million and $110.6 million, or 36.4% and 34.8% of sales, respectively. The year-to-year increase in operating income, as a percentage of sales, was primarily due to improvements in gross margin. Interest and Other Income Interest and other income for the three months ended June 30, 1999 and 1998 were $6.0 million and $1.7 million, respectively. For the six months ended June 30, 1999 and 1998, interest and other income were $10.6 million and $1.8 million, respectively. Interest and other income consists mainly of interest income on cash balances available for investment. The increase in interest and other income was primarily due to the reduction in interest expense related to the conversion of the convertible subordinated notes during the second quarter of 1998 and the increase in interest income related to higher cash balances available for investment. The increase in interest and other income was partially offset by a $1.2 million charge attributed to the write-off of an equity investment during the first quarter of 1999. Provision for Income Taxes The Company's effective tax rate was 32.5% for the three and six months ended June 30, 1999 and 1998. 12 13 Equity Investment In June 1996, the Company, TSMC and several other partners formed WaferTech, LLC ("WaferTech"), a joint-venture company, to build and operate a wafer manufacturing plant in Camas, Washington. In return for a $140.4 million cash investment, the Company received an 18% equity ownership in the joint-venture company and certain rights and obligations to procure up to 27% of the factory's output at market prices. In January 1999, the Company purchased from Analog Devices, Inc. an additional 5% equity ownership interest in WaferTech for approximately $37.5 million, increasing its ownership interest to 23% and enabling the Company to procure up to 35% of the factory's output at market prices. The Company accounts for this investment under the equity method based on the Company's ability to exercise significant influence on the operating and financial policies of WaferTech. The Company's equity in the net loss of WaferTech was $1.5 million and $3.5 million for the three and six months ended June 30, 1999, respectively, as compared to $2.3 million and $4.1 million for the same periods a year ago. Future Results Future operating results will depend on the Company's ability to develop, manufacture and sell complex semiconductor components and programming software that offer customers greater value than solutions offered by competing vendors. The Company's efforts in this regard may not be successful. The Company is developing programmable chips for applications that are presently served by other ASIC vendors. These vendors have well-established market positions and a solution that has been proven technically feasible and economically competitive over several decades. There can be no assurance that the Company will be successful in displacing ASIC vendors in the targeted applications and densities. Furthermore, other programmable logic vendors are targeting these applications and may be successful in securing market share to the exclusion of the Company. Moreover, standard cell technologies are increasingly used by the Company's customers to achieve greater integration in their systems; this may not only impede the Company's efforts to penetrate the ASIC market but may also displace the Company's products in the applications that it presently serves. The Company's future growth will depend on its ability to continually and, on a timely basis, introduce new products, and to continue to improve the performance of the Company's products in response to both evolving demands of the market place and competitive product offerings. The Company is highly dependent upon subcontractors to manufacture silicon wafers and perform assembly, test and shipment to end customers. The Company is also dependent on its wafer foundry partners to improve process technologies in a timely manner to enhance the Company's product designs and cost structure. Their inability to do so could have a severe negative impact on the Company. The vast majority of the Company's products are manufactured and shipped to customers by subcontractors located in Asia, principally Japan, Taiwan, Korea, the Philippines, Hong Kong and Malaysia. Disruptions or adverse supply conditions arising from market conditions, political strife, labor disruptions and other factors could have adverse consequences on the Company's future results. Natural or man-made disasters, normal process fluctuations and variances in manufacturing yields could have a severe negative impact on 13 14 the Company's operating capabilities. The Company has sought to diversify its operating risk by participating in the WaferTech joint venture to manufacture silicon wafers with other partners in Camas, Washington. In October 1998, production began at WaferTech. WaferTech is currently in the initial stages of production volumes and has yet to make a profit. Although the Company expects future WaferTech production volumes and profitability to increase, the ramp up of WaferTech's production has not met the targeted level to achieve such profitability. There can be no assurances that the worldwide supply and demand for semiconductor wafers will be such that WaferTech will make a profit and that WaferTech will not continue to have an adverse impact on the Company's operating results. Also, a number of factors outside of the Company's control, including general economic conditions and cycles in world markets, exchange rate fluctuations or a lack of growth in the Company's end markets could adversely impact future results. An important component of the Company's growth, the networking equipment market, has been growing at a slower rate in recent years. Should this trend continue, the Company's growth in future years may be limited. Because of the foregoing and other factors that might affect the Company's operating results, past financial performance should not be considered an indicator of future performance, and investors should not use historical trends to anticipate future results. In addition, the cyclical nature of the semiconductor industry and other factors have resulted in a highly volatile price of the Company's common stock. Liquidity and Capital Resources Since its inception, the Company has used a combination of equity and debt financing and cash flow from operations to support its operating activities. During the first six months of 1999, cash, cash equivalents and short-term investments increased by $96.7 million to $675.8 million from $579.1 million at December 31, 1998. During the first six months of 1999, the Company's operating activities generated net cash of $141.1 million. This cash flow was primarily attributable to net income of $98.1 million, adjusted by depreciation and amortization of $13.9 million, an increase in income taxes payable and a decrease in other assets of $38.8 million and $17.7 million, respectively, partially offset by an increase in accounts receivable of $21.8 million and a decrease in accounts payable and accrued liabilities of $15.8 million. Cash used in investing activities of $93.9 million for the first six months of 1999 is primarily the result of net purchases of short-term investments of $44.9 million, an additional investment in WaferTech, LLC of $37.5 million and purchases of property, plant and equipment of $11.0 million. Financing activities provided cash of $4.6 million for the first six months of 1999 primarily from proceeds from exercises of stock options of $17.4 million, offset partially by repurchase of common stock of $12.8 million. As of June 30, 1999, the Company had $675.8 million of cash, cash equivalents and short-term investments available to finance future growth. The Company believes the available sources of funds and 14 15 cash expected to be generated from operations will be adequate to finance current operations and capital expenditures for at least the next year. The Company purchases the majority of its materials and services in U.S. dollars, and its foreign sales are transacted in U.S. dollars. Altera does have Japanese yen denominated purchase contracts with Sharp Corporation ("Sharp") of Japan for processed silicon wafers. Effective August 1, 1999, all purchase contracts with Sharp are denominated in U.S. dollars. In recent years, the Company has not entered into any foreign exchange contracts for the purchase or sale of Japanese yen. At the end of the second quarter of 1999, the Company had no open forward contracts. The Company may choose to enter into such contracts from time to time should conditions appear favorable. Effects of inflation on Altera's financial results have not been significant. Year 2000 Compliance Most computer programs were designed to perform data computations on the last two digits of the numerical value of a year. When a computation referencing the year 2000 is performed, these systems may interpret "00" as the year 1900 and could either stop processing date-related computations or could process them incorrectly. Computations referencing the year 2000 might be invoked at any time, but are likely to begin occurring in the year 1999. Pursuant to its year 2000 ("Y2K") compliance program, the Company has undertaken various initiatives intended to ensure that its computer equipment and software will function properly with respect to dates in the year 2000 and thereafter. As used herein, the term "computer equipment and software" includes systems that are commonly considered information technology ("IT") systems (e.g., accounting, data processing and telephone systems) as well as those that are not commonly considered IT systems (e.g., manufacturing equipment, building and facility operations systems). In addition, the Company has also reviewed the software products it sells, and has upgraded and will upgrade such products to offer full Y2K compliance. As of the end of June 1999, all computer equipment and software that are material to the Company's internal business operations have been determined to be Y2K compliant. With respect to MAX+PLUS II, the Company's third-generation software product, the Company has determined that it is fully compliant with Y2K standards, specifically DISC PD-2000-1 as published by the British Standards Institute. While the Company believes that its newest software product, Quartus, is also Y2K compliant, this software product is currently undergoing formal Y2K compliance testing, which is scheduled to be completed by the first half of October 1999. The Company has not incurred and does not anticipate that it will incur material expenditures for the remediation of any Y2K issues. The Company could be adversely impacted by Y2K issues faced by major distributors, suppliers, customers, vendors and financial service organizations ("Third Parties") with which the Company interacts. The most reasonably likely worst case scenario for the Company with respect to the Y2K problem is the failure of a major distributor or supplier to be Y2K compliant such that the distribution of Altera products or the supply 15 16 of components for such products is interrupted temporarily. This could result in the Company not being able to produce or distribute product for a period of time, which in turn could result in lost sales and profits. Based solely on responses received from these Third Parties, the Company has no reason to believe that there will be any material adverse impact on the Company's financial condition or results of operations relating to any Y2K issues of such Third Parties. However, if the responses received from these Third Parties are not accurate or circumstances change, then there could be an unforeseen material adverse impact on the Company's financial condition and results of operations. Management will continue to determine the impact, if any, that Third Parties who are not Y2K compliant may have on the financial condition or results of operations of the Company. The Company charged its business resumption planning committee to evaluate Y2K business disruption scenarios, coordinate the establishment of Y2K contingency plans, and identify and implement preemptive strategies. These contingency plans were fully developed by the end of June 1999. Altera will maintain compliance of its essential business systems and continue to track the vendors and manufacturers of these system components in order to seek to resolve any Y2K issues that may be identified in the second half of 1999. 16 17 PART II OTHER INFORMATION ITEM 1. Legal Proceedings In June 1993, Xilinx, Inc. ("Xilinx") brought suit against the Company seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by Xilinx. In June 1993, the Company brought suit against Xilinx, seeking monetary damages and injunctive relief based on Xilinx's alleged infringement of certain patents held by the Company. In April 1995, the Company filed a separate lawsuit against Xilinx in Delaware, Xilinx's state of incorporation, seeking monetary damages and injunctive relief based on Xilinx's alleged infringement of one of the Company's patents. In May 1995, Xilinx counterclaimed against the Company in Delaware, asserting defenses and seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by Xilinx. Subsequently, the Delaware case has been transferred to California. Due to the nature of the litigation with Xilinx and because the lawsuits are still in the pre-trial stage, the Company's management cannot estimate the total expense, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the allegations. Management cannot ensure that Xilinx will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of the Company's MAX 5000, MAX 7000, FLEX 8000 or MAX 9000 families of products, or succeed in invalidating any of the Company's patents. Although no assurances can be given as to the results of these cases, based on the present status, management does not believe that any of such results will have a material adverse effect on the Company's financial condition or results of operations. In August 1994, Advanced Micro Devices, Inc. ("AMD") brought suit against the Company seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by AMD. In September 1994, Altera answered the complaint asserting that it is licensed to use the patents which AMD claims are infringed and filed a counterclaim against AMD alleging infringement of certain patents held by the Company. In October 1997, upon completion of trials bifurcated from the infringement claims, the District Court ruled that the Company is licensed under all patents asserted by AMD in the suit. In December 1997, AMD filed a Notice of Appeal of the District Court's rulings. In April 1999, the Federal Circuit Court ruled in AMD's favor on its appeal, finding that Altera is not licensed to AMD's patents, and remanded the case back to the District Court for further proceedings. Altera filed a petition for rehearing before the Federal Circuit Court to seek an overturn of this determination, which was denied. Further proceedings will now take place in the District Court. Due to the nature of the litigation with AMD, the Company's management cannot estimate the total expense, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the allegations. Management cannot ensure that AMD will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of the Classic, MAX 5000, MAX 7000, FLEX 8000, MAX 9000, FLEX 10K and FLASHlogic product families, or succeed in invalidating any of the Company's patents remaining in the suit. Although no assurances can be given as to the results of this case, based on its present status, management does not believe that any of such results will have a material adverse effect on the Company's financial condition or results of operations. 17 18 ITEM 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of the Company was held on May 26, 1999 at 10:00 a.m. The following matters were acted upon at the meeting:
VOTES BROKER MATTER FOR VOTES WITHHELD/ NON- ACTED UPON VOTES AGAINST ABSTENTIONS VOTES ---------- ----- ------- ----------- ----- 1. Rodney Smith 84,475,985 5,871,136 0 0 Charles M. Clough 84,465,048 5,882,073 0 0 Michael A. Ellison 84,609,694 5,737,427 0 0 Paul Newhagen 84,609,894 5,737,227 0 0 Robert W. Reed 84,589,794 5,757,327 0 0 Deborah D. Rieman 84,456,370 5,890,751 0 0 William D. Terry 84,598,799 5,748,322 0 0 2. Approval of amendment of the 1996 58,039,082 32,205,752 102,387 100 Stock Option Plan to Increase from 13,000,000 to 18,000,000 the number of shares of Common Stock Reserved for issuance thereunder. 3. Approval of amendment of the 1987 88,119,723 2,138,620 88,878 100 Employee Stock Purchase Plan to increase from 6,200,000 to 6,600,000 the number of shares of Common Stock reserved for issuance thereunder. 4. Ratification of the appointment 90,244,844 23,776 78,501 0 of PriceWaterhouseCoopers LLP as independent accountants for the Company for the fiscal year ending December 31, 1999.
ITEM 5. Other Information On April 21, 1999, the Board of Directors of the Company approved a two-for-one stock split in the form of a stock dividend. Holders of record of the Company's common stock on May 4, 1999 received one additional share of Company common stock for each share held. The market price for Altera common stock as reported by Nasdaq reflected the stock split beginning May 20, 1999. In connection with the stock split, the Board of Directors of the Company also authorized doubling from 6,000,000 to 12,000,000 the number of shares authorized for repurchase under the Company's share repurchase program. 18 19 ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule for the six months ended June 30, 1999. (b) Reports on Form 8-K None. 19 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALTERA CORPORATION /s/ NATHAN SARKISIAN --------------------------------------- Nathan Sarkisian, Senior Vice President (duly authorized officer) and Chief Financial Officer (principal financial officer) Date: August 16, 1999 20 21 INDEX TO EXHIBITS
Exhibit Number Description - ------- ----------- 27.1 Financial Data Schedule for the six months ended June 30, 1999.
EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 182,796 492,974 77,908 5,256 65,861 913,485 150,621 83,606 1,225,975 201,094 0 0 0 199 1,024,682 1,225,975 384,182 384,182 141,422 141,422 102,946 102,946 0 150,437 48,892 98,053 0 0 0 98,053 0.50 0.48
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