-----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, GLwW7CZ8e5U3VcCYfG7ji5eD4HZVRwb2iDZgakvv9OzbTiLlHXMeFvZw/Su8+4m3 Adv6y751fScuQLKbI/vX8g== 0000891618-99-005189.txt : 19991117 0000891618-99-005189.hdr.sgml : 19991117 ACCESSION NUMBER: 0000891618-99-005189 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99751897 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 ENDED SEPTEMBER 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 September 30, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to Commission file number 0-16617 ALTERA CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 77-0016691 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 101 INNOVATION DRIVE SAN JOSE, CALIFORNIA 95134 (Address of principal executive offices) 408-544-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes [X] No [ ] Number of shares of common stock outstanding at November 5, 1999: 199,475,141 2
PART I FINANCIAL INFORMATION NUMBER ------ ITEM 1: Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 ..................................................... 3 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1999 and 1998 ................... 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998.............................. 5 Notes to Condensed Consolidated Financial Statements ............................... 6 ITEM 2: Management's Discussion and Analysis of Financial Conditions and Results of Operations ................................................ 9 PART II OTHER INFORMATION ITEM 1: Legal Proceedings ......................................................................... 18 ITEM 5: Other Information .......................................................................... 19 ITEM 6: Exhibits and Reports on Form 8-K............................................................ 19 Signatures ................................................................................... 20
2 3 PART I FINANCIAL INFORMATION ITEM 1: Financial Statements ALTERA CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED, IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 175,038 $ 131,029 Short-term investments 611,131 448,077 ---------- ---------- Total cash, cash equivalents, and short-term investments 786,169 579,106 Accounts receivable, net 91,164 56,138 Inventories 58,835 69,869 Deferred income taxes 72,145 69,644 Other current assets 28,264 24,776 ---------- ---------- Total current assets 1,036,577 799,533 Property and equipment, net 152,082 152,320 Investments and other assets 156,541 141,478 ---------- ---------- $1,345,200 $1,093,331 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 19,689 $ 14,479 Accrued liabilities 15,281 16,615 Accrued compensation 19,548 19,356 Deferred income on sales to distributors 204,867 161,160 ---------- ---------- Total current liabilities 259,385 211,610 ---------- ---------- Stockholders' equity: Common stock 199 98 Capital in excess of par value 364,550 314,182 Retained earnings 721,066 567,441 ---------- ---------- Total stockholders' equity 1,085,815 881,721 ---------- ---------- $1,345,200 $1,093,331 ========== ========== See accompanying notes to condensed consolidated financial statements.
3 4 ALTERA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Sales $ 215,121 $ 164,218 $ 599,303 $ 481,910 Costs & expenses: Cost of sales 76,707 62,511 218,129 184,292 Research and development 23,213 15,223 60,098 43,863 Selling, general and administrative 36,784 27,142 102,845 83,852 --------- --------- --------- --------- Total costs and expenses 136,704 104,876 381,072 312,007 --------- --------- --------- --------- Income from operations 78,417 59,342 218,231 169,903 Interest and other income, net 7,987 5,065 18,610 6,882 --------- --------- --------- --------- Income before income taxes and equity investment 86,404 64,407 236,841 176,785 Provision for income taxes 28,081 20,931 76,973 57,451 --------- --------- --------- --------- Income before equity investment 58,323 43,476 159,868 119,334 Equity in loss of WaferTech, LLC (2,751) (3,333) (6,243) (7,440) --------- --------- --------- --------- Net income $ 55,572 $ 40,143 $ 153,625 $ 111,894 ========= ========= ========= ========= EARNINGS PER SHARE: Basic $ 0.28 $ 0.21 $ 0.78 $ 0.61 ========= ========= ========= ========= Diluted $ 0.27 $ 0.20 $ 0.74 $ 0.57 ========= ========= ========= ========= WEIGHTED AVERAGE SHARES: Basic 198,880 194,470 197,656 184,346 ========= ========= ========= ========= Diluted 208,175 201,804 206,995 202,976 ========= ========= ========= ========= See accompanying notes to condensed consolidated financial statements.
4 5 \ ALTERA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1999 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 153,625 $ 111,894 Adjustments to reconcile net income to net cash provided by operating activities: Equity in loss of WaferTech 6,243 7,440 Depreciation and amortization 21,382 22,487 Deferred income taxes (2,501) (4,503) Changes in assets and liabilities: Accounts receivable, net (35,026) (9,416) Inventories 10,878 28,844 Other assets 13,312 4,447 Accounts payable and accrued liabilities 3,908 (8,097) Deferred income on sales to distributors 43,707 22,039 Income taxes payable 54,843 11,155 --------- --------- Cash provided by operating activities 270,371 186,290 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (19,047) (18,363) Net change in short-term investments (163,054) (51,636) Investment in WaferTech, LLC (37,500) -- Net change in long-term investments (1,928) 552 --------- --------- Cash used for investing activities (221,529) (69,447) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 22,296 9,153 Repurchase of common stock (27,129) (60,348) --------- --------- Cash used for financing activities (4,833) (51,195) --------- --------- Net increase in cash and cash equivalents 44,009 65,648 Cash and cash equivalents at beginning of period 131,029 22,761 --------- --------- Cash and cash equivalents at end of period $ 175,038 $ 88,409 ========= ========= Supplemental disclosure of non-cash items: Conversion of subordinated debt into common stock $ -- $ 226,787 Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $ 27,294 $ 48,421 Cash paid during the period for interest -- 6,568 See accompanying notes to condensed consolidated financial statements.
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 September 30, 1999 and for the nine month periods ended September 30, 1999 and 1998 included herein is unaudited and has been prepared by the Company in accordance with generally accepted accounting principles and reflects all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to state fairly the Company's financial position, results of operations, and cash flows for the periods presented. The December 31, 1998 balance sheet was derived from audited financial statements on that date. All significant intercompany transactions and balances have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reporting period. Actual results will differ from those estimates, and such differences may be material to the financial statements. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1998 included in the Company's Annual Report on Form 10-K, as filed on March 30, 1999, with the Securities and Exchange Commission. The results of operations for the nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for any future periods. The Company has an interim period that ends on the Friday nearest September 30, 1999. For presentation purposes, the interim financial statements and accompanying notes refer to the Company's interim period end as September 30th. Certain prior year amounts have been reclassified to conform to the current year's presentation. Note 2 - Balance Sheet Details (in thousands):
September 30, 1999 December 31, 1998 ----------------- ----------------- Inventories: Purchased parts and raw materials $ 75 $ 65 Work-in-process 38,840 46,207 Finished goods 19,920 23,597 --------- --------- $ 58,835 $ 69,869 ========= ========= Property and equipment: Land $ 20,496 $ 20,496 Building 80,653 80,338 Equipment and software 126,500 115,332 Office furniture and fixtures 11,154 10,287 Leasehold improvements 1,370 1,183 --------- --------- 240,173 227,636 Accumulated depreciation and amortization (88,091) (75,316) --------- --------- $ 152,082 $ 152,320 ========= =========
6 7 Note 3 - Common Stock Split: On April 21, 1999, the Board of Directors of the Company approved a two-for-one stock split in the form of a 100 percent stock dividend to holders of record of the Company's common stock on May 4, 1999. The dividend shares were distributed to stockholders on May 19, 1999. All share and per share data has been retroactively restated to reflect the two-for-one stock split for all periods presented. Note 4 - Earnings Per Share: Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period and excludes the dilutive effect of stock options. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during a period. In computing diluted earnings per share, the tax benefit resulting from employee stock transactions and the average stock price for the period are used in determining the number of shares assumed to be purchased from exercise of stock options. A reconciliation of basic and diluted earnings per share is presented below (in thousands, except per share amounts):
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Basic: Net income $ 55,572 $ 40,143 $153,625 $111,894 ======== ======== ======== ======== Weighted average common shares outstanding 198,880 194,470 197,656 184,346 ======== ======== ======== ======== Basic earnings per share $ 0.28 $ 0.21 $ 0.78 $ 0.61 ======== ======== ======== ======== Diluted: Net income $ 55,572 $ 40,143 $153,625 $111,894 Convertible notes interest, net of income taxes and capitalized interest -- -- -- 4,039 -------- -------- -------- -------- $ 55,572 $ 40,143 $153,625 $115,933 ======== ======== ======== ======== Weighted average common shares outstanding 198,880 194,470 197,656 184,346 Dilutive stock options 9,295 7,334 9,339 7,764 Assumed conversion of notes -- -- -- 10,866 -------- -------- -------- -------- Weighted average common shares outstanding 208,175 201,804 206,995 202,976 ======== ======== ======== ======== Diluted earnings per share $ 0.27 $ 0.20 $ 0.74 $ 0.57 ======== ======== ======== ========
7 8 Note 5 - Common Stock Repurchase: In the first and third quarters of 1999, the Company repurchased 520,000 and 395,000 shares of common stock at an aggregate cost of $12.8 million and $14.3 million, respectively. The repurchased shares were retired upon acquisition. In connection with the stock split, the Board of Directors of the Company also authorized doubling from 6,000,000 to 12,000,000 the number of shares authorized for repurchase under the Company's share repurchase program. Since the inception of the repurchase program, the Company has repurchased a total of 5,135,000 shares. Note 6 - Convertible Subordinated Notes: In June 1995, the Company issued $230.0 million of convertible subordinated notes (the "Notes") due in June 2002 and bearing an interest rate of 5.75%, payable semiannually. The Notes were convertible into shares of the Company's common stock at a price of $25.59 per share. On May 15, 1998, the Company called for the redemption of the Notes effective June 16, 1998. As a result, substantially all of the Notes were converted into 8,988,649 shares of common stock with the remaining Notes redeemed at a price of $1,033.06 per $1,000 principal amount of the Notes. Total semi-annual interest paid on the Notes during 1998 was $6.5 million. The unamortized debt issuance costs as of the redemption date of approximately $3.1 million was recorded as a reduction to additional paid-in-capital. Note 7 - New Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes standards for accounting and reporting on derivative instruments for periods beginning after June 15, 2000 and early adoption is permitted. SFAS No. 133 requires that all derivative instruments be recognized in the balance sheet as either assets or liabilities and measured at fair value. Furthermore, SFAS No. 133 requires current recognition in earnings of changes in the fair value of derivative instruments depending on the intended use of the derivative and the resulting designation. The Company expects that its adoption of SFAS No. 133, which will become effective in fiscal year 2001, will not have a material effect on the Company's financial statements. Note 8 - Subsequent Events: In October 1999, the Company sold to Cypress Semiconductor Corporation ("Cypress") the exclusive right to manufacture, market and sell its MAX 5000 Programmable Logic Device product line and its equity interest in Cypress Semiconductor (Texas), Inc. The Company anticipates a one-time gain of approximately $9 million on a pre-tax basis to be recorded in the fourth quarter of 1999. The sale of the MAX 5000 family will not materially affect the Company's future revenues. In October 1999, the Company made an additional $23.0 million cash investment in WaferTech. As a result of this additional cash investment, there were no changes to the Company's ownership interest or rights and obligations for the procurement of the factory's output. 8 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 ability of Third Parties to be Y2K compliant, and general market conditions. Additional risk factors are disclosed in the Company's 1998 Annual Report on Form 10-K on file with the Securities and Exchange Commission. RESULTS OF OPERATIONS Sales Sales during the third quarter of 1999 were $215.1 million, or 31.0% higher than the $164.2 million reported for the same period last year. Sales in the third quarter of 1999 increased from the same period last year primarily due to increases in unit sales of New and Mainstream products, which were partially offset by decreases in average unit selling prices as well as lower unit sales of Mature products. Sales of New products increased to $71.6 million or 205.0% in the third quarter of 1999 from $23.5 million in the third quarter of 1998, while sales of Mainstream products increased to $74.5 million or 26.8% from $58.8 million. During the same periods, sales of Mature products decreased to $55.2 million or 18.7% from $67.9 million. Sales during the nine months ended September 30, 1999 were $599.3 million or 24.4% higher than the $481.9 million reported for the same period last year. This increase is attributable primarily to increases in unit sales of New and Mainstream products partially offset by decreases in average unit selling prices as well as lower unit sales of Mature products. Sales of New and Mainstream products increased $114.9 million and $63.2 million or 235.1% and 40.7%, respectively, in the first nine months of 1999 compared to the first nine months of 1998. During the same periods, sales of Mature products decreased $59.6 million or 25.6%. Management expects that the decline in sales of the Mature products, which presently comprise approximately 25.6% of the Company's revenue base during the third quarter of 1999 and 29.0% during the nine months ended September 30, 1999, will continue. The Company's ability to maintain or increase sales in the future is dependent on sales of New and Mainstream product families increasing more rapidly than the decline in sales 9 10 of Mature product families. While management is optimistic that New and Mainstream product sales will increase, there can be no assurances that New and Mainstream product sales growth will offset the decline in sales of Mature products. In the third quarter of 1998, the composition of the Company's product categories was changed and prior data reported here have been restated to reflect those changes. New products now consist of the Company's 3.3-volt (or lower) families, are manufactured on a 0.35-micron (or finer) geometry and are made up of the FLEX 10KA/10KE, FLEX 6000/6000A, MAX 3000A, MAX 7000A/7000B and APEX families. Sales of New products represented 33.3% of total sales in the third quarter of 1999 as compared to 14.3% in the third quarter of 1998. Mainstream products now include the MAX 7000S, MAX 9000 and FLEX 10K families. Sales of Mainstream products represented 34.7% of total sales in the third quarter of 1999 and 35.8% in the third quarter of 1998. Mature products now consist of the Classic, MAX 5000, MAX 7000 and FLEX 8000 families. Sales of Mature products represented 25.6% of total sales in the third quarter of 1999 and 41.3% in the third quarter of 1998. Other products include Tools, FLASHlogic, Configuration Devices, MPLDs, and FSPs. Other products represented 6.4% and 8.6% of total sales in the third quarters of 1999 and 1998, respectively. Sales in North America, Japan and Asia Pacific increased, while sales in Europe declined as a percentage of total sales in the first nine months of 1999 compared to the first nine months of 1998. Sales in North America increased 26.7% to $337.2 million from $266.0 million, Japan increased 32.1% to $114.9 million from $86.9 million and Asia Pacific increased 81.1% to $35.0 million from $19.4 million. European sales increased 2.4% to $112.2 million from $109.6 million but declined as a percentage of total sales. Gross Margin Gross Margin for the three and nine months ended September 30, 1999 were $138.4 million or 64.3% of sales and $381.2 million or 63.6% of sales, respectively. Gross margin for the comparable periods in 1998 were $101.7 million or 61.9% of sales and $297.6 million or 61.8% of sales, respectively. The percentage increase was primarily attributable to cost reductions as a result of manufacturing process improvements. Yields on New products continued to improve for the nine months ended September 30, 1999. This includes improvements in our APEX, FLEX 10KE and FLEX 10KA product families. The Company also achieved cost reductions on its FLEX 10KA and FLEX 10K families through new wafer process technologies (die shrinks). The Company continues to spend significant research and development resources to improve production yields on both new and established products. Difficulties in production yields can often occur when the Company is beginning production of new products or transitioning to new processes. These difficulties can potentially result in significantly higher costs and lower product availability. For example, in the second quarter of 1999, difficulties in the manufacturing process limited the availability of packaging material (piece parts) used in certain of the Company's new and proprietary FineLine BGA ("Ball Grid Array") packages causing limited production. This in turn limited shipments of the Company's new FLEX 10KE product family. Management expects to continue to introduce new and established products using new process technologies 10 11 and may encounter similar start-up difficulties during the transition to such process technologies. Further, production throughput times vary considerably among the Company's wafer suppliers, and the Company may experience delays from time to time in processing some of its products which also may result in higher costs and lower product availability. Research and Development Research and development expenditures for the three months ended September 30, 1999 and 1998 were $23.2 million and $15.2 million, or 10.8% and 9.3% of sales, respectively. For the nine months ended September 30, 1999 and 1998, research and development expenses were $60.1 million and $43.9 million, or 10.0% and 9.1% of sales, respectively. Research and development expenditures include expenditures for labor, prototype and pre-production costs, development of process technology, development of software to support new products and design environments, and development of new packages. In absolute dollars, expenses increased primarily as a result of increased headcount, spending on masks, wafers, package development and outside development services. This increased spending relates to the development of new products including FLEX 10KA/10KE, MAX 3000A, MAX 7000A/7000B and APEX, as well as the Quartus software. Historically, the level of research and development expenditures as a percentage of sales has fluctuated in part due to the timing of the purchase of masks and wafers used in development and prototyping of new products. The Company expects that, in the long term, research and development expenses will increase in absolute dollars and will likely exceed ten percent of sales for at least the next several quarters. The Company expects to continue to make significant investments in the development of FLEX 10KA/10KE, MAX 3000A, MAX 7000A/7000B, APEX and Quartus software. During the first quarter of 1999, the Company shipped its newest family of devices, APEX, and its new fourth generation software design tool, Quartus. APEX devices utilize a new architecture for programmable logic and address higher density designs. APEX devices are exclusively supported by the Company's new software design tool, Quartus. Management expects both APEX and Quartus software to be successful in the market, however, the commercial success of these products is dependent on the acceptance of the use of APEX in high-density designs and the acceptance of the Quartus design software. Management can give no assurances on the market acceptance of the Company's products. The Company also continues to focus its efforts on the development of new programmable logic chips, related development software and hardware, and advanced semiconductor wafer fabrication processes. However, there can be no assurance that the Company will accomplish its goals in the development and subsequent introduction of new products and manufacturing processes. Furthermore, there is no assurance that these products will achieve market acceptance, that the new manufacturing processes will be successful, or that the suppliers will provide the Company with the quality or quantity of wafers and materials that the Company requires. The Company must continue to develop and introduce new products in a timely manner to help counter the industry's historical trend of declining prices as products mature. 11 12 Selling, General and Administrative Selling, general and administrative expenses for the three months ended September 30, 1999 and 1998 were $36.8 million and $27.1 million, or 17.1% and 16.5% of sales, respectively. For the nine months ended September 30, 1999 and 1998, selling, general and administrative expenses were $102.8 million and $83.9 million, or 17.2% and 17.4% of sales, respectively. Selling, general, and administrative expenses include commission and incentive expenses, advertising and promotional expenditures, legal expenses and salary expenses related to field sales, marketing and administrative personnel. In absolute dollars, the increase in selling, general and administrative expenses was mainly driven by increased personnel expenses for marketing and administration, and higher commission and incentive expenses associated with higher sales. Income from Operations Income from operations for the third quarters of 1999 and 1998 were $78.4 million and $59.3 million, or 36.5% and 36.1% of sales, respectively. For the nine months ended September 30, 1999 and 1998, income from operations were $218.2 million and $169.9 million, or 36.4% and 35.3% of sales, respectively. The year-to-year increase in operating income, as a percentage of sales, was primarily due to improvements in gross margin. Interest and Other Income Interest and other income for the three months ended September 30, 1999 and 1998 were $8.0 million and $5.1 million, respectively. For the nine months ended September 30, 1999 and 1998, interest and other income were $18.6 million and $6.9 million, respectively. Interest and other income consists mainly of interest income on cash balances available for investment. The increase in interest and other income was primarily due to the reduction in interest expense related to the conversion of the convertible subordinated notes during the second quarter of 1998 and the increase in interest income related to higher cash balances available for investment. The increase in interest and other income was partially offset by a $1.7 million charge attributed to the write-off of an equity investment during 1999. Provision for Income Taxes The Company's effective tax rate was 32.5% for the three and nine months ended September 30, 1999 and 1998. 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. In October 1999, the Company made an additional $23.0 million cash investment in WaferTech. As a result of this additional cash investment, there were no changes to the Company's ownership interest or rights and obligations for the procurement of the factory's output. The Company accounts for this investment under the equity method based on the Company's ability to exercise significant influence on the operating and financial policies of WaferTech. The Company's equity in the net loss of WaferTech was $2.8 million and $6.2 million for the three and nine months ended September 30, 1999, respectively, as compared to $3.3 million and $7.4 million for the same periods a year ago. Future Results Future operating results will depend on the Company's ability to develop, manufacture and sell complex semiconductor components and programming software that offer customers greater value than solutions offered by competing vendors. The Company's efforts in this regard may not be successful. The Company is developing programmable chips for applications that are presently served by other ASIC vendors. These vendors have well-established market positions and a solution that has been proven technically feasible and economically competitive over several decades. There can be no assurance that the Company will be successful in displacing ASIC vendors in the targeted applications and densities. Furthermore, other programmable logic vendors are targeting these applications and may be successful in securing market share to the exclusion of the Company. Moreover, standard cell technologies are increasingly used by the Company's customers to achieve greater integration in their systems; this may not only impede the Company's efforts to penetrate the ASIC market but may also displace the Company's products in the applications that it presently serves. The Company's future growth will depend on its ability to continually and, on a timely basis, introduce new products, and to continue to improve the performance of the Company's products in response to both evolving demands of the market place and competitive product offerings. The Company is highly dependent upon subcontractors to manufacture silicon wafers and perform assembly, test and shipment to end customers. The Company is also dependent on its wafer foundry partners to improve process technologies in a timely manner to enhance the Company's product designs and cost structure. Their inability to do so could have a severe negative impact on the Company. The vast majority of the Company's products are manufactured and shipped to customers by subcontractors located in Asia, principally Japan, Taiwan, Korea, the Philippines, Hong Kong and Malaysia. Disruptions or 13 14 adverse supply conditions arising from market conditions, political strife, labor disruptions and other factors could have adverse consequences on the Company's future results. Market demand for silicon wafers has increased significantly during the course of 1999 while supply of such wafers has increased at a much slower rate, resulting in a firmer pricing environment, less responsiveness to requests for expedited delivery by wafer suppliers, and in some cases, unsatisfied demand. In general, the lead time to increase market wafer supply by building additional wafer fabrication facilities is approximately two years and in periods where demand for wafers increases rapidly for a prolonged period, market shortages tend to occur. Management believes that for at least the next several quarters, demand will exceed the foundry industries ability to supply silicon wafers and that certain companies that rely on the foundry industry will not be successful in securing all of the wafers that they desire, thereby constraining their revenues. The Company believes that under such circumstances it is important to have close business relationships with wafer suppliers in order to receive the desired quantity of product. The Company believes that it enjoys close working relationships with its principal wafer supplier, TSMC, and as of September 30, 1999, the Company had in its other current assets a deposit of $16.8 million for future wafer allocations from TSMC which will be utilized during 2000, but there can be no assurance the Company will be successful in securing its total desired output from TSMC or that the Company's future growth will not be impaired by the scarcity of silicon wafers. Natural or man-made disasters, normal process fluctuations and variances in manufacturing yields could have a severe negative impact on the Company's operating capabilities. For example, in September of this year a major earthquake struck Taiwan resulting in widespread physical damage and loss of life. The earthquake halted wafer fabrication production at the Company's primary vendor TSMC, for several days, and then only limited production began. It was nearly two weeks before full production resumed and additionally some portion of the inventory in the production process was scrapped as a result of damage incurred during the earthquake. As a result, the Company will maintain lower inventory levels in the near term than it would otherwise desire. While the Company believes this reduction in inventories will have no material impact on its ability to service demand, the Company may not be able to respond in a timely fashion to certain market opportunities that might arise, and may lose the opportunity to participate in those specific opportunities as a result. The Company has sought to diversify its operating risk by participating in the WaferTech joint venture to manufacture silicon wafers with other partners in Camas, Washington. In October 1998, production began at WaferTech. WaferTech is currently in the initial stages of production volumes and has yet to make a profit. Although the Company expects future WaferTech production volumes and profitability to increase, the ramp up of WaferTech's production has not met the targeted level to achieve such profitability. There can be no assurances that the worldwide supply and demand for semiconductor wafers will be such that WaferTech will make a profit and that WaferTech will not continue to have an adverse impact on the Company's operating results. Also, a number of factors outside of the Company's control, including general economic conditions and cycles in world markets, exchange rate fluctuations or a lack of growth in the Company's end markets could adversely impact future results. An important component of the Company's growth, the networking 14 15 equipment market, has been growing at a slower rate in recent years. Should this trend continue, the Company's growth in future years may be limited. Because of the foregoing and other factors that might affect the Company's operating results, past financial performance should not be considered an indicator of future performance, and investors should not use historical trends to anticipate future results. In addition, the cyclical nature of the semiconductor industry and other factors have resulted in a highly volatile price of the Company's common stock. Liquidity and Capital Resources Since its inception, the Company has used a combination of equity and debt financing and cash flow from operations to support its operating activities. During the first nine months of 1999, cash, cash equivalents and short-term investments increased by $207.1 million to $786.2 million from $579.1 million at December 31, 1998. During the first nine months of 1999, the Company's operating activities generated net cash of $270.4 million. This cash flow was primarily attributable to net income of $153.6 million, adjusted by depreciation and amortization of $21.4 million, an increase in deferred income on sales to distributors and income taxes payable of $43.7 million and $54.8 million, respectively, partially offset by an increase in accounts receivable of $35.0 million. Cash used in investing activities of $221.5 million for the first nine months of 1999 is primarily the result of net purchases of short-term investments of $163.1 million, an additional investment in WaferTech, LLC of $37.5 million and purchases of property, plant and equipment of $19.0 million. Cash used in financing activities of $4.8 million for the first nine months of 1999 primarily from the repurchase of common stock of $27.1 million, offset by proceeds from exercises of stock options of $22.3 million. As of September 30, 1999, the Company had $786.2 million of cash, cash equivalents and short-term investments available to finance future growth. The Company believes the available sources of funds and cash expected to be generated from operations will be adequate to finance current operations and capital expenditures for at least the next year. The Company purchases the majority of its materials and services in U.S. dollars, and its foreign sales are transacted in U.S. dollars. Effective August 1, 1999, all purchase contracts for processed silicon wafers with Sharp Corporation of Japan are denominated in U.S. dollars. In recent years, the Company has not entered into any foreign exchange contracts for the purchase or sale of Japanese yen. At the end of the third quarter of 1999, the Company had no open forward contracts. The Company may choose to enter into such contracts from time to time should conditions appear favorable. Effects of inflation on Altera's financial results have not been significant. 15 16 Year 2000 Compliance Most computer programs were designed to perform data computations on the last two digits of the numerical value of a year. When a computation referencing the year 2000 is performed, these systems may interpret "00" as the year 1900 and could either stop processing date-related computations or could process them incorrectly. Computations referencing the year 2000 might be invoked at any time, but are likely to begin occurring in the year 1999. Pursuant to its year 2000 ("Y2K") compliance program, the Company has undertaken various initiatives intended to ensure that its computer equipment and software will function properly with respect to dates in the year 2000 and thereafter. As used herein, the term "computer equipment and software" includes systems that are commonly considered information technology ("IT") systems (e.g., accounting, data processing and telephone systems) as well as those that are not commonly considered IT systems (e.g., manufacturing equipment, building and facility operations systems). In addition, the Company has also reviewed the software products it sells, and has upgraded and will upgrade such products to offer full Y2K compliance. All computer equipment and software that are material to the Company's internal business operations have been determined to be Y2K compliant. With respect to MAX+PLUS II, the Company's third-generation software product, the Company has determined that it is fully compliant with Y2K standards, specifically DISC PD-2000-1 as published by the British Standards Institute. During the quarter, the Company completed formal Y2K compliance testing on its newest software product, Quartus. As a result of this testing, the Company determined that Quartus version 1999.06 is not compliant due to a two-digit, rather than four-digit, year displayed in a report window. The Company has made available to its customers a special beta release of Quartus 1999.10, version 1999.10 EBI, which is certified to be compliant per DISC PD-2000-1. The Company has not incurred and does not anticipate that it will incur material expenditures for the remediation of any Y2K issues. The Company could be adversely impacted by Y2K issues faced by major distributors, suppliers, customers, vendors and financial service organizations ("Third Parties") with which the Company interacts. The most reasonably likely worst case scenario for the Company with respect to the Y2K problem is the failure of a major distributor or supplier to be Y2K compliant such that the distribution of Altera products or the supply of components for such products is interrupted temporarily. This could result in the Company not being able to produce or distribute product for a period of time, which in turn could result in lost sales and profits. Based solely on responses received from these Third Parties, the Company has no reason to believe that there will be any material adverse impact on the Company's financial condition or results of operations relating to any Y2K issues of such Third Parties. However, if the responses received from these Third Parties are not accurate or circumstances change, then there could be an unforeseen material adverse impact on the Company's financial condition and results of operations. Management will continue to determine the impact, if any, that Third Parties who are not Y2K compliant may have on the financial condition or results of operations of the Company. The Company charged its business resumption planning committee to evaluate Y2K business disruption scenarios, coordinate the establishment of Y2K contingency plans, and identify and implement 16 17 preemptive strategies. These contingency plans were fully developed by the end of June 1999. Altera will maintain compliance of its essential business systems and continue to track the vendors and manufacturers of these system components in order to seek to resolve any Y2K issues that may be identified in the last quarter of 1999. 17 18 PART II OTHER INFORMATION ITEM 1. Legal Proceedings In June 1993, Xilinx, Inc. ("Xilinx") brought suit against the Company seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by Xilinx. In June 1993, the Company brought suit against Xilinx, seeking monetary damages and injunctive relief based on Xilinx's alleged infringement of certain patents held by the Company. In April 1995, the Company filed a separate lawsuit against Xilinx in Delaware, Xilinx's state of incorporation, seeking monetary damages and injunctive relief based on Xilinx's alleged infringement of one of the Company's patents. In May 1995, Xilinx counter-claimed against the Company in Delaware, asserting defenses and seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by Xilinx. Subsequently, the Delaware case has been transferred to California. In October 1998, both parties filed motions for summary judgment with respect to certain issues in the first two cases regarding infringement or non-infringement and validity or invalidity of the patents at issue in the respective cases. In October 1999, the Court ruled on the motions in the Xilinx suit, finding that one of Xilinx's claims is invalid and denying that other claims are invalid. The Court also denied the Company's motions that claims are not infringed and Xilinx's motions that the Company's products do infringe the claims. As a result, issues of infringement and validity remain subject to trial in the Xilinx case. The Court also ruled on certain Xilinx motions in the Company's suit, granting that one of the Company's patents is invalid, denying that the Company's other asserted patents are invalid or unenforceable and granting that one patent is not infringed. The Court has not yet ruled on Xilinx's other motion of noninfringement. Due to the nature of the litigation with Xilinx and because the lawsuits are still in the pre-trial stage, the Company's management cannot estimate the total expense, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the allegations. Management cannot ensure that Xilinx will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of the Company's MAX 5000, MAX 7000, FLEX 8000 or MAX 9000 families of products, or succeed in invalidating other of the Company's patents. Although no assurances can be given as to the results of these cases, based on the present status, management does not believe that any of such results will have a material adverse effect on the Company's financial condition or results of operations. In August 1994, Advanced Micro Devices, Inc. ("AMD") brought suit against the Company seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by AMD. In September 1994, Altera answered the complaint asserting that it is licensed to use the patents which AMD claims are infringed and filed a counterclaim against AMD alleging infringement of certain patents held by the Company. In October 1997, upon completion of trials bifurcated from the infringement claims, the District Court ruled that the Company is licensed under all patents asserted by AMD in the suit. In December 1997, AMD filed a Notice of Appeal of the District Court's rulings. In April 1999, the Federal Circuit Court ruled in AMD's favor on its appeal, finding that the Company is not licensed to AMD's patents, and remanded the case back to the District Court for further proceedings. In 1999, Lattice Corporation entered into an 18 19 agreement with AMD which includes assuming both the claims against the Company and the claims against AMD. Due to the nature of the litigation, the Company's management cannot estimate the total expense, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the allegations. Management cannot ensure that AMD will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of the Classic, MAX 5000, MAX 7000, FLEX 8000, MAX 9000, FLEX 10K and FLASHlogic product families, or succeed in invalidating any of the Company's patents remaining in the suit. Although no assurances can be given as to the results of this case, based on its present status, management does not believe that any of such results will have a material adverse effect on the Company's financial condition or results of operations. ITEM 5. Other Information On April 21, 1999, the Board of Directors of the Company approved a two-for-one stock split in the form of a stock dividend. Holders of record of the Company's common stock on May 4, 1999 received one additional share of Company common stock for each share held. The market price for Altera common stock as reported by Nasdaq reflected the stock split beginning May 20, 1999. In connection with the stock split, the Board of Directors of the Company also authorized doubling from 6,000,000 to 12,000,000 the number of shares authorized for repurchase under the Company's share repurchase program. In October 1999, the Company sold to Cypress Semiconductor Corporation ("Cypress") the exclusive right to manufacture, market and sell its MAX 5000 Programmable Logic Device product line and its equity interest in Cypress Semiconductor (Texas), Inc. The Company anticipates a one-time gain of approximately $9 million on a pre-tax basis to be recorded in the fourth quarter of 1999. The sale of the MAX 5000 family will not materially affect the Company's future revenues. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule for the nine months ended September 30, 1999. (b) Reports on Form 8-K None. 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: November 15, 1999 20 21 EXHIBIT INDEX
Exhibit Number Description - ------ ----------- 27.1 Financial Data Schedule
EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 175,038 611,131 91,164 5,242 58,835 1,036,577 152,082 88,091 1,345,200 259,385 0 0 0 199 1,085,616 1,345,200 599,303 599,303 218,129 218,129 162,943 0 0 236,841 76,973 153,625 0 0 0 153,625 0.78 0.74 For purposes of this Exhibit, Primary means Basic.
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