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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997 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 No.)
101 Innovation Drive, San Jose, California 95134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 544-7000
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 11, 1997: 89,108,834
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ALTERA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1997
PART I
FINANCIAL INFORMATION AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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ALTERA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
Sept. 30, Dec.31,
1997 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 87,282 $ 70,788
Short-term investments 323,511 210,062
-------- --------
Total cash, cash equivalents, and
short-term investments 410,793 280,850
Accounts receivable, less allowance
for doubtful accounts of $2,465 and $2,399 49,259 68,486
Inventories 97,913 75,798
Deferred income taxes 68,402 45,402
Other current assets 2,914 2,451
-------- --------
Total current assets 629,281 472,987
Property and equipment, net 148,468 89,804
Investments and other assets 202,678 215,421
-------- --------
$980,427 $778,212
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,534 $ 13,279
Accrued liabilities 134,381 89,209
Obligations 56,160 56,160
Accrued compensation 15,474 14,136
Income taxes payable -- 5,183
-------- --------
Total current liabilities 238,549 177,967
Convertible notes 230,000 230,000
-------- --------
Total liabilities 468,549 407,967
-------- --------
Stockholders' equity:
Common stock; $0.001 par value: 400,000
shares authorized, 89,023 and 87,604
shares issued and outstanding 89 88
Additional paid-in capital 119,592 90,556
Retained earnings 392,197 279,601
-------- --------
Total stockholders' equity 511,878 370,245
-------- --------
$980,427 $778,212
======== ========
See accompanying notes to financial information
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ALTERA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ -------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
--------- --------- ---------- ----------
Sales $ 162,126 $ 116,728 $ 468,680 $ 370,121
--------- --------- --------- ---------
Costs and expenses:
Cost of sales 60,749 45,094 176,086 142,997
Research and development 14,334 13,308 41,088 37,174
Selling, general, and
administrative 29,163 20,590 83,423 66,484
--------- --------- --------- ---------
Total costs and expenses 104,246 78,992 300,597 246,655
--------- --------- --------- ---------
Operating income 57,880 37,736 168,083 123,466
Interest and other income, net 925 (51) 2,516 1,259
--------- --------- --------- ---------
Income before taxes 58,805 37,685 170,599 124,725
Provision for income taxes 19,994 13,567 58,003 44,902
--------- --------- --------- ---------
Net income $ 38,811 $ 24,118 $ 112,596 $ 79,823
========= ========= ========= =========
Net income per share:
Primary $ 0.41 $ 0.26 $ 1.20 $ 0.87
========= ========= ========= =========
Fully diluted $ 0.40 $ 0.26 $ 1.15 $ 0.85
========= ========= ========= =========
Shares and equivalents used in
calculation of net income per
share:
Primary 94,078 91,150 93,620 91,588
========= ========= ========= =========
Fully diluted 103,068 100,610 102,674 100,606
========= ========= ========= =========
See accompanying notes to financial information
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ALTERA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
-----------------
Sept. 30, Sept. 30,
1997 1996
-------- ---------
Cash flows from operating activities:
Net income $112,596 $ 79,823
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 19,428 15,133
Deferred income taxes (23,000) (6,501)
Changes in assets and liabilities:
Accounts receivable, net 19,227 236
Inventories (22,115) (34,008)
Other current and non-current assets 6,257 3,129
Accounts payable 19,255 (11,134)
Accrued liabilities 45,172 3,937
Accrued compensation 1,338 (4,393)
Income taxes payable (5,183) (1,610)
-------- ---------
Cash provided by operating activities 172,975 44,612
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment (71,381) (26,617)
Net change in short-term investments (113,449) 67,059
Long-term investments (688) (44,120)
-------- ---------
Cash used for investing activities (185,518) (3,678)
Cash flows from financing activities:
Tax benefit from employee stock dispositions 16,835 3,000
Net proceeds from issuance of common stock 12,202 4,993
Repurchase of common stock - (4,331)
Payment on notes payable - (57,120)
---------- ---------
Cash provided by (used for) financing activities 29,037 (53,458)
---------- ---------
Net increase (decrease) in cash and cash equivalents 16,494 (12,524)
Cash and cash equivalents at beginning of period 70,788 79,409
---------- ---------
Cash and cash equivalents at end of period $ 87,282 $ 66,885
========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 70,195 $ 49,875
Cash paid during the period for interest $ 6,613 $ 6,613
See accompanying notes to financial information
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ALTERA CORPORATION
NOTES TO FINANCIAL INFORMATION
(Unaudited)
Note 1 - Interim Statements:
In the opinion of the Company, the accompanying unaudited financial data contain
all adjustments, consisting only of normal, recurring adjustments, necessary to
present fairly the financial information included therein. This financial data
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report to Shareholders for the year
ended December 31, 1996. Results for the interim period presented are not
necessarily indicative of results for the entire year.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
Note 2 - Balance Sheet Detail:
(In thousands)
Sept. 30, Dec. 31,
1997 1996
--------- ---------
Inventories:
Purchased parts and raw materials $ 1,678 $ 1,773
Work-in-process 63,655 56,870
Finished goods 32,580 17,155
--------- ---------
$ 97,913 $ 75,798
========= =========
Property and equipment:
Land $ 19,925 $ 19,925
Building 72,897 32,955
Equipment 94,864 75,453
Office furniture and equipment 13,288 9,508
Leasehold improvements 1,067 3,493
--------- ---------
202,041 141,334
Accumulated depreciation and
amortization (53,573) (51,530)
--------- ---------
$ 148,468 $ 89,804
========= =========
Note 3 - Net Income Per Share:
Primary net income per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of the assumed net shares issuable
upon the exercise of dilutive stock options using the treasury stock method. The
convertible notes issued in June 1995 are not common stock equivalents and,
therefore, have been excluded from the computation of primary net income per
share.
Fully diluted net income per share assumes the conversion of the convertible
notes into shares of common stock, the elimination of the related interest
expense, net of income taxes, and the dilutive effect of the stock options.
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ALTERA CORPORATION
NOTES TO FINANCIAL INFORMATION (continued)
(Unaudited)
Note 4 - Pro Forma Net Income Per Share:
The Company computes its net income per share as stated in Note 3 in accordance
with provisions of the Accounting Principles Board's Opinion No. 15 (APB 15),
"Earnings per Share." In February 1997, the Financial Accounting Standards Board
released FAS 128, "Earnings per Share." The new standard supersedes APB 15 and
is effective for periods ending after December 15, 1997.
Under FAS 128, primary and fully diluted net income per share will be replaced
by basic and diluted net income per share. Basic net income per share is
computed based on the weighted average number of common shares outstanding
during the period and does not give effect to the dilutive effect of common
equivalent shares, such as stock options. Diluted net income per share is
computed in the same manner as fully diluted net income per share, except that
the dilutive effect of the stock options is always based on the average market
price of the stock during the period, not the higher of the average and the
period end market price as required under APB 15.
Had the Company computed its net income per share based on FAS 128, the pro
forma amounts for basic and diluted net income per share would have been as
follows:
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------ -----------------
1997 1996 1997 1996
-------- -------- -------- --------
Basic Net Income Per Share:
Net income $ 38,811 $ 24,118 $112,596 $ 79,823
======== ======== ======== ========
Weighted average common shares
outstanding 88,782 87,308 88,332 87,320
======== ======== ======== ========
Basic net income per share $ 0.44 $ 0.28 $ 1.27 $ 0.91
======== ======== ======== ========
Diluted Net Income Per Share:
Net income $ 38,811 $ 24,118 $112,596 $ 79,823
Convertible notes interest, net of
income taxes and capitalized interest 2,020 1,842 5,100 5,658
-------- -------- -------- --------
$ 40,831 $ 25,960 $117,696 $ 85,481
======== ======== ======== ========
Weighted average common shares
outstanding 88,782 87,308 88,332 87,320
Dilutive stock options 5,296 3,842 5,288 4,268
Assumed conversion of notes 8,990 8,990 8,990 8,990
-------- -------- -------- --------
103,068 100,140 102,610 100,578
======== ======== ======== ========
Diluted net income per share $ 0.40 $ 0.26 $ 1.15 $ 0.85
======== ======== ======== ========
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ALTERA CORPORATION
NOTES TO FINANCIAL INFORMATION (continued)
(Unaudited)
Note 5 - Stockholders' Equity:
Effective June 19, 1997, Altera Corporation reincorporated as a Delaware
corporation with authorized capital of 400,000,000 shares of Common Stock with
$0.001 par value.
Note 6 - New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a financial
statement that is displayed with the same prominence as other financial
statements for periods beginning after December 15, 1997. Comprehensive income,
as defined, includes all changes in equity (net assets) during a period from
nonowner sources. Examples of items to be included in comprehensive income which
are excluded from net income include cumulative translation adjustments
resulting from consolidation of foreign subsidiaries' financial statements and
unrealized gains and losses on available-for-sale securities. Reclassification
of financial statements for earlier periods for comparative purposes is
required. The Company will adopt SFAS No. 130 beginning in 1998 and does not
expect such adoption to have a material effect on the consolidated financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements for periods beginning after December 15, 1997. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The company will adopt SFAS 131 beginning
in 1998 and does not expect such adoption to have a material effect on the
consolidated financial statements.
Note 7 - Subsequent Event
In October 1997, the Company announced that it will change its accounting method
for recognizing sales. The Company currently recognizes sales upon shipment as
title passes to customers, including distributors, net of appropriate reserves
for sales returns and allowances. The accounting change involves the deferral of
sales recognition on shipments to distributors until the product is sold to the
end customer. The Company will adopt the new sales recognition method in the
fourth quarter of 1997 with an effective date of January 1, 1997 and expects to
incur a charge to earnings of approximately $18.1 million, net of tax, for the
cumulative effect of the accounting change.
The effect of the accounting change, exclusive of the charge for the cumulative
effect of such change, is expected to result in an increase in sales of $3.6
million and $1.8 million for the first and second quarters of 1997,
respectively, and a corresponding increase in income before the cumulative
effect of the accounting change of $1.5 million and $740,000 for the first and
second quarters of 1997, respectively. The effect of the accounting change on
third quarter 1997 sales, net income and net income per share is not expected to
be material. The pro forma effect on 1996 sales and net income, had the Company
been using the new accounting method in the prior year for sales recognition, is
not material.
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ALTERA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Sales. Third quarter 1997 sales of $162.1 million were 38.9% higher than
the $116.7 million reported for the same period last year, and were down 1.2%
from the second quarter 1997 sales of $164.1 million. Sales in the third quarter
of 1997 were higher than sales for the same period last year primarily as a
result of significantly higher sales of the Company's FLEX 10K, MAX 7000, and
FLEX 8000 product families, which were partially offset by reduced sales in the
more mature Classic and MAX 5000 product families. Sales were higher than the
third quarter of 1996 in all geographic areas. The decrease in sales from the
second to the third quarter of 1997 was primarily centered in North America.
Japan and Asia Pacific combined, experienced an aggregate sales increase of
approximately 8.2% while Europe sales remained relatively the same. The decrease
in sales from the second to the third quarter of 1997 resulted from an overall
decrease in sales of the Company's more mature product families net of increased
sales in the newer MAX 7000S and FLEX 10K product families. The Company effected
book price reductions for the MAX 7000S and FLEX 10K product families during the
third quarter of 1997 and despite such price reductions, sales for both product
families increased as compared to the second quarter. Management believes that
the reduced prices may result in increased demand and strengthen the Company's
market share over the long term. However, reduced prices may negatively affect
the Company's short-term sales growth. Additionally, potential new product
introductions from competitors may cause further pricing pressures and affect
sales growth. There can be no assurance that increased demand and market share
will be achieved in the longer term.
During the third quarter of 1997, the Company's inventories on hand
increased to $97.9 million from $72.0 million at June 30, 1997. The build up of
inventory is intended to increase responsiveness to customer demand, especially
on the Company's newer product families, and support potential growth in overall
sales. The Company believes current inventory levels to be reasonable and
adequate. However, the Company's ability to adjust production schedules to
unanticipated changes in demand is limited in the short term. If demand varies
significantly from management's expectations, inventory may rise above, or fall
below targeted levels in the short term.
Gross Margin. The gross margin percentage in the third quarter of 62.5%
was down from 62.7% during the prior quarter, and up from 61.4% in the same
period a year ago. Gross margins during the third quarter decreased slightly
from the second quarter due to lower selling prices which were partially offset
by lower manufacturing costs due to improved yields, process advancements,
increased manufacturing activity and lower wafer costs.
Although yields measured as a total for all product families improved
for the first nine months, yields for the FLEX 10K product family were slightly
lower in the second and third quarters as the Company transitioned certain FLEX
10K product family members to new and more advanced processes. The Company
continues to spend significant research and development resources to improve
production yields
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on both new and established products. Difficulties in production yields 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. 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 were
$14.3 million for the third quarter of 1997, or $105,000 lower than the prior
quarter, and $1.0 million higher than the same period a year ago. The 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. As a percentage of sales, the research and development expenditures
remained the same at 8.8% for the second and third quarters of 1997, compared to
11.4% for the third quarter of 1996. 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 currently expects that, in the long
term, research and development expenses will continue to increase in absolute
dollars but may fluctuate as a percentage of sales.
The Company expects to continue to make significant investments in
prototyping of the FLEX 6000 and FLEX 10K product families. Also, the Company is
focusing its efforts on the development of new programmable logic chips, related
development software and hardware, and advanced semiconductor wafer fabrication
processes. However, even if the Company accomplishes its goals for the
development of new products and manufacturing processes, 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 prices declining as
products mature.
Selling, General, and Administrative. Third quarter selling, general,
and administrative expenses of $29.2 million are $8.6 million higher than the
same quarter a year ago, and $337,000 lower than the prior quarter. Selling,
general and administrative expenses in the third quarter of 1997 decreased
slightly from the second quarter primarily as a result of a reduction in the
provision for legal costs. The decrease is also attributable to decreases in
advertising and promotional expenditures, and lower commissions due to decreased
sales. Compared to the same period a year ago, the increase in selling, general
and administrative expenses relates primarily to increased salary expenses as a
result of increased headcount, increased legal expenses, and higher selling
expenses on increased sales. Selling, general, and administrative expenses
includes commission and incentive expenses, advertising and promotional
expenditures, legal, and salary expenses related to field sales, marketing, and
administrative personnel.
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Operating Income. Third quarter 1997 operating income of $57.9 million,
representing 35.7% of sales, was lower than the 35.9% achieved during the second
quarter of 1997 and higher than the 32.3% for the same quarter a year ago. The
year-to-year increase in operating income, on a percentage of sales basis, was
affected by the overall increase in the Company's gross margin and the decreases
in research and development and selling, general and administrative expenses as
a percentage of sales.
Interest and Other Income. Interest and other income decreased compared
to the second quarter of 1997 and increased compared to the same quarter a year
ago. Interest and other income consists of interest income on cash balances
available for investment offset by interest expense related to the convertible
notes (such interest expense is net of capitalized interest incurred during the
construction of the new headquarters). The decrease in interest and other income
from the second quarter to the third quarter of 1997 is primarily a result of
decreased capitalization of interest expenses.
Income Taxes. The Company's provision for income taxes was 34% for the
third quarter of 1997 compared to 36% for the quarter ended September 30, 1996.
The decrease in the income tax provision rate is due in part to increased
research and development credits, a geographical shift in the sources of the
Company's income, and tax-exempt interest income in 1997 compared to 1996.
Equity in Investment. In June 1996, Altera, 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, to be made in three installments of which the
final one will be made in November 1997, Altera received an 18% equity ownership
in the joint venture company and certain rights to procure output from the
facility at market price. 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. Cumulative financial
results of WaferTech to date are not material. The Company expects that start-up
and pre-operating expenses will result in losses at WaferTech in 1998. Based on
current projections, the Company further expects that its share of WaferTech's
losses in 1998 will be between $5.0 million to $15.0 million, net of tax. While
WaferTech is expected to record income after 1998, there can be no assurance
that WaferTech will realize any income in 1999 or in subsequent periods.
Change in Accounting Method. In October 1997, the Company announced that
it will change its accounting method for recognizing sales. The Company
currently recognizes sales upon shipment as title passes to customers, including
distributors, net of appropriate reserves for sales returns and allowances. The
accounting change involves the deferral of sales recognition on shipments to
distributors until the product is sold to the end customer. The Company will
adopt the new sales recognition method in the fourth quarter of 1997 with an
effective date of January 1, 1997 and expects to incur a charge to earnings of
approximately $18.1 million, net of tax, for the cumulative effect of the
accounting change.
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The effect of the accounting change, exclusive of the charge for the
cumulative effect of such change, is expected to result in an increase in sales
of $3.6 million and $1.8 million for the first and second quarters of 1997,
respectively, and a corresponding increase in income before the cumulative
effect of the accounting change of $1.5 million and $740,000 for the first and
second quarters of 1997, respectively. The effect of the accounting change on
third quarter 1997 sales, net income and net income per share is not expected to
be material. The pro forma effect on 1996 sales and net income, had the Company
been using the new accounting method in the prior year for sales recognition, is
not material.
New Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements for periods beginning after
December 15, 1997. Comprehensive income, as defined, includes all changes in
equity (net assets) during a period from non-owner sources. Examples of items to
be included in comprehensive income which are excluded from net income include
cumulative translation adjustments resulting from consolidation of foreign
subsidiaries' financial statements and unrealized gains and losses on
available-for-sale securities. Reclassification of financial statements for
earlier periods for comparative purposes is required. The Company will adopt
SFAS No. 130 beginning in 1998 and does not expect such adoption to have a
material effect on the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for the way companies report information about operating segments in annual
financial statements for periods beginning after December 15, 1997. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The company will adopt SFAS 131 beginning
in 1998 and does not expect such adoption to have a material effect on the
consolidated financial statements.
Future Results. Future operating results will depend on the Company's
ability to develop, manufacture, and sell complicated semiconductor components
and complex software that offer customers greater value than products of
competing vendors. The Company's efforts in this regard may not be successful.
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 impact future results. The
Company is highly dependent upon subcontractors to manufacture silicon wafers
and perform assembly and testing services. Disruptions or adverse supply
conditions arising from market conditions, political strife, labor disruptions,
natural or man-made disasters, other factors, and normal process variations
could have a material adverse effect on the Company's future operating results.
Competitive break-throughs and particularly competitive pricing could also
impact future operating results. Additionally, litigation relating to
competitive patents and intellectual property could have an adverse impact on
the Company's financial condition or operating results.
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The Company owns more than 100 United States patents and has additional
pending United States patent applications on its semiconductor products. The
Company also has technology licensing agreements with AMD, Cypress
Semiconductor, Intel, and Texas Instruments giving the Company royalty-free
rights to design, manufacture, and package products using certain patents they
control. Other companies have filed applications for, or have been issued, other
patents and may develop, or obtain proprietary rights relating to products or
processes competitive with those of the Company. From time to time the Company
may find it desirable to obtain additional licenses from the holders of patents
relating to products or processes competitive with those of the Company.
Although its patents and patent applications may have value in discouraging
competitive entry into the Company's market segment and the Company believes
that its current licenses will assist it in developing additional products,
there can be no assurance that any additional patents will be granted to the
Company, that the Company's patents will provide meaningful protection from
competition, or that any additional products will be developed based on any of
the licenses that the Company currently holds. The Company believes that its
future success will depend primarily upon the technical competence and creative
skills of its personnel, rather than on its patents, licenses, or other
proprietary rights.
The Company, in the normal course of business, from time-to-time
receives and makes inquiries with respect to possible patent infringements. As a
result of inquiries received from companies, it may be necessary or desirable
for the Company to obtain additional licenses relating to one or more of its
current or future products. There can be no assurance that such additional
licenses could be obtained, and, if obtainable, could be obtained on conditions
that would not have a material adverse effect on the Company's operating
results. If the inquiring companies were to allege infringement of their
patents, as is the case in the Company's current litigation with competitors,
there can be no assurance that any necessary licenses could be obtained, and, if
obtainable, that such licenses would be on terms or conditions that would not
have a material adverse effect on the Company. In addition, if litigation were
initiated, there can be no assurance that these companies would not succeed in
obtaining significant monetary damages or an injunction against the manufacture
and sale of one or more of the Company's product families. It may be necessary
or desirable for the Company to incur significant litigation expenses to enforce
its intellectual property rights.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments
increased by $129.9 million in the first nine months of 1997, from $280.9
million at December 31, 1996 to $410.8 million at September 30, 1997. The
increase is mainly attributable to net income of $112.6 million, adjusted by
non-cash items including depreciation and amortization of $19.4 million, and
increases in accounts payable, accrued liabilities, and accrued compensation
totaling $65.8 million. Additional sources were decreases in accounts receivable
and other current and non-current assets, the issuance of common stock to
employees and the tax benefit from employee stock dispositions totaling $54.5
million. Offsetting these sources of cash were primarily purchases of fixed
assets of $71.4 million, an increase in deferred income taxes and inventory of
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$45.1 million and a decrease in income taxes payable of $5.2 million during the
first nine months of the year.
During the nine months ended September 30, 1997, the Company invested
$71.4 million in property and equipment, primarily consisting of computer and
test equipment (approximately $16.5 million) and the construction of the new
corporate headquarters (approximately $41.9 million). In addition, during the
fourth quarter of 1997, the Company will be completing its investment in
WaferTech in the amount of $56.2 million.
The Company believes that its cash, cash equivalents, and short-term
investments, combined with cash generated from ongoing operations, will be
adequate to finance the Company's operations, the remaining investment in
WaferTech, and capital expenditures for at least the next year.
Impact of Currency and Inflation. The Company purchases the majority of
its materials and services in U.S. dollars, and most of its foreign sales are
transacted in U.S. dollars. However, Altera does have Yen denominated purchase
contracts with Sharp Corporation of Japan for processed silicon wafers. In
recent years, the Company did not hold or purchase any foreign exchange
contracts for the purchase or sale of foreign currencies but may choose to enter
into such contracts in the future should conditions appear favorable. Effects of
inflation on Altera's financial results have not been significant.
Safe Harbor Notice
This Report on Form 10-Q 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
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
that are contained in the section of this Report entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Factors that could cause actual results to differ materially from projected
results include but are not limited to risks associated with the Company's
dependence on third-party wafer suppliers, the Company's ability to achieve
continued cost reductions and maintain gross margins, the Company's ability to
achieve and maintain appropriate inventory 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 of new products through investment in research and development and
application of new process technologies to old and new product lines,
recruitment and retention of qualified personnel, market acceptance of and
demand for the Company's products, competition for and pressure on pricing of
the Company's products, changes in customer ordering patterns, litigation
involving intellectual property rights, issuance of new patents and acquisition
of other intellectual property rights, and general market conditions. Additional
risk factors are
14
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disclosed in the Company's Annual Report on Form 10-K on file with the
Securities and Exchange Commission.
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ALTERA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1997
PART II
OTHER INFORMATION
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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 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 a June 1996
trial bifurcated from the infringement claims, the Company prevailed in its
defense that it is licensed under some or all of the patents asserted by AMD in
the suit. In October 1997, the Company prevailed in its defense that it is
licensed under all of such patents asserted by AMD in the suit. Due to the
nature of the litigation with AMD, and because AMD may appeal the court rulings
that the Company is licensed under all of the patents asserted by AMD in the
suit, 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 ultimately
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.
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Item 5. Other Information
In October 1997, the Company announced that it will change its
accounting method for recognizing sales. The Company currently recognizes sales
upon shipment as title passes to customers, including distributors, net of
appropriate reserves for sales returns and allowances. The accounting change
involves the deferral of sales recognition on shipments to distributors until
the product is sold to the end customer. The Company will adopt the new sales
recognition method in the fourth quarter of 1997 with an effective date of
January 1, 1997 and expects to incur a charge to earnings of approximately $18.1
million, net of tax, for the cumulative effect of the accounting change.
The effect of the accounting change, exclusive of the charge for the
cumulative effect of such change, is expected to result in an increase in sales
of $3.6 million and $1.8 million for the first and second quarters of 1997,
respectively, and a corresponding increase in income before the cumulative
effect of the accounting change of $1.5 million and $740,000 for the first and
second quarters of 1997, respectively. The effect of the accounting change on
third quarter 1997 sales, net income and net income per share is not expected to
be material. The pro forma effect on 1996 sales and net income, had the Company
been using the new accounting method in the prior year for sales recognition, is
not material.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Computation of earnings per share.
27. Financial Data Schedule.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALTERA CORPORATION
/s/ Nathan Sarkisian
-----------------------------------
Nathan Sarkisian, Vice President
(duly authorized officer) and Chief
Financial Officer (principal
financial officer)
Date: November 12, 1997
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INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
11.1 Computation of earnings per share
27 Financial Data Schedule