-----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, CtiH454ilqfVC2Wk59lY8+pOo3DmREbJdWvz7sDJSThbMZg0YeLBWKOuAFStTP+s Act2PdByHBV/LRp4DW7/CA== 0000891618-97-001429.txt : 19970328 0000891618-97-001429.hdr.sgml : 19970328 ACCESSION NUMBER: 0000891618-97-001429 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NASD 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: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16617 FILM NUMBER: 97565852 BUSINESS ADDRESS: STREET 1: 2610 ORCHARD PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95134-2020 BUSINESS PHONE: 4088947000 MAIL ADDRESS: STREET 1: 2610 ORCHARD PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95134-2020 10-K 1 FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NUMBER: 0-16617 ALTERA CORPORATION (Exact Name of Registrant as Specified in its Charter) CALIFORNIA (State or Other Jurisdiction of Incorporation or Organization) 77-0016691 (I.R.S. Employer Identification No.) 2610 ORCHARD PARKWAY, SAN JOSE, CALIFORNIA 95134 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (408) 894-7000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK (Title of Class) 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 the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was approximately $3,281,013,660 as of February 28, 1997, based upon the closing sale price on the Nasdaq National Market for that date. There were 88,133,415 shares of the registrant's Common Stock issued and outstanding as of February 28, 1997. DOCUMENTS INCORPORATED BY REFERENCE Items 5, 6, 7, and 8 of Part II incorporate information by reference from the Annual Report to Shareholders for the fiscal year ended December 31, 1996. Items 11, 12, and 13 of Part III incorporate information by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held May 7, 1997. ================================================================================ 2 PART I ITEM 1. BUSINESS. GENERAL Founded in 1983, Altera is a world-wide leader in high-performance, high-density programmable logic devices and associated computer aided engineering (CAE) logic development tools. Programmable logic devices are semiconductor chips that offer on-site programmability to customers using the Company's proprietary software. The software runs on personal computers and engineering workstations and interfaces with a large number of industry-standard electronic design automation environments. User benefits include ease of use, lower risk, and fast time-to-market. The Company offers the broadest line of CMOS programmable logic devices that address high-speed, high-density, and lower power applications. The Company's semiconductor devices range in density from an estimated 150 to 100,000 useable gates. Altera products serve a broad range of markets, including telecommunications, data communications, computers, and industrial applications. BACKGROUND The CMOS programmable logic market has developed as a result of two primary factors: (i) the need for more logic functions on each integrated circuit in order to achieve the performance and cost objectives of electronic systems manufacturers; and (ii) shortened product life cycles for end products which put an increased premium on time to market for the system manufacturer. The desire of manufacturers for further differentiation and improvement of their products has generated demand for higher density logic circuits. Higher density (and thus more "integrated") circuits, which have more logic functions on each chip, allow the electronic equipment manufacturer to make improvements to the end product that reduce physical size, cost, and power consumption, improve performance, and add features for further differentiation. However, the need for increased integration and greater product differentiation makes it difficult for electronic system manufacturers to use standard, mass-produced logic circuits. In the 1980's, ASICs gained popularity as a solution to the integration problems noted above. ASICs include a variety of custom and semi-custom alternatives, such as gate arrays, cell libraries, and silicon compilers. Using computer aided engineering software tools, ASIC designers are able to combine sections of standard logic and memory, and generate unique tooling which can then be used to fabricate a unique custom chip in the manufacturing process. Although ASICs achieve the goal of higher density and more integration by combining a variety of low-density parts into a single chip, they do so by introducing several compromises, resulting from the customized manufacturing process, that are undesirable to many users of standard low-density chips. These compromises can include longer lead time to the marketplace, non-recurring engineering (NRE) fees, dedicated custom product inventory, lack of control over sources of supply, and inflexibility of design iteration. Over the past decade, CMOS programmable logic has had a significant impact on electronic design. PLDs help the Company's customers to meet their performance and cost objectives while avoiding the significant development costs, long development lead times, and dedicated custom product inventories associated with ASICs. Using the Company's PLDs, engineers can complete numerous iterations of a product design and test and verify the design until it meets their expectations, while still delivering new products to market relatively quickly. Since 1984, when the Company introduced the first CMOS PLD, the market for such devices has grown to over $1.9 billion dollars in 1996. CMOS programmable logic devices are currently offered to the market by semiconductor vendors in various architectures, using EPROM (erasable-programmable-read-only-memory), EEPROM (electrically- erasable-programmable-read-only-memory), SRAM (static random access memory), FLASH (non-volatile) memory, and anti-fuse configuration storage elements. 3 BUSINESS STRATEGY The Company's strategy is to be a leading supplier of CMOS programmable logic devices and related software development tools by developing and offering products which provide its customers with effective solutions for quickly bringing their own products to market. Key elements of the Company's strategy include: Standard Components. The Company's PLDs are manufactured as standard products (i.e., shipped "blank" for programming by the user). The chips use CMOS technology for low power and use an erasable configuration element: EPROM, EEPROM, SRAM, or FLASH. This combination allows designers using the Company's PLDs to shorten the long design cycle associated with ASIC custom chips by permitting multiple design iterations without the need to have prototype custom designs fabricated in silicon, redesigned, and refabricated. The end user benefits because Altera's programmable chips are configured at the desktop, rather than in the foundry, by means of Altera's proprietary development software, dramatically shortening the time to market. Since Altera's integrated circuits are standard products and have a wide range of uses, inventory risks are minimized for customers, distributors, and the Company. Altera also benefits from economies of scale in the manufacturing process by minimizing logistics, inventory, and overhead costs. Proprietary Product Architecture. The Company holds patents on various aspects of its chip architectures which combine speed and density with the benefits of user programmability. The Altera CPLD architectures make certain performance paths in the integrated circuits easier to predict and simplify the task of designing with programmable logic devices. Software Development Tools. Altera has dedicated a significant portion of its research and development staff to the development of its proprietary software. This software permits designers to use their desktop personal computers or workstations to develop and program Altera chips to function as custom logic devices quickly and under the designers' own control. The Company's strategy has been to offer its development software systems at relatively modest prices in order to achieve an installed base of design sites that may generate future chip orders. Broad Product Line. The Company applies its basic technology to a broad general purpose product line spanning a range of densities, pin counts, and speeds. Products currently in production range in density from an estimated 150 to 100,000 usable gates. Customer Designs. The Company actively seeks to induce designers to incorporate its PLDs into products early in their design cycle. Such "design wins" can lead to use of the Company's PLDs in prototyping and, ultimately, in volume production of a customer's product, potentially for the life cycle of that product. In addition, system designers who have become familiar with the Company's PLDs may be more inclined to use them in future designs, potentially resulting in additional sales for the Company. The Company's marketing efforts include advertising, seminars, and demonstrations for potential customers. The Company also provides applications engineers to assist customers and potential customers in adapting existing or proposed designs, including those using competitors' PLDs or gate arrays, to use the Company's PLDs. The Company has observed that the length of customers' design cycles -- even as they may be reduced through use of the Company's products -- often results in a lag between the Company's marketing efforts, particularly when introducing a new PLD product family, and the commencement of significant product sales resulting from those efforts. Diversified Markets. The Company has sold its semiconductor components to a broad base of customers worldwide in a range of market segments, including communications, computer, and industrial applications. International sales constituted 47% of the Company's sales in 1996. Technology and Production Relationships. Altera has obtained its CMOS silicon chips through supply arrangements with leading semiconductor manufacturers. The Company has avoided the full capital commitment and overhead burden of establishing its own wafer fabrication facility and has the flexibility to utilize new process technologies as they become available. 2 4 TECHNOLOGY Altera's chips incorporate several types of internal architectures which, combined with advanced CMOS semiconductor technology, provide speed and logic density for the customer. The Company holds a number of patents on various parts of its chip architectures. Altera's chips are configured by the Company's proprietary development software that translates a system logic designer's logic schematics and hardware descriptions into logic functions on an Altera chip. Altera Logic Chips Architectures. Altera believes its architectures offer relatively high performance across a broad range of user applications. At the same time they provide simplicity to the system logic designer, making the task of designing and using Altera's chips relatively easy. The architectures used in the Company's Classic, MAX 5000, MAX 7000, FLASHlogic, and MAX 9000 families are known as array-based architectures. These architectures are very regular, comprised of elements called "macrocells," and are optimized for combinatorial logic. The Company's FLEX 8000 and FLEX 10K architectures are optimized for register intensive logic applications. These architectures consist of fine grained logic elements grouped into higher level logic array blocks which are then connected together with a proprietary programmable interconnect structure. The FLASHlogic family uses non-volatile FLASH memory cells that can be configured as on-board memory or logic. Process Technology. Through technology relationships, Altera has gained access to CMOS process technologies from various semiconductor manufacturers. The Company's Classic and MAX 5000 product families are manufactured using processes with 0.8 and 0.65 micron effective channel lengths. MAX 7000, MAX 9000, FLEX, and FLASHlogic products are being produced using processes with effective channel lengths of 0.5 and 0.35 microns and are expected to continue the migration to more advanced CMOS processes when available. The Company procures wafers from various semiconductor manufacturers including Sharp, TSMC, Cypress, and Intel. EPROM configuration elements, found on certain of the Company's older Classic and MAX 5000 products, require ultraviolet light for erasure, necessitating relatively expensive quartz-windowed packages. Devices in quartz-windowed packages are primarily used by customers for prototyping and low-volume production. Altera has mitigated this package cost to users by also making its parts available in plastic one-time programmable packages to permit reduced costs for volume production. Altera also offers chips incorporating EEPROM (MAX 7000, MAX 7000S, and MAX 9000) and SRAM (FLEX 8000 and FLEX 10K) configuration elements. The EEPROM (E(2)) element permits electrical erasure so that erasure can occur even when packaged in plastic packages, providing further flexibility and cost advantage for customers. The SRAM element provides low stand-by power consumption and in-circuit reprogrammability. FLASH memory elements also offer these features. The Company routinely evaluates existing and emerging types of programmable elements. If Altera perceives that such programming methods provide benefits that complement those of its current products, it will consider incorporating them into its products. Development System Software The Company's development system software and hardware is used to implement logic designs in its chips. The MAX+PLUS II software runs under the Microsoft Windows operating environment on personal computers and in the Motif environment on UNIX workstations. By utilizing these popular graphical user interfaces, the Company has designed the software for portability to widely used personal computers and engineering workstations. The Company provides interfaces to many industry standard third party CAE tools via the industry standard EDIF net list format and hardware description languages (Verilog and VHDL, for example). These connections allow the Altera software to be used in conjunction with software packages including those offered 3 5 by Cadence Design Systems, Inc., Data I/O Corporation, Exemplar Logic, Inc., Intergraph Corporation, Mentor Graphics Corporation, OrCAD Systems Corporation, Synopsys, Inc., and Viewlogic Systems, Inc. An Altera chip design for a particular end product application is achieved in four steps: design entry, implementation, verification, and programming. The Company's development software provides complete facilities for each step so that customers can take advantage of a uniform and relatively easy to learn design environment. Extensive online help is available in the software to provide relevant information quickly. Design entry is accomplished using either the proprietary integrated editors or third party tools. Three basic entry formats are accepted: schematic, where the logic is represented pictorially; hardware description language, where textual logic equations define the circuit; and waveform design entry, where a designer specifies only the input and output waveforms of a circuit. A combination of the three methods may be used hierarchically in a design. Implementation of the design is performed by Altera's proprietary logic synthesis, partitioning, and fitting software. This software takes a design and uses sophisticated mathematical routines to optimize and compact the user's logic, partition the logic among several chips (if necessary), and then fit each partitioned section into one of these chips. Typically this process requires minimal intervention from the user. Design verification lets a user confirm the correctness of a design by using several proprietary tools in addition to third party simulators. The Company's static timing analyzer allows analysis of the timing of critical logic paths; integrated functional simulation allows rapid functional logic debugging; and timing simulation allows the validation of full circuit operation. Simulation results may be viewed using the Company's waveform editor. The final step, programming, may be performed using the Company's programming hardware and integrated software, or third party programmers such as those from Data I/O Corporation. During this step, the optimized logic design is programmed into a PLD (or serial EPROM in the case of the FLEX SRAM-based logic chips), which is then ready for use on a circuit board in an electronic system product. PRODUCTS Altera sells a range of CMOS programmable logic integrated circuits and associated development software and hardware. The integrated circuits include products aimed at general logic replacement as an alternative to ASICs and products targeted at specific functions. The Company's development software allows the user to take advantage of the features of Altera integrated circuits. The Company's strategy has been to provide support for users of its newest integrated circuits from the date of product introduction by developing its software tools in tandem with the related components. Altera currently markets seven general purpose families of CMOS programmable logic in over 500 package/chip combinations. The Company must continue to make significant investments in research and development in order to continue to develop new products, enhance existing products, and achieve market acceptance for such products, particularly in light of the industry pattern of price erosion for mature products. Over the past 12 months, the Company has added further enhanced members of its existing MAX 7000, FLEX 8000, MAX 9000, and FLEX 10K families. The commercial success of these products will depend upon the achievement of targeted yield, product cost, and performance levels and the development of manufacturing, marketing, and support capabilities. Even if such goals are accomplished, there can be no assurance that these products will achieve significant market acceptance. See "Research and Development." Integrated Circuits Classic. This is the initial family of integrated circuits introduced to the market by Altera. It originally consisted of four general-purpose PLDs targeted to replace multiple small scale integrated circuits. The product family was expanded with the acquisition of Intel's PLD division and now includes ten different circuits. This architecture provides densities ranging from an estimated 150 to 900 usable logic gates in packages ranging from 20 to 68 pins. Wafers for this family of products were initially provided by Intel and were subsequently migrated to more advanced CMOS process technologies to provide faster speed and 4 6 reduced cost. All of these products use wafers with EPROM configuration elements manufactured by Cypress, Sharp and Intel. The products generally incorporate the first generation architecture and are currently marketed and sold to customers as the "Classic" family of products. MAX 5000. This family of PLDs uses a second generation architecture known as Multiple Array MatriX (MAX) to provide greater densities than products in the Classic family. The MAX architecture provides multiple array logic. Signals in the higher-density devices are routed between multiple arrays by the Programmable Interconnect Array that delivers a high percentage of routability. This multiple array architecture enables MAX 5000 PLDs to offer the speed of smaller arrays with the integration density of larger arrays -- MAX 5000 offers up to an estimated 3,750 usable gates. Wafers for MAX 5000 products use EPROM configuration elements and are manufactured by Cypress Semiconductor currently on 0.65 micron CMOS process technologies. These products are available in packages ranging from 24 to 100 pins. Cypress has a license to manufacture and sell certain MAX 5000 products. MAX 7000. This third family of PLDs incorporates an enhanced MAX architecture. The MAX 7000 family provides higher integration densities with faster performance and higher pin count than the MAX 5000 family. Current MAX 7000 products offer a range of densities from an estimated 600 to 5000 usable gates, in packages ranging from 44 to 208 pins. This family incorporates EEPROM configuration elements on all of its chips. The Company is currently obtaining wafers for this product from Sharp and TSMC. FLEX 8000. The FLEX 8000 family, which uses 0.65 micron CMOS technology from Sharp, is based on SRAM configuration elements which provide in-system reconfigurability, and low standby power. The Company also acquires FLEX 8000 wafers from TSMC's facility, using a 0.5 micron CMOS process technology. The FLEX 8000 architecture provides relatively high register count compared to the Classic and MAX architectures, with an estimated 16,000 usable gates and 1,500 registers in up to a 304 pin package. MAX 9000. This further enhanced MAX family is one of the Company's newest architectures. MAX 9000 is a feature-rich, high-density macrocell architecture with up to 560 macrocells (an estimated 12,000 usable gates). The EEPROM-based devices are PCI-compliant and offer non-volatile, 5.0 volt, in-system programmability (ISP). ISP functionality allows these devices to be programmed after being soldered onto the circuit board for manufacturing ease. Devices are offered in packages ranging from 84 to 304 pins and have in-system clock speeds of up to 100 MHz. FLEX 10K. The FLEX 10K architecture features an embedded array which can more efficiently implement a variety of memory and specialized logic functions. This family includes the Company's largest devices (currently a device with an estimated 100,000 usable gates). Various combinations of memory configurations and complex logic functions can be implemented in FLEX 10K devices. FLASHlogic. Acquired through the Company's purchase of Intel's PLD product line, this high-speed, medium density family combines volatile SRAM elements and non-volatile FLASH memory elements to create one of the most feature rich families in the PLD industry. Features include on-board RAM, ISP, and in-circuit reconfigurability. Devices are offered in usable gate counts from an estimated 800 to 3,200, with up to 208 pin packages, and in-system clock speeds of up to 100 MHz. The Company offers a variety of plastic and quartz-windowed ceramic packages for its chips, including dual-inline, surface mount, ball-grid, and pin-grid array configurations. Altera provides components to meet the operating temperature ranges of commercial and industrial users. The Company also offers a conversion option to its customers on a number of its chips that converts the programmable chip to a non-programmable gate array format. This option is called a Mask Programmable Logic Device (MPLD). By hard coding the programming into the chip with a mask (as with a gate array), Altera is able to provide the customer a lower cost end solution after prototyping with programmable chips. Development System Software and Hardware A cornerstone of Altera's strategy is the market penetration of its low-cost proprietary software design tools. These tools improve the productivity of Altera's customers, and the Company, in turn, develops a base of customers who use Altera's software to design their products. Each development software package can be used 5 7 repeatedly for different designs on an ongoing basis. A number of these designs may become incorporated into long-term customer products, which may generate expanded logic chip sales. As of the end of 1996, Altera had licensed over 29,000 of its development system software packages, although at any given time only a portion of these are active. The Company attempts to work closely with its installed base of customers, tracking the progress of logic chip designs, providing applications design support, and for those customers who have purchased maintenance agreements, upgrading the customers' software. Management believes that close contact with its development software customers is a key element in customer satisfaction and can also provide insight into new product development areas. Altera's PC-based development software runs under Microsoft Windows. The compiler software has also been ported and is available for engineering workstations, including Sun, IBM, and Hewlett-Packard workstation platforms. The software is typically delivered to the customer on CD-ROM along with documentation manuals. The hardware consists of a programming board which plugs into an expansion slot of the user's personal computer, and a programming unit which uses hardware that accepts various chip package types. High-volume production programming equipment is available from Data I/O Corporation and other companies. Altera's development software products aid the chip user's design efficiency by allowing the user to continue with proven, familiar methods rather than learn new ones. Accordingly, the most widely-used design methodologies are supported, including Boolean algebra for low-density PLD users, and schematic capture and hardware description languages for TTL and ASIC users. The output from any of these design methodologies is translated into a consistent format for implementation into an Altera chip, and the design is fitted by Altera's proprietary software into the particular chip chosen. This approach frees the system design engineer from the unfamiliar task of chip design and allows the engineer to focus on logic implementation. MANUFACTURING The Company does not directly manufacture its silicon wafers. Altera's chips are produced using other semiconductor manufacturers' high-volume wafer fabrication processes, thus enabling the Company to take advantage of economies of scale and process advances. The Company believes that these manufacturers can produce wafers at lower cost due to their advanced production facilities and manufacturing economies of scale. Altera presently has its primary wafer supply arrangements with four semiconductor vendors: Sharp, TSMC, Cypress, and Intel. See "Patents and Licenses" for a summary of the license agreements related to the wafer supply arrangements with Cypress and Intel. The Company continues to negotiate additional foundry contracts and intends to establish other sources of wafer supply for its products as such arrangements become useful or necessary. Although there are a number of new state of the art wafer fabrication facilities currently under construction around the world, semiconductor foundry capacity can become limited, and the Company cannot guarantee that manufacturing capacity constraints will not pose significant problems in the future. The Company owns a 17% equity interest in Cypress Semiconductor (Texas) Inc. (CSTI), a subsidiary of Cypress Semiconductor Corporation. Pursuant to the agreements governing this ownership, Altera can obtain wafer supply from CSTI approximately in proportion to its percentage ownership in CSTI. This investment provides Altera with the option to design and market certain sole-sourced products produced at CSTI. The Company uses this facility for the manufacture of all of its Classic and MAX 5000 products. Cypress Semiconductor, which has manufacturing and marketing rights to certain MAX 5000 products, also manufactures its own products in the CSTI facility. In 1995, the Company entered into several agreements with TSMC, whereby it agreed to make certain deposits to TSMC for future wafer capacity allocations extending into 2001. The Company made cash deposits amounting to $2.4 million in 1995 and issued promissory notes for $120.5 million representing partial prepayments for wafers to be supplied under these agreements. During the second quarter of 1996, the Company and TSMC renegotiated these agreements, resulting in the cancellation of all notes payable and a 6 8 refund of certain prepayments, except for a $57.1 million prepayment made in January 1996 for wafer capacity from 1997 through 2000. Under the terms of the agreement related to the $57.1 million prepayment, TSMC agrees to provide the Company with wafers manufactured with TSMC processes and according to the Company's specifications, and the Company agrees to purchase and TSMC agrees to supply, a specific capacity of wafers per year through 2000. Subsequent billings for actual wafers from TSMC will reduce the prepaid balance. The prepayments are generally nonrefundable if the Company does not purchase the full prepaid capacity unless the Company identifies a third party purchaser, acceptable to TSMC, for the capacity. To further secure capacity, in June 1996, Altera, TSMC, and several other partners formed 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, Altera received an 18% equity ownership in the joint-venture company and certain rights to procure output from the fab at market price. The investment is to be made in three installments of which the first two were made in June and November of 1996 in equal amounts of $42.1 million. The remaining installment amounts to $56.2 million and is due in November 1997. In addition, the Company has an obligation to guarantee a pro-rata share of debt incurred by WaferTech up to a maximum of $45.0 million. The Company depends upon its foundries to produce wafers at acceptable yields and to deliver them to the Company in a timely manner. The manufacture of advanced CMOS semiconductor wafers is a highly complex process, and the Company has from time to time experienced difficulties in obtaining acceptable yields and timely deliveries from its suppliers. Good production yields are particularly important to the Company's business, including its ability to meet customers' demand for products and to maintain profit margins. The manufacture of semiconductor products is sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in the materials used, and the performance of personnel and equipment. As is common in the semiconductor industry, the Company has from time to time experienced in the past and expects that it will experience in the future production yield problems. Accordingly, no assurance can be given that the Company will not experience significant production yield problems with one or more of its product lines. Production throughput times also vary considerably among the Company's wafer suppliers. The Company has experienced delays from time to time in processing some of its products. Any prolonged inability to obtain adequate yields or deliveries could adversely affect the Company's operating results. The Company expects that, as is customary in the semiconductor business, in order to maintain or enhance competitive position, it will in the future continue to convert its fabrication process arrangements to larger wafer sizes, to more advanced process technologies, or to new suppliers. Such conversions entail inherent technological risks that can adversely affect yields and delivery times. In addition, if for any reason the Company were required to seek alternative sources of supply, shipments could be delayed significantly while such sources are qualified for volume production, and any significant delay would have a material adverse effect on the Company's operating results. After wafer manufacturing is completed, each wafer is tested using a variety of test and handling equipment. Resulting good die are separated into individual chips that are then encapsulated in ceramic or plastic packages by subcontractors in Malaysia, Korea, the Philippines, Hong Kong, Taiwan, and the United States. Following assembly, the packaged units receive final testing. Altera has developed sophisticated proprietary test software and hardware that provides relatively high speed, back-end testing. After final testing, each unit goes through marking and final inspection prior to shipment to customers. Much of the manufacturing, assembly, testing, and packaging of Altera's development system hardware products is done by outside contractors. Although the Company's wafer fabrication, assembly, and other subcontractors have not recently experienced any serious work stoppages, the social and political situations in countries where certain subcontractors are located are volatile, and any prolonged work stoppages or other inability of the Company to manufacture and assemble its products would have a serious adverse effect on the Company's operating 7 9 results. Furthermore, economic risks, such as changes in tax laws, tariff or freight rates, or interruptions in air transportation, could have a material adverse effect on the Company's operating results. MARKETING, SALES, AND CUSTOMERS The Company markets its products in the United States and Canada through a network of direct sales personnel, independent sales representatives, and electronics distributors to a broad range of customers. The Company's direct sales personnel and independent sales representatives focus on major target accounts. Distributors generally focus selling activities on the broad base of small and medium-size customers and often provide stocking, kitting, and programming services, even to larger accounts. In the United States, Altera's major distributors currently include Arrow/Schweber Electronics Inc. and Wyle Electronics Marketing Group, a division of Wyle Electronics, Inc. which provide nationwide coverage. From time-to-time the Company expects that it may add or delete distributors from its selling organization as it deems appropriate to the level of business. To support its distribution network and focus on the target accounts and the direct OEM channel of business, the Company has manufacturer's representative firms throughout the United States and Canada. The Company also has domestic sales offices in San Jose and in major metropolitan areas throughout the country. The Company's international business is supported by a network of technical distributors throughout Europe and the Far East. The Company has representation in every major European country, in Israel, Japan, Australia, South America, and the Pacific Rim. International sales management offices are located in the metropolitan areas of Brussels, Hong Kong, London, Munich, Ottawa, Paris, Seoul, Stockholm, Tokyo, and Turin. Customer service and support are important aspects of the CMOS programmable logic integrated circuit business. Altera provides several levels of user support, including applications assistance, design services, and customer training. The Company's applications engineering staff publishes data sheets and application notes, conducts technical seminars, and provides design assistance via modem links to the customer's design station. Customer service is supported with inventory maintained both at the factory and at distributors' locations to provide short-term delivery of chips. During each of the last three years, export sales constituted nearly half of the Company's total sales revenue. Through 1996, almost all export sales were denominated in U.S. dollars. The Company's export sales are subject to those risks common to all export activities, including governmental regulation, possible imposition of tariffs or other trade barriers, and currency fluctuations. Certain export sales must be licensed by the Office of Export Administration of the U.S. Department of Commerce. From time to time, the Company has experienced delays in obtaining the necessary licenses, but to date such delays have not had a material adverse effect on the Company's business. There can be no assurance that such delays will not occur in the future, however, or that if such delays do occur, that they will not have a material adverse effect on the Company's business or operating results. In the year ended December 31, 1996, worldwide sales through distributors accounted for approximately 85% of sales. In 1996, the two largest distributors accounted for 29% and 15% of sales. In 1995, the two largest distributors accounted for 21% and 15% of sales, whereas in 1994, they each accounted for 15% and 14% of sales, respectively. No direct OEM customer accounted for more than 10% of the Company's sales in 1996, 1995, or 1994. Export sales constituted 47%, 47%, and 48% of sales in 1996, 1995, and 1994, respectively. BACKLOG The Company's backlog of released orders at December 31, 1996 was approximately $102.6 million as compared to approximately $189.6 million at December 31, 1995. The Company includes in its backlog OEM customer-released orders that are requested for delivery within the next six months, and distributor orders requested for delivery within the next three months. The Company produces standard products which may be shipped from inventory within a short time after receipt of an order. The Company's business has been 8 10 characterized by a high percentage of short-term orders with short-term shipment schedules (turns orders). At times, due to high demand and supply constraints in certain products, lead times can lengthen, causing an increase in backlog. However, orders constituting the Company's current backlog are cancelable without significant penalty at the option of the purchaser, thereby decreasing backlog during periods of lower demand. In addition, distributor shipments are subject to price adjustments. Accordingly, backlog as of any particular date should not be used as a measure of sales for any future period. PATENTS AND LICENSES 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, 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. In addition, there can be no assurance that such additional licenses could be obtained on terms or conditions acceptable to the Company or that such licenses, if obtained, would lead to the development of additional products. 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. An agreement with Cypress Semiconductor covers certain of the Company's MAX 5000 family of products. An initial agreement, entered into in June 1987, was terminated on November 23, 1993, though product licenses continue after termination. In April 1990, the Company entered into an additional agreement with Cypress Semiconductor regarding a 17% equity investment in CSTI and a related supply agreement. This supply agreement was amended effective November 23, 1993, and currently is in effect. See "Manufacturing." The Company entered into an intellectual property cross-licensing agreement with Intel as part of the Company's purchase of Intel's PLD division in October 1994. The agreement continues for the lives of the licensed patents, and is perpetual with respect to other licensed intellectual property. In March 1987, the Company and Monolithic Memories, Inc. (MMI) entered into an agreement cross-licensing all of each others' patents covering programmable and reprogrammable logic devices and processes for making such devices having a first filing date prior to April 1, 1989, as part of the settlement of a patent suit against the Company. This agreement covered only patents, and no products or non-patented technology was licensed to either company as a result of this agreement. In March, 1988, AMD succeeded to MMI's rights and responsibilities under the license agreement, and agreed to be bound by the terms of the agreement, in connection with its acquisition of MMI. In March 1994, AMD informed the Company that it believes the scope of the patent license described above is more limited than the Company has interpreted such license. In August, 1994, AMD sued the Company on patents for which the Company believes it is licensed. In a June 1996 trial, the Company prevailed in its defense that it is licensed under some or all of the patents asserted by AMD in the suit. It is not yet possible to determine what effect, if any, this dispute might have on the operations of the Company (see Item 3. Legal Proceedings). 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 which would not have a material and 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 9 11 current litigation with two of its competitors, there can be no assurance that any necessary licenses could be obtained, and, if obtainable, would be on terms or conditions that would not have a material adverse effect on the Company. In addition, if litigation ensued, 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 products families. It may be necessary or desirable for the Company to incur litigation expenses to enforce its intellectual property rights. There is no assurance that any such litigation would be successful, or that the Company's patents would be upheld if challenged. RESEARCH AND DEVELOPMENT The Company's research and development activities have focused primarily on general purpose programmable logic chips and on the associated development software and hardware. The Company has developed these related products in parallel to provide software support to customers simultaneously with circuit introduction. Altera believes that advanced software tools are a critical factor in the advancement of programmable semiconductor technology. Since 1991, the Company's research and development activities have been primarily directed toward the design of the MAX 7000 integrated circuits and subsequently the FLEX 8000, MAX 9000, and FLEX 10K circuits, as well as the development of new software and hardware for these circuits, cost reductions and advancements in other existing products, and development of alternative architectures and technologies. In the last two years, the Company has introduced the MAX 9000, FLEX 10K and MAX 7000S families of products, two major new software releases, and several new package technologies. Additionally, the Company has redesigned a number of its products to accommodate their manufacture on new wafer fabrication processes, including a new eight-inch wafer process using triple-layer metal technology. The Company's research and development expenditures in 1996, 1995, and 1994 were $49.5 million, $33.8 million, and $22.2 million (excluding an R&D In Process charge in 1994 of $23.7 million associated with the Intel PLD product line acquisition), respectively. The Company has not capitalized research and development or software costs to date. The Company intends to continue to spend substantial amounts on research and development in order to continue to develop new products and achieve market acceptance for such products, particularly in light of the industry pattern of price erosion for mature products and increasing competition within the programmable logic market. Even if such goals are accomplished, there can be no assurance that these products will achieve significant market acceptance. If the Company were unable to successfully define, develop, and introduce competitive new products, and enhance its existing products, its future operating results would be adversely affected. COMPETITION The semiconductor industry overall is intensely competitive and is characterized by rapid technological change, rapid rates of product obsolescence, and price erosion resulting from both product obsolescence and price competition. The Company competes directly with a number of fast-growing domestic companies that devote a significant portion of their resources to new product development and existing product enhancement. The semiconductor industry also includes many large domestic and foreign companies that have substantially greater financial, technical, and marketing resources than the Company. The Company currently experiences direct competition from Lucent, Philips and other large companies, and others offer products that are indirectly competitive with the Company's products or have announced their intention to enter the market. The principal factors of competition in the CMOS programmable logic marketplace include the capability of software development tools, the integration capacity and flexibility of the individual circuits, product performance and features, quality and reliability, pricing, technical service and support, and the ability to respond rapidly to technical innovation. The Company believes it competes favorably with respect to these factors, although it may be at a disadvantage in comparison to larger companies with broader product lines, greater technical service and support capabilities, and internal wafer fabrication capabilities. The Company believes, however, that its proprietary device architecture and its installed base of development systems with proprietary software may provide some competitive advantage. 10 12 The Company's competition for its general-purpose programmable logic chips has come from many sources. The Company's licensee, Cypress Semiconductor, competes on their particular licensed products. Cypress Semiconductor can compete directly with pin-compatible parts even after a customer has chosen to design its product using the Company's chips. In anticipation of this, the Company structured its license so that the licensee has rights to a limited portion of the Company's overall product line. In addition, the Company's agreement with Cypress Semiconductor and CSTI allows the Company to manufacture certain products without granting second source rights. The Company also experiences significant competition from a number of other companies which are in the market with products competitive with those of the Company. These companies include major domestic and international semiconductor companies, traditional programmable logic and application-specific circuit manufacturers, and emerging companies. Among these are companies such as Actel Corporation, AMD (Vantis), Atmel Corporation, Lattice Semiconductor Corporation, Lucent, and Xilinx. The Company's primary competition is from suppliers of products marketed as programmable logic devices (PLDs) and field programmable gate arrays ("FPGAs"), though as the average pin count and functional density for the Company's products continue to increase, the Company expects to compete to an increasing extent with ASIC suppliers, such as LSI Logic. A number of very large, well-financed companies compete with the Company in its core business. These companies, including Lucent, Motorola, Philips, and others, have proprietary wafer manufacturing ability, preferred vendor status with many of the Company's customers, extensive marketing power and name recognition, much greater financial resources than those of the Company, and other significant advantages over the Company. The Company expects that as the dollar volume of the programmable logic market grows, the attractiveness of this market to larger, more powerful competitors will continue to increase. Substantial direct or indirect competition could have a significant adverse effect on the Company's future sales and operating results. EMPLOYEES As of December 31, 1996, the Company had 918 employees. The success of the Company is dependent in large part upon the continued service of its key management, technical, sales, and support employees and on its ability to continue to attract and retain additional qualified employees. The competition for such employees is intense and their loss as employees could have an adverse effect on the Company. The Company believes employee relations are good. ITEM 2. PROPERTIES. The Company's headquarters are in facilities in San Jose, California totaling approximately 220,000 square feet. Design, limited manufacturing, research, marketing, and administrative activities are performed in these facilities. The Company occupies these properties under non-cancelable leases which expire in 1997. In June 1995, the Company purchased approximately 25 acres of land near the Company's present headquarters for the development of a multiple building corporate headquarters. During 1996, $27.0 million was spent by the Company on construction of 500,000 square feet of office and light manufacturing space on this land. Construction is expected to be completed in 1997. The Company also leases on a short-term basis office facilities for its domestic and international sales management offices. ITEM 3. 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 11 13 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. A motion by Xilinx to transfer the Delaware case to California has been granted. The California litigation has been the subject of court-ordered mediation, which to date has not resulted in resolution of the litigation. 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 ("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. A second phase of the bifurcated licensing trial will determine the specific AMD patents that are covered by the license. Due to the nature of the litigation with AMD, and because the infringement portion of the lawsuit is 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 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. 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. 12 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The textual portion of the section entitled "About Your Investment" and the section entitled "Corporate Directory" in the Company's 1996 Annual Report to Shareholders for the year ended December 31, 1996 ("1996 Annual Report") are incorporated herein by reference. The Company believes factors such as quarter-to-quarter variances in financial results, announcements of new products, new orders, and order rate variations by the Company or its competitors could cause the market price of its Common Stock to fluctuate substantially. In addition, the stock prices for many high technology companies experience large fluctuations, which are often unrelated to the operating performance of the specific companies. Broad market fluctuations, as well as general economic conditions such as a recessionary period or high interest rates, may adversely affect the market price of the Company's Common Stock. ITEM 6. SELECTED FINANCIAL DATA. The section entitled "Selected Consolidated Financial Data/Five-Year Summary" in the Company's 1996 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The textual portion of the section entitled "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in the Company's 1996 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements, together with the report thereon of Price Waterhouse LLP dated January 22, 1997 and the section entitled "Selected Consolidated Financial Data/Quarterly Data (Unaudited)" in the Company's 1996 Annual Report are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 13 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers and directors of the Company and their ages are as follows:
NAME AGE POSITION WITH THE COMPANY - ---------------------------- --- ------------------------------------------------ Rodney Smith 56 Chairman of the Board of Directors; President; and Chief Executive Officer C. Wendell Bergere 51 Vice President, General Counsel, and Secretary Denis Berlan 47 Executive Vice President, Chief Operating Officer Erik Cleage 36 Vice President, Marketing John R. Fitzhenry 47 Vice President, Human Resources Clive McCarthy 50 Senior Vice President, Development Engineering Paul Newhagen(1)(3) 47 Director; Vice President, Administration Thomas J. Nicoletti 50 Vice President, Investor Relations and Business Development Nathan Sarkisian 38 Vice President, Finance; Chief Financial Officer Peter Smyth 59 Vice President, Sales Michael A. Ellison(1)(2)(3) 51 Director Robert W. Reed(1)(3) 50 Director William E. Terry(1)(2) 63 Director Deborah Triant 47 Director
- --------------- (1) Member of Nominating Committee (2) Member of Compensation Committee. (3) Member of Audit Committee. All directors hold office until the next annual meeting of shareholders or until their successors have been elected and qualified. There are no family relationships between any of the directors or executive officers of the Company. Rodney Smith joined the Company in November 1983 as Chairman of the Board of Directors, President, and Chief Executive Officer. Prior to that time, he held various management positions with Fairchild Semiconductor Corporation ("Fairchild"), a semiconductor manufacturer. C. Wendell Bergere joined the Company in August 1995 as Vice President, General Counsel, and Secretary. Prior to joining the Company, from 1993 to 1995, Mr. Bergere was Special Counsel at the law firm of Sheppard, Mullin, Richter & Hampton. From 1982 to 1993, he was Vice President, General Counsel, and Secretary of The Perkin-Elmer Corporation, a producer of analytical and life science systems. Denis M. Berlan joined the Company in December 1989 as Vice President, Product Engineering, and was named Vice President, Operations and Product Engineering in October 1994. In January 1996, he was named Vice President, Operations. In January 1997, he was named Executive Vice President and Chief Operating Officer. He was previously employed by Advanced Micro Devices, Inc. ("AMD"), a semiconductor manufacturer, and by Lattice Semiconductor Corporation, a semiconductor manufacturer, in engineering management capacities. Erik Cleage joined the Company as International Marketing Manager in February 1986. He became Director, Japan and Asia Pacific Sales in April 1989, and was appointed Vice President, Marketing in August 1990. Previously, he was employed by AMD and Fairchild in various positions. John R. Fitzhenry joined the Company in May 1995 as Vice President of Human Resources. From 1983 to May 1995, he was employed by Apple Computer, Inc., a manufacturer of personal computers, in various human resource management positions. 14 16 Clive McCarthy joined the Company in February 1984 as Director of Applications. He was appointed Vice President of Software in March 1987. In March 1990 he was appointed Vice President of Development Engineering. Prior to joining the Company, Mr. McCarthy had been employed by Fairchild, Northern Telecom, and Texas Instruments in various technical and marketing management positions. Paul Newhagen, a co-founder of the Company, has served as a director of the Company since July 1987 and as Vice President of Administration since December 1994. Mr. Newhagen served as Vice President of the Company from November 1992 to February 1993, Secretary from July 1987 to January 1993, Vice President of Finance and Administration from June 1983 to November 1992, and Chief Financial Officer from June 1983 to February 1993. From June 1993 to November 1994, Mr. Newhagen served as a consultant to the Company. Thomas J. Nicoletti joined the Company in October 1992 as Vice President of Finance and was appointed Chief Financial Officer in February 1993. In August 1995 he became Vice President, Investor Relations and Business Development. Previously, he was Chief Financial Officer for Procase, Inc., a software company, and for Lam Research Corporation, a semiconductor equipment manufacturer. Prior to that, Mr. Nicoletti was employed by Fairchild and AMD in various accounting and financial positions. Nathan Sarkisian joined the Company in June 1992 as Corporate Controller. He was appointed Vice President, Finance and Chief Financial Officer in August 1995. Prior to joining the Company, Mr. Sarkisian held various accounting and financial positions at Fairchild, and at Schlumberger, an oil field services company. Peter Smyth joined the Company in May 1990 as Vice President of Sales. Prior to joining the Company, Mr. Smyth served as Vice President of Sales at Precision Monolithics, Inc., a semiconductor manufacturer, and Vice President of North American Sales at Mostek, a semiconductor manufacturer. Mr. Smyth was also previously associated with Texas Instruments in a variety of sales and marketing capacities. Michael A. Ellison has served as a director of the Company since April 1984. Since October 1994, Mr. Ellison has been the Chief Executive Officer of Steller, Inc., a distributor of electronic parts. Until December 1992, he was a General Partner at Cable & Howse Ventures, a venture capital investment firm, and following that a private venture capital investor. Mr. Ellison also served as a director of Wall Data Incorporated from September 1986 to January 1996. Robert W. Reed has served as a director of the Company since October 1994. In 1996, Mr. Reed retired from his position as Senior Vice President of Intel Corporation, a semiconductor manufacturer. From 1983 to 1991 Mr. Reed was Intel's Chief Financial Officer. William E. Terry has served as a director of the Company since August 1994. Mr. Terry is a former director and Executive Vice President of the Hewlett-Packard Company, a diversified electronics manufacturing company. At Hewlett-Packard, he held a number of senior management positions, including general manager of Hewlett-Packard's Data Products and Instrument Groups, and subsequently had overall responsibility for the Measurement Systems Sector. He retired from Hewlett-Packard in November 1993. Mr. Terry also serves as a director of Key Tronic Corporation. Deborah Triant has served as a director of the Company since May 1996. Dr. Triant is the President and Chief Executive Officer of CheckPoint Software Technologies, Inc. ("CheckPoint"), an Internet security software company, and a director of CheckPoint's Israeli parent company, CheckPoint Software Technologies, Ltd. Prior to joining CheckPoint, Dr. Triant held various marketing and technical executive positions with Adobe Systems Inc., a computer software company, Sun Microsystems Inc., a computer networking company, and Xerox Corp., a diversified electronics manufacturer. The section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement dated March 20, 1997 filed with the Securities and Exchange Commission (the "Proxy Statement") is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The section entitled "Executive Compensation" and the section entitled "Changes to Benefit Plans" in the Company's Proxy Statement are incorporated herein by reference. 15 17 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The section entitled "Director Compensation" and the section entitled "Certain Business Relationships" in the Company's Proxy Statement are incorporated herein by reference. 16 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. The following documents from the Annual Report to Shareholders are filed as part of this report: Consolidated Statements of Operations for each of the three years in the period ended December 31, 1996 Consolidated Balance Sheets at December 31, 1996 and December 31, 1995 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1996 Notes to Consolidated Financial Statements Report of Independent Accountants 2. Financial Statement Schedules. All schedules have been omitted as they are either not required, not applicable, or the required information is included in the financial statements or notes thereto. 3. Exhibits.
EXHIBIT NUMBER EXHIBIT --------- --------------------------------------------------------------------------- 2.1* Asset Purchase Agreement dated as of July 12, 1994 by and between the Company and Intel Corporation(8). 2.2* Amendment No. 1 to Asset Purchase Agreement dated as of October 1, 1994 by and between the Company and Intel Corporation(8). 2.3 Investor Agreement dated as of July 12, 1994 by and between the Company and Intel Corporation(8). 3.1 Restated Articles of Incorporation of the Company dated December 18, 1996. 3.3 Amended and Restated Bylaws of the Company, as amended through May 8, 1996. 4.1 Specimen copy of certificate for shares of Common Stock of the Registrant.(7) 4.2 Indenture Agreement dated as of June 15, 1995 by and between Registrant and the First National Bank of Boston, as Trustee.(11) 4.3 Form of Convertible Subordinated Note due 2002.(11) 10.1* License Agreement dated as of July 12, 1994 with Intel Corporation.(9) 10.2* Supply Agreement dated as of July 12, 1994 with Intel Corporation.(9) 10.3(a)+ 1987 Stock Option Plan, and forms of Incentive and Non statutory Stock Option Agreements, as amended March 22, 1995 and as restated effective May 10, 1995.(12) 10.4(b)+ 1987 Employee Stock Purchase Plan, and form of Subscription Agreement, as amended May 10, 1995.(12) 10.6* Technology License and Manufacturing Agreement with Cypress Semiconductor Corporation, dated June 19, 1987.(1) 10.6(a)* Termination Agreement dated November 23, 1993, regarding Technology License and Manufacturing Agreement with Cypress Semiconductor Corporation.(7) 10.11 Form of Sales Representative Agreement.(1)
17 19
EXHIBIT NUMBER EXHIBIT --------- --------------------------------------------------------------------------- 10.22* Advanced Micro Devices, formerly MMI, Settlement Agreement and associated Series E Preferred Stock Purchase Agreement and Patent License Agreement, all dated March 31, 1987.(1) 10.23 Amended and Restated Lease Agreement with Orchard Investment Company Number 611, dated November 10, 1989, for lease of Buildings B and C at 2610 Orchard Parkway, San Jose, California.(3) 10.24 First Amendment, effective February 5, 1990, to Lease Agreement with Orchard Investment Company Number 611.(3) 10.25 Product Distribution Agreement with Wyle Electronics Marketing Group, effective May 16, 1984, as amended.(1) 10.26 Form of Indemnification Agreement entered into with each of the Company's officers and directors.(10) 10.30 Technology License and Manufacturing Agreement with Texas Instruments Incorporated, dated July 1, 1988.(2) 10.30(a)* Amendment No. 2 to Technology License and Manufacturing Agreement with Texas Instruments Incorporated, dated effective October 1, 1990.(5) 10.31 Product Distribution Agreement with LEX Electronics, Inc., formerly Schweber Electronics Corporation effective December 22, 1988, as amended.(2) 10.31(a) Consent to Assignment of Product Distribution Agreement, effective September 23, 1991.(6) 10.33(b)+ 1988 Director Stock Option Plan and form of Outside Director Nonstatutory Stock Option Agreement, as amended January 18, 1995 and as restated effective May 10, 1995.(10) 10.34* Foundry and PROM II.5 Process Technology License Agreement with Cypress Semiconductor Corporation and Cypress Semiconductor (Texas) Inc., dated April 24, 1990.(4) 10.34(a)* Amendment Number 1 dated November 23, 1993, regarding Foundry and PROM II.5 Process Technology License Agreement with Cypress Semiconductor Corporation and Cypress Semiconductor (Texas) Inc.(7) 10.35 Master Distribution Agreement with Japan Macnics Corporation dated June 26, 1986, as amended effective March 18, 1987.(6) 10.37 LSI Products Supply Agreement with Sharp Corporation, dated October 1, 1993.(7) 10.38+ Altera Corporation Nonqualified Deferred Compensation Plan and Trust Agreement dated February 1, 1994, and form of Deferred Compensation Agreement.(7) 10.39 Wafer Supply Agreement dated June 26, 1995 between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(11) 10.40 Option Agreement dated June 26, 1995 between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(11) 10.41 Memorandum of Intent dated October 1, 1995 between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(13) 10.42 Amendment No. 1 dated as of October 1, 1995 to Wafer Supply Agreement dated as of June 26, 1995 by and between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd. And to Option Agreement 1 dated as of June 26, 1995 between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd. (13) 10.43 Option Agreement 2 dated as of October 1, 1995 by and between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd. (13)
18 20
EXHIBIT NUMBER EXHIBIT --------- --------------------------------------------------------------------------- 10.44 Option Agreement 3 dated as of October 1, 1995 by and between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(13) 10.45(a)+ 1996 Stock Option Plan. 10.45(b) Form of Stock Option Agreement under 1996 Stock Option Plan.(13) 10.46 Owner/Contractor Agreement for Construction between Registrant and Rudolph and Sletten, Inc. dated January 10, 1996.(13) 10.47 Amended and Restated Limited Liability Company Agreement of Wafertech, LLC, a Delaware limited liability company, dated as of August 9, 1996.(14) 10.48 Purchase Agreement by and between Taiwan Semiconductor Manufacturing Co., Ltd., as Seller, and Analog Devices, Inc., the Registrant, and Integrated Silicon Solutions, Inc., as Buyers (dated as of June 25, 1996).(14) 10.49 Rescission (dated as of June 25, 1996) of Option Agreement 1 dated as of June 26, 1995 by and between the Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(14) 11.1 Computation of Earnings per Share. 13.1 Annual Report to Shareholders for the fiscal year ended December 31, 1996 (to be deemed filed only to the extent required by the instructions to Exhibits for Reports on Form 10-K). 21.1 Subsidiaries of the Registrant. 23.1 Consent of Price Waterhouse LLP (see page 21). 24.1 Power of Attorney (included on page 22). 27.1 Financial Data Schedule.
- --------------- (1) Incorporated by reference to identically numbered exhibits filed in response to item 16(a), "Exhibits," of the registrant's Registration Statement on Form S-1, as amended, (File No. 33-17717) which became effective March 29, 1988. (2) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1988. (3) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1989. (4) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended March 31, 1990, as amended by a Form 8 filed on July 13, 1990. (5) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1990. (6) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1992. (7) Incorporated by reference to identically numbered exhibits field in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1993. (8) Incorporated by reference to identically numbered exhibits field in response to Item 7, "Exhibits," of the registrant's Report on Form 8-K dated October 15, 1994 and 8-KA dated December 15, 1994 (9) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended September 30, 1994 19 21 (10) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1994. (11) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended June 30, 1995. (12) Incorporated by reference to identically numbered exhibits filed in response to Item 8, "Exhibits," of the registrant's Registration Statement on Form S-8, as amended (File No. 33-61085) which became effective July 17, 1995. (13) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1995. (14) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended August 14, 1996. * Confidential treatment has previously been granted for portions of this exhibit pursuant to an order of the Commission. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report on Form 10-K pursuant to Item 14(c) thereof. (b) Reports on Form 8-K. None 20 22 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-22877, No. 33-37159, No. 33-57350, No. 33-61085, and No. 333-06859) of Altera Corporation of our report dated January 22, 1997 appearing on page 32 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP San Jose, California March 21, 1997 21 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K to be signed on its behalf, by the undersigned thereto duly authorized. ALTERA CORPORATION Registrant By: /s/ NATHAN SARKISIAN -------------------------------------- Nathan Sarkisian, Vice President - Finance Chief Financial Officer March 21, 1997 POWER OF ATTORNEY Know all persons by these present, that each person whose signature appears below constitutes and appoints Nathan Sarkisian, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
SIGNATURE CAPACITY IN WHICH SIGNED DATE ---------------------------------------- ---------------------------------- --------------- /s/ RODNEY SMITH President, Chief Executive Officer ---------------------------------------- (Principal Executive Officer), and Rodney Smith Chairman of the Board of Directors March 12, 1997 /s/ NATHAN SARKISIAN Vice President -- Finance and ---------------------------------------- Chief Financial Officer (Principal Nathan Sarkisian Financial and Accounting Officer) March 12, 1997 /s/ MICHAEL A. ELLISON ---------------------------------------- Michael A. Ellison Director March 12, 1997 /s/ PAUL NEWHAGEN ---------------------------------------- Paul Newhagen Director March 12, 1997 /s/ ROBERT W. REED ---------------------------------------- Robert W. Reed Director March 12, 1997 /s/ WILLIAM E. TERRY ---------------------------------------- William E. Terry Director March 12, 1997 /s/ DEBORAH TRIANT ---------------------------------------- Deborah Triant Director March 12, 1997
22 EX-3.1 2 RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF ALTERA CORPORATION I. The name of this corporation is Altera Corporation. II. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III. This corporation is authorized to issue one class of shares designated Common Stock. The total number of shares of Common Stock this corporation shall have the authority to issue is 160,000,000, without par value. Upon the amendment of this Article III as set forth herein, each share of this corporation's Common Stock shall be divided into two shares of this corporation's Common Stock. IV. Section 1. Limitation of Directors' Liability. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Section 2. Indemnification of Corporate Agents. This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California General Corporation Law) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by such Section 317, subject only to the applicable limits set forth in Section 204 of the California General Corporation Law with respect to actions for breach of duty to the corporation and its shareholders. Section 3. Repeal or Modification. Any repeal or modification of the foregoing provisions of this Article IV shall not adversely affect any right of indemnification or limitation of liability of an agent of this corporation relating to acts or omissions occurring prior to such repeal or modification. V. There shall be no right, with respect to shares of stock of this corporation, to cumulate votes in the election of directors. EX-10.45(A) 3 FORM OF STOCK OPTION AGREEMENT 1 Exhibit 10.45(a) ALTERA CORPORATION 1996 STOCK OPTION PLAN (Restated effective January 15, 1997) 1. Purposes of the Plan. The purposes of this Stock Option Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to Employees and Consultants, and - to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the legal requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code and the applicable laws of any foreign country or jurisdiction where Options are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a Committee appointed by the Board in accordance with Section 4 of the Plan. (f) "Common Stock" means the Common Stock of the Company. (g) "Company" means Altera Corporation, a California corporation. (h) "Consultant" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services and who is compensated for such services. The term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (i) "Continuous Status as an Employee or Consultant" means that the employment or consulting relationship with the Company, any Parent, or Subsidiary, is not interrupted or terminated. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of (i) any leave of absence approved by the Company or 1 2 (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. A leave of absence approved by the Company shall include sick leave, military leave, or any other personal leave approved by an authorized representative of the Company. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. (j) "Director" means a member of the Board. (k) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (l) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (n) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (o) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (p) "Misconduct" means the commission of any act that is inimical, contrary, or harmful to the interests of the Company (or any Parent or Subsidiary), including but not limited to 2 3 (1) conduct related to employment for which either criminal or civil penalties may be sought, (2) willful violation of the Company's written policies, (3) engaging in any activity that is in competition with the Company (or any Parent or Subsidiary), or (4) unauthorized disclosure of confidential information or trade secrets of the Company (or any Parent or Subsidiary). The foregoing definition shall not be deemed to be inclusive of all acts or omissions that the Company (or any Parent or Subsidiary) may consider as Misconduct for purposes of the Plan. (q) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (r) "Notice of Grant" means a written notice evidencing certain terms and conditions of an individual Option grant. The Notice of Grant is part of the Option Agreement. (s) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (t) "Option" means a stock option granted pursuant to the Plan. (u) "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (v) "Optioned Stock" means the Common Stock subject to an Option. (w) "Optionee" means an Employee or Consultant who holds an outstanding Option. (x) "Parent" means a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code. (y) "Plan" means this 1996 Stock Option Plan. (z) "Retirement" means: (i) a termination of Optionee's Continuous Status as an Employee or Consultant, other than for Misconduct, after attaining age fifty (50) with at least ten (10) years of service as an Employee or Consultant of the Company rendered after attaining age forty (40); or (ii) a termination of Optionee's Continuous Status as an Employee or Consultant as a result of Disability, regardless of Optionee's age, if Optionee has completed at least ten (10) years of service as an Employee or Consultant of the Company and if Optionee qualifies for Social Security disability benefits at the time of such termination. (aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. 3 4 (bb) "Section 16" means Section 16 of the Securities Exchange Act of 1934, as amended. (cc) "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 of the Plan. (dd) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 5,300,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. If permitted by Rule 16b-3, the Plan may be administered by different bodies with respect to Directors, Officers who are not Directors, and Employees who are neither Directors nor Officers. (ii) Administration With Respect to Directors and Officers Subject to Section 16. With respect to Option grants made to Employees who are also Officers or Directors subject to Section 16 of the Exchange Act, the Plan shall be administered by (A) the Board, if the Board may administer the Plan in a manner complying with the rules under Rule 16b-3 relating to the disinterested administration of employee benefit plans under which Section 16 exempt discretionary grants and awards of equity securities are to be made, or (B) a committee or committees designated by the Board to administer the Plan, which committee shall be constituted to comply with the rules under Rule 16b-3 relating to the disinterested administration of employee benefit plans under which Section 16 exempt discretionary grants and awards of equity securities are to be made. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the rules under Rule 16b-3 relating to the disinterested administration of employee benefit plans under which Section 16 exempt discretionary grants and awards of equity securities are to be made. (iii) Administration With Respect to Other Persons. With respect to Option grants made to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a committee or committees 4 5 designated by the Board, which committee shall be constituted to satisfy Applicable Laws. Once appointed, such Committee shall serve in its designated capacity until otherwise directed by the Board. The Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to grant options to Employees and Consultants hereunder; (ii) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(n) of the Plan; (iii) to determine the Consultants and Employees eligible to be granted Options hereunder; (iv) to determine whether and to what extent Options are granted hereunder; (v) to determine the number of shares of Common Stock to be covered by each Option granted hereunder; (vi) to approve forms of agreement for use under the Plan; (vii) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration, and any restriction or limitation regarding any Option or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend, and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to modify or amend each Option (subject to Section 14(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option previously granted by the Administrator; and 5 6 (xii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options. 5. Eligibility. Nonstatutory Stock Options may be granted to those Employees and Consultants selected by the Administrator. Incentive Stock Options may be granted only to those Employees selected by the Administrator. If otherwise eligible, an Employee or Consultant who has been granted an Option may be granted additional Options. 6. Limitations. (a) Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. (b) Neither the Plan nor any Option shall confer upon an Optionee any right with respect to continuing the Optionee's employment or consulting relationship with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such employment or consulting relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options to Employees: (i) No Employee shall be granted, in any fiscal year of the Company, Options to purchase more than 500,000 Shares. (ii) In connection with his or her initial employment, an Employee may be granted Options to purchase up to an additional 500,000 Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 12. 7. Term of Plan. Subject to Section 18 of the Plan, the Plan shall become effective upon its approval by the shareholders of the Company as described in Section 18 of the Plan. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 14 of the Plan. 6 7 8. Term of Option. The term of each Option shall be stated in the Notice of Grant; provided, however, that in the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Notice of Grant. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be no less than 100% of the Fair Market Value per Share on the date of grant. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. In so doing, the Administrator may specify that an Option may not be exercised until the completion of a service period. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. 7 8 (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Employment or Consulting Relationship. (i) In General. Upon termination of an Optionee's Continuous Status as an Employee or Consultant, other than upon the Optionee's death, Disability, or Retirement, the Optionee may exercise his or her Option within such period of time as is specified in the Notice of Grant to the extent that he or she is entitled to exercise it on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant). In the absence of a specified time in the Notice of Grant, the Option shall remain exercisable for thirty (30) days following the Optionee's termination. In the case of an Incentive Stock Option, such period of time for exercise shall not exceed three (3) months from the date of termination. If, on the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. Notwithstanding the above, in the event of an Optionee's change in status from Consultant to Employee or Employee to Consultant, the Optionee's Continuous Status as an Employee or Consultant shall not automatically terminate solely as a result of such change in status. In the event of an Optionee's change in status from Employee to Consultant, each Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock 8 9 Option and shall be treated for tax purposes as a Nonstatutory Stock Option three months and one day following such change of status. (ii) Retirement of Optionee. In the event of termination of an Optionee's Continuous Status as an Employee or Consultant as a result of his or her Retirement, such Optionee's Option shall, in the sole discretion of the Administrator, and so long as no act of Misconduct is committed by Optionee, continue to vest, continue to become exercisable, and may be exercised during such period of time as is determined by the Administrator and as provided in the Option Agreement (but in no event may the Option be exercised after the expiration date of the term of such Option as set forth in the Option Agreement). If, at the end of such period of time, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. If Optionee commits an act of Misconduct, the Option shall immediately terminate, and the Shares covered by such Option shall revert to the Plan. (iii) Disability of Optionee. Upon termination of an Optionee's Continuous Status as an Employee or Consultant as a result of the Optionee's Disability, the Optionee may exercise his or her Option at any time within three (3) months (or such other period of time not exceeding twelve (12) months as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) from the date of termination, but only to the extent that the Optionee is entitled to exercise it on the date of termination (and in no event later than the expiration of the term of the Option as set forth in the Notice of Grant). If, on the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (iv) Death of Optionee. Upon the death of an Optionee: (A) during the term of the Option who is at the time of his or her death an Employee or Consultant of the Company and who shall have been in Continuous Status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance at any time within six (6) months (or, in the case of Retirement, such longer period of time, not to exceed 12 months, as determined by the Administrator) following the date of death, but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement, and only to the extent of the right to exercise the Option that would have accrued had the Optionee continued living and remained in Continuous Status as an Employee or Consultant six (6) months after the date of death, subject to the limitation set forth in Section 6(a); or (B) within thirty (30) days (or such other period of time not exceeding three (3) months as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after his or her 9 10 termination of Continuous Status as an Employee or Consultant, the Option may be exercised by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, at any time within six (6) months (or, in the case of Retirement, such longer period of time, not to exceed 12 months, as determined by the Administrator) following the date of death, but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement, and only to the extent of the right to exercise the Option that had accrued at the date of termination. (c) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. (d) Rule 16b-3. Options granted to individuals subject to Section 16 of the Exchange Act ("Insiders") must comply with the applicable provisions of Rule 16b-3 and shall contain such additional conditions or restrictions as may, in the Administrator's sole discretion, be necessary and desirable to qualify thereunder for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 11. Non-Transferability of Options. An Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 12. Adjustments Upon Changes in Capitalization, Dissolution, Merger, or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination, or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding, and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option prior to 10 11 such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Optionee shall have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be exercisable. If an Option is exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 13. Date of Grant. The date of grant of an Option shall be, for all purposes, the date on which the Administrator makes the determination granting such Option, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend, or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Rule 16b-3 or with Section 422 of the Code (or any successor rule or statute or other applicable law, rule, or regulation, including the requirements of any exchange or quotation system on which the Common Stock is listed or quoted). Such shareholder approval, if required, shall be obtained in such a manner and to such a degree as is required by the applicable law, rule, or regulation. 11 12 (c) Effect of Amendment or Termination. No amendment, alteration, suspension, or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. 15. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, Applicable Laws, and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. Liability of Company. (a) Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. (b) Grants Exceeding Allotted Shares. If the Optioned Stock covered by an Option exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional shareholder approval, such Option shall be void with respect to such excess Optioned Stock, unless shareholder approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with Section 14(b) of the Plan. 17. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 18. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws and the rules of any stock exchange upon which the Common Stock is listed. 12 EX-11.1 4 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 ALTERA CORPORATION ------------------------ COMPUTATION OF EARNINGS PER SHARE(1)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) -------------------------------- YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 -------- ------- ------- PRIMARY: Weighted average shares outstanding........................ 87,405 86,626 83,252 Net effect of dilutive stock options....................... 4,419 4,528 3,240 -------- ------- ------- Total...................................................... 91,824 91,154 86,492 ======== ======= ======= Net income................................................. $109,135 $86,871 $14,608 ======== ======= ======= Net income per share....................................... $ 1.19 $ 0.95 $ 0.17 ======== ======= ======= FULLY DILUTED: Weighted average shares outstanding........................ 87,405 86,626 83,252 Net effect of dilutive stock options....................... 5,042 4,684 3,240 Assumed conversion of convertible subordinated notes....... 8,990 4,778 -- -------- ------- ------- Total...................................................... 101,437 96,088 86,492 ======== ======= ======= Net income................................................. $109,135 $86,871 $14,608 Add: Convertible subordinated notes interest, net of income taxes.................................................... 7,440 4,397 -- -------- ------- ------- Adjusted net income........................................ $116,575 $91,268 $14,608 ======== ======= ======= Net income per share....................................... $ 1.15 $ 0.95 $ 0.17 ======== ======= =======
- --------------- (1) This exhibit should be read in conjunction with Notes 2, 9 and 10 of Notes to Consolidated Financial Statements. 23 EX-13.1 5 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13.1 ABOUT YOUR INVESTMENT STOCK OWNERSHIP PROFILE. The Company estimates that at December 31, 1996 there were more than 20,000 holders of Altera stock. STOCK PRICE. Altera's initial public offering took place on March 31, 1988. The Company's price-to-earnings ratio at each year-end for the last five years was as follows: 1992 1993 1994 1995 1996 ------------------------------------------ 23.0 32.4 26.0* 26.0 30.5 * Excludes R&D in-process write-off associated with the acquisition of Intel's programmable logic business. TRADING VOLUME. The average trading volume in the Company's stock increased 30% in 1996 over 1995, as measured by Nasdaq. Trading volume in 1996 averaged 4.4 million shares per day, compared to 3.4 million per day in 1995, and 3.0 million in 1994, retroactively adjusted for 2-for-1 splits of the Company's common stock in the second quarter of 1995 and the fourth quarter of 1996. 2 CORPORATE DIRECTORY BOARD OF DIRECTORS Rodney Smith Chairman, Chief Executive Officer & President Altera Corporation Michael A. Ellison Chief Executive Officer Steller, Inc. Paul Newhagen Vice President, Administration Altera Corporation Robert W. Reed Former Senior Vice President Intel Corporation William E. Terry Former Director & Executive Vice President Hewlett-Packard Company Deborah Triant, Ph.D. President and Chief Executive Officer CheckPoint Software Technologies, Inc. CORPORATE OFFICERS Rodney Smith President & Chief Executive Officer C. Wendell Bergere Vice President, General Counsel & Secretary Denis Berlan Vice President, Operations/Product Engineering Erik Cleage Vice President, Marketing John R. Fitzhenry Vice President, Human Resources Clive McCarthy Vice President, Development Engineering Paul Newhagen Vice President, Administration Thomas J. Nicoletti Vice President, Investor Relations and Business Development Nathan Sarkisian Vice President, Finance & Chief Financial Officer Peter Smyth Vice President, Sales CORPORATE HEADQUARTERS 2610 Orchard Parkway San Jose, California 95134-2020 (408) 544-7000 CORPORATE COUNSEL Wilson, Sonsini, Goodrich & Rosati Palo Alto, California INDEPENDENT ACCOUNTANTS Price Waterhouse LLP San Jose, California FORM 10-K A copy of the Company's Form 10-K, filed with the Securities and Exchange Commission (without exhibits), is available from: Shareholder Relations Altera Corporation 2610 Orchard Parkway San Jose, California 95134-2020 (408) 544-7707 STOCK LISTING Altera's common stock has been traded on the over-the- counter market since the Company's initial public offering (IPO) on March 31, 1988, and is quoted on The Nasdaq Stock Market under the symbol "ALTR." The Company has never paid cash dividends on its common stock and has no present plans to do so. 3 For the past two years, the quarterly high and low closing sales prices for the common stock were:
1996 1995 ------------------- ------------------ Quarter High Low High Low - ---------------------------------------------------- First 38 1/2 22 9/16 14 27/32 10 1/8 Second 31 3/16 18 13/16 22 1/2 13 31/32 Third 27 5/8 14 34 7/8 21 13/16 Fourth 38 7/8 24 7/8 32 19/32 23 1/16
REGISTRAR/TRANSFER AGENT Investor Relations Boston EquiServe L.P. P.O. Box 8040 Boston, MA 02266-8040 (617) 575-3100 Altera, MAX, FLEX, and MAX+PLUS are registered trademarks, and MAX+PLUS II, FLEX 10K, FLEX 8000, MAX 9000, MAX 7000, MAX 7000S, MAX 5000, Classic, FLASHlogic, and individual device designations are trademarks of Altera Corporation. Altera Corporation acknowledges the trademarks of other organizations for their respective products or services mentioned in this document. 4 SELECTED CONSOLIDATED FINANCIAL DATA
FIVE-YEAR SUMMARY Year Ended December 31 (In thousands, ------------------------------------------------------------------------ except per share amounts) 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- STATEMENTS OF OPERATIONS DATA: Sales $497,306 $401,598 $198,796 $140,279 $101,470 Cost of sales 191,958 158,808 77,672 58,470 43,994 -------- -------- -------- -------- -------- Gross profit 305,348 242,790 121,124 81,809 57,476 Research and development 49,513 33,849 45,994 16,847 15,826 Selling, general, and administrative 87,742 74,658 45,771 35,202 25,147 -------- -------- -------- -------- -------- Income from operations $168,093 $134,283 $ 29,359 $ 29,760 $ 16,503 ======== ======== ======== ======== ======== Income before income taxes $169,137 $137,891 $ 31,496 $ 31,392 $ 18,024 ======== ======== ======== ======== ======== Net income $109,135 $ 86,871 $ 14,608 $ 21,195 $ 11,539 ======== ======== ======== ======== ======== Primary net income per share $ 1.19 $ 0.95 $ 0.17 $ 0.25 $ 0.14 Fully diluted net income per $ 1.15 $ 0.95 $ 0.17 $ 0.25 $ 0.14 share Shares used in computing net income per share: Primary 91,824 91,154 86,492 83,984 82,572 Fully diluted 101,437 96,088 86,492 83,984 82,572
December 31 ---------------------------------------------------------------------- (In thousands, except per share amounts) 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Working capital $295,020 $346,242 $121,479 $ 94,895 $ 66,508 Total assets 778,212 715,554 213,882 155,757 114,693 Long-term debt 230,000 288,600 -- -- -- Shareholders' equity 370,245 255,189 158,019 121,699 95,606 Book value per share 4.23 2.93 1.84 1.49 1.19
QUARTERLY DATA (UNAUDITED)
Year Ended December 31, 1996 -------------------------------------------------------- (In thousands, First Second Third Fourth except per share amounts) Quarter Quarter Quarter Quarter 1996 DATA: -------- -------- -------- -------- Sales $137,098 $116,295 $116,728 $127,185 Gross profit 84,044 71,446 71,634 78,224 Net income 31,440 24,265 24,118 29,312 Primary net income per share 0.34 0.27 0.26 0.32 Fully diluted net income per share 0.33 0.26 0.26 0.31
1995 DATA: Sales $75,038 $92,165 $109,079 $125,316 Gross profit 44,987 54,676 66,262 76,865 Net income 15,097 19,632 23,729 28,413 Net income per share 0.17 0.21 0.26 0.31
11 5 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITIONS & RESULTS OF OPERATIONS RESULTS OF OPERATIONS SALES. 1996 sales were $497.3 million, a 24% increase from 1995 sales of $401.6 million, and a 150% increase from 1994 sales of $198.8 million. The increase in sales from 1995 reflects increased unit volumes of the Company's MAX 7000 component family, and to a lesser extent the MAX 9000 product family. Sales of the mature Classic, MAX 5000 and FLASHlogic product lines were down from 1995, although unit volumes increased. The increase in sales from 1994 to 1995 was driven by increased unit volumes of the Company's MAX 7000 component family, and to a lesser extent by the FLEX 8000, Classic and FLASHlogic product lines. Percentage sales growth in 1996 and 1995 was generally consistent across all geographic regions. Sales of development systems and software used by customers to design and program Altera components were approximately 6% of sales in 1996, compared to 6% and 9% of sales in 1995 and 1994, respectively. Licensed installations grew approximately 26% during the year and now cumulatively total approximately 29,000. Sales of the MAX 7000 family increased 46% from 1995 and comprised approximately 49% of total Company sales for the year. The MAX 7000 family offers users some of the fastest mid-density parts available in the marketplace today. All members of the family are electrically erasable. Average selling prices for the family did not change significantly throughout the year. Sales of the FLEX 8000 family accounts for 16% of Company sales. This family includes some of the largest programmable logic devices offered by any vendor. All members of the family may be reprogrammed without being removed from the end-user's system (in-circuit reconfigurability). During 1996, average selling prices for the family declined approximately 20%. In the second quarter of 1995, the Company began shipping the MAX 9000 product family. This family has a feature-rich, high-density architecture. All members of the family can be programmed after being soldered onto the circuit board for manufacturing ease. Also in 1995, the Company introduced the FLEX 10K family. This family offers logic capacities that were once associated exclusively with gate arrays, combined with the time-to-market advantages of programmable logic devices. Various combinations of memory configurations and complex logic functions can be implemented in FLEX 10K devices. Unit sales of these products continued to increase throughout 1996. The 1996 revenue growth rate of the FLEX 10K was the highest for any product family every introduced by the 12 6 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITIONS & RESULTS OF OPERATIONS Company. For the year ended December 31, 1996, combined sales of the MAX 9000 and the FLEX 10K families amounted to 6% of total sales. Altera's major markets are in communications, computing, and industrial applications. Altera's 1996 international sales were 47% of total sales, compared to 47% in 1995 and 48% in 1994. Major items in the statements of operations, expressed as a percentage of sales, were as follows:
Year Ended December 31 -------------------------- 1996 1995 1994 ---- ---- ---- Cost of sales 39% 40% 39% Gross margin 61% 60% 61% Research and development 10% 8% 23% Selling, general, and administrative 17% 19% 23% Operating income 34% 33% 15% Interest expense 3% 2% -% Interest and other income, net 3% 3% 1% Provision for income taxes 12% 13% 9% Net income 22% 22% 7% --- --- ---
GROSS MARGIN. As a percentage of sales, gross margin increased from 60.5% in 1995 to 61.4% in 1996; in 1995, gross margin declined slightly from 60.9% in 1994 to 60.5%. The margin percentage increased in 1996 compared to 1995, due to lower manufacturing costs resulting from improved yields, process advancements, and lower wafer costs, despite reductions in selling prices. The decline in 1995 compared to 1994 was mainly due to lower prices to end customers and higher costs for purchased silicon wafers driven by the appreciation of the yen versus the dollar. The increased silicon costs in 1995 were partially offset by a reduction in other manufacturing costs as a result of scale efficiencies on higher production volumes and improvements in production yields. RESEARCH & DEVELOPMENT. In the last two years, the Company has introduced the MAX 9000, FLEX 10K and MAX 7000S families of products, two major new software releases, and several new package technologies. Additionally, the Company has redesigned a number of its products to accommodate their manufacture using new wafer fabrication processes, including a new eight-inch wafer process using triple-layer metal technology. 13 7 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITIONS & RESULTS OF OPERATIONS The increase in research and development expenditures as a percentage of sales from 8% in 1995 to 10% in 1996 is primarily associated with the transition of several of the Company's newer products to more advanced process geometries, as well as prototype and pre-production expenditures related to the MAX 7000S, MAX 9000 and FLEX 10K product families. The research and development expenditures for 1994 included a $23.7 million non-recurring charge related to "research and development in-process" in conjunction with the purchase of the Intel programmable logic business. Excluding this charge, research and development expenditures increased by 52% from 1994 to 1995. The increase was driven by larger expenditures for the design of new products, including more design engineering labor, prototype wafers, and masks. Also contributing to the increase in 1995 were the higher labor expenses for the development of software to support new products and design environments, and pre-production costs related to the introductions of the MAX 9000 and FLEX 10K families. SELLING, GENERAL & ADMINISTRATIVE. Selling, general, and administrative expenses for 1996 increased 18% from 1995 but slightly decreased as a percentage of sales. From 1994 to 1995, selling, general, and administrative expenses increased 63%, but decreased as a percentage of sales from 23% to 19%. Selling, general, and administrative expenses include commission and incentive expenses, advertising and promotional expenditures, legal, and salary expenses related to field sales, marketing, and administrative personnel. The increases over the last three years are mainly driven by higher marketing and field sales headcount, new offices both domestically and internationally, increases in advertising and promotional expenditures, and higher commissions due to increased sales. As a percentage of sales, selling, general, and administrative expenses were lower in 1995 than 1994 due to the growth in sales outpacing the increase in expenses in 1995. Altera has approximately twenty field sales offices and markets its products through distributors, representatives, and its own direct sales force. Approximately 85% of the Company's worldwide sales are made through distributors. The Company will continue to increase sales resources in markets and regions where it anticipates such actions will increase sales or improve customer service. OPERATING INCOME. Operating income in 1996 was $168.1 million, compared to $134.3 million in 1995. The 25% increase in operating income from 1995 to 1996 is commensurate with the increase in sales. The 1994 operating income of $29.4 million includes a $23.7 million charge for research and development in-process. Excluding this charge, operating income for 1994 was $53.1 million or 27% of 14 8 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITIONS & RESULTS OF OPERATIONS sales compared to 33% of sales in 1995. On this basis, the operating income as a percentage of sales increased from 1994 to 1995, as strong sales growth outpaced increases in operating expenses. INTEREST EXPENSE. Interest expense increased from $7.4 million in 1995 to $12.3 million in 1996. The expense relates to the convertible notes issued in June 1995 and includes interest expense and amortization of $7.4 million of debt issuance costs, partially offset in 1996 by capitalized interest of approximately $1.7 million related to the construction of the new headquarters. INTEREST AND OTHER INCOME, NET. Interest and other income increased from $11.0 million in 1995 to $13.3 million in 1996 as a result of increased cash balances available for investment throughout the year. In 1995, increased cash balances, as a result of the issuance of the convertible notes in 1995, combined with higher interest rates, increased interest income to $11.0 million, compared to $2.9 million in 1994. TAXES. Altera's tax rate was 35% in 1996, compared to 37% in 1995 and 54% in 1994. The decrease of the rate in 1996 is primarily due to an increased amount of earned interest income from tax exempt investments and research and development credits. The higher rate in 1994 resulted from the tax treatment of the research and development in-process charge. Excluding the effect of the research and development in-process charge, the effective rate was 37% in 1994, which is consistent with the 1995 rate. 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 solutions offered by 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 adversely 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, normal process fluctuations, variances in manufacturing yields, and other factors could have adverse consequences on the Company's future results. Additionally, litigation relating to competitive patents and intellectual property, competitive breakthroughs, and aggressive competitive pricing could also adversely affect future operating results. 15 9 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITIONS & RESULTS OF OPERATIONS For instance, in 1994, the Company found it necessary to significantly reduce the prices for its FLEX 8000 family of products in order to stimulate customer interest and design activity. At various times in 1996, the Company reduced the book prices on the MAX 7000, FLEX 8000, MAX 9000 and FLEX 10K product families in order to attract customers and expand market share. The Company expects price competition and other competitive pressures to continue. 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 OPERATING ACTIVITIES. During 1996, the Company generated $98.2 million in net cash from operating activities which was primarily attributable to net income of $109.1 million adjusted by non-cash items including depreciation and amortization of $20.9 million and an increase in accrued liabilities of $17.0 million. Offsetting these were increases in deferred taxes of $8.1 million, accounts receivable of $14.0 million, and inventories of $20.4 million and a decrease in accounts payable of $8.2 million. These increases in the use of cash were primarily the result of an increase in sales volume from 1995 to 1996. INVESTING ACTIVITIES. Net cash used in investing activities for 1996 was $55.7 million. The Company's principal investing activities have been investments in a joint-venture called WaferTech, LLC (WaferTech) of $84.2 million, the construction of a multiple-building corporate headquarters of $27.0 million and routine capital expenditures of $18.2 million. These investing activities were partially funded by the sale of $75.7 million of short-term investments. Capital expenditures for 1996 amounted to $45.2 million, of which $27.0 million related to the construction of a multiple-building corporate headquarters. During 1996, the Company started the construction of 500,000 square feet of office and light manufacturing space on a new site which was purchased in 1995. The construction is expected to be completed in 1997. The remaining capital expenditures in 1996 consisted of additional test and automated handling capacity to accommodate increased sales and more rigorous test requirements of the Company's newer products. Altera's 16 10 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITIONS & RESULTS OF OPERATIONS capital expenditures in the past three years, excluding the land purchase in 1995 and the headquarters construction in 1996, have been primarily for semiconductor design and test equipment, as well as data processing software and equipment. In June 1996, Altera, Taiwan Semiconductor Manufacturing Corporation (TSMC), and several other partners formed 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, Altera will receive 18% equity ownership in the joint-venture company and certain rights to procure output from the fab at market price. The investment is to be made in three installments of which the first two were made in 1996. The remaining installment amounts to $56.2 million and is due in November 1997. In addition, the Company has an obligation to guarantee a pro rata share of debt incurred by WaferTech, up to a maximum of $45 million. FINANCING ACTIVITIES. In 1996, the Company used $51.2 million of cash for financing activities, consisting primarily of payments on the notes payable to secure wafer capacity of $57.1 million and the repurchase of 300,000 shares of common stock of $4.3 million. Cash used by financing activities in 1996 was partially offset with the proceeds from common stock issued under the Company's Stock Option and Employee Stock Purchase Plans. In 1995, the Company also generated funds from the issuance of $230.0 million of convertible subordinated notes. The convertible subordinated notes are due in June of 2002 and bear an interest rate of 5.75%, payable semiannually. The notes are convertible at the option of the holder into shares of the Company's common stock at a price of $25.59 per share. Discounts, commissions, and expenses, which are amortized over the seven-year life of the notes, reduced the proceeds to $224.8 million. The notes are callable by the Company no sooner than June of 1998. At December 31, 1996, Altera had $280.9 million of cash, cash equivalents, and short-term investments available to finance future growth, $56.2 million of short-term obligations and $230.0 million of long-term debt. Management believes that operational capital expenditures in 1997 will increase from 1996 commensurate with sales growth. In addition, the Company expects $50 to $55 million of costs in 1997 related to the construction of its corporate headquarters. Altera believes the available sources of funds and the cash expected to be generated from operations will be adequate to finance current operations, the remaining obligation to WaferTech, and capital expenditures through at least 1997. 17 11 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITIONS & RESULTS OF OPERATIONS EMPLOYEES Over the course of 1996, the number of regular employees increased 4% to 918 at year end. Sales per employee were $553,000 in 1996 compared to $519,000 in 1995, and $335,000 in 1994. IMPACT OF CURRENCY & INFLATION The Company purchases the majority of its materials and services in U.S. dollars, and its foreign sales are also billed in U.S. dollars. However, certain contracts for silicon wafer purchases are denominated in Japanese yen, and the volume of such contracts increased significantly in 1994, 1995 and 1996. The appreciation of the U.S. dollar with respect to the yen had a positive impact on the Company's margin during 1996. The increase of yen-denominated purchases in 1995 and the declining value of the dollar with respect to the yen had an adverse impact on the Company's margins during the first six months of 1995. The Company was able to mitigate much of that impact with improved yields and efficiencies. In addition, in the third quarter of 1995, the Company purchased yen forward contracts in an amount approximately equal to its expected yen requirements for that quarter. As of December 31, 1995 and throughout 1996, the Company had no open foreign exchange contracts for the purchase or sale of foreign currencies. If market conditions change, however, Altera may choose to bill foreign customers in local currencies. In addition, the impact of other foreign currency exchange rate fluctuations may be material in the future, as a result of increased foreign currency fluctuations or increased material purchases in yen. The effects of inflation upon Altera's financial results have not been significant to date. 18 12 CONSOLIDATED BALANCE SHEETS
ASSETS December 31 ------------------------ (In thousands) 1996 1995 - ----------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 70,788 $ 79,409 Short-term investments 210,062 285,810 -------- -------- Total cash, cash equivalents, and short-term investments 280,850 365,219 Accounts receivable, less allowance for doubtful accounts of $2,399 and $1,005 68,486 54,518 Inventories 75,798 55,421 Deferred income taxes 45,402 37,339 Other current assets 2,451 5,510 -------- -------- Total current assets 472,987 518,007 Property and equipment, net 89,804 54,846 Investments 206,671 131,331 Other assets 8,750 11,370 -------- -------- $778,212 $715,554 ======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------- Current liabilities: Accounts payable $ 13,279 $ 17,049 Accrued liabilities 89,209 72,209 Notes payable and short-term obligations 56,160 61,920 Accrued compensation 14,136 16,347 Income taxes payable 5,183 4,240 -------- -------- Total current liabilities 177,967 171,765 Notes payable -- 58,600 Convertible notes 230,000 230,000 -------- -------- Total liabilities 407,967 460,365 -------- -------- Commitments and contingencies (Notes 5, 6, 7, 8) Shareholders' equity: Common stock; no par value; 160,000 shares authorized; 87,604 and 87,117 shares issued and outstanding 90,644 83,445 Retained earnings 279,601 171,744 -------- -------- Total shareholders' equity 370,245 255,189 -------- -------- $778,212 $715,554 ======== ========
See accompanying notes to consolidated financial statements. 13 CONSOLIDATED STATEMENTS OF OPERATIONS & SHAREHOLDERS' EQUITY OPERATIONS
OPERATIONS YEAR ENDED DECEMBER 31 ------------------------------------------- (In thousands, except per share amounts) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- Sales $497,306 $401,598 $198,796 Cost of sales 191,958 158,808 77,672 -------- -------- -------- Gross profit 305,348 242,790 121,124 Research and development 49,513 33,849 22,249 Research and development in process -- -- 23,745 Selling, general, and administrative 87,742 74,658 45,771 -------- -------- -------- Income from operations 168,093 134,283 29,359 Interest expense (12,284) (7,401) -- Interest and other income, net 13,328 11,009 2,137 -------- -------- -------- Income before income taxes 169,137 137,891 31,496 Provision for income taxes 60,002 51,020 16,888 -------- -------- -------- Net income $ 109,135 $ 86,871 $ 14,608 ========= ========= ======== Primary net income per share $ 1.19 $ 0.95 $ 0.17 Fully diluted net income per share $ 1.15 $ 0.95 $ 0.17 - ------- Shares used in computing net income per share: Primary 91,824 91,154 86,492 Fully diluted 101,437 96,088 86,492
SHAREHOLDERS' EQUITY
Common Retained (In thousands) Stock Earnings - ------------------------------------------------------------------- Balance, December 31, 1993 $ 51,434 $ 70,265 Tax benefit resulting from stock option transactions 2,265 Issuance of 4,319 shares 19,447 Net income 14,608 --------- --------- Balance, December 31, 1994 73,146 84,873 Tax benefit resulting from stock option transactions 5,269 Issuance of 1,165 shares 5,030 Net income 86,871 --------- --------- Balance, December 31, 1995 83,445 171,744 Tax benefit resulting from stock option transactions 4,492 Issuance of 787 shares 5,760 Repurchase of 300 shares (3,053) (1,278) Net income 109,135 --------- --------- Balance, December 31, 1996 $ 90,644 $ 279,601 ========= =========
See accompanying notes to consolidated financial statements. 14 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (In thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 109,135 $ 86,871 $ 14,608 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 14,604 9,269 7,001 Amortization 6,280 2,897 2,527 Research and development in process -- -- 23,745 Deferred taxes (8,063) (24,974) (4,568) Changes in assets and liabilities: Accounts receivable, net (13,968) (22,856) (9,804) Inventories (20,377) (16,944) (12,235) Other assets 3,059 (4,341) (825) Accounts payable (8,160) 5,736 6,001 Accrued liabilities 17,000 37,553 10,799 Accrued compensation (2,211) 7,716 3,041 Income taxes payable 943 2,894 (2,107) --------- --------- -------- Cash provided by operating activities 98,242 83,821 38,183 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (45,172) (45,820) (10,509) Acquisition of Intel programmable logic business -- -- (22,911) Other long-term investments (86,240) (500) (600) Net change in short-term investments 75,748 (234,855) 13,850 --------- --------- -------- Cash used for investing activities (55,664) (281,175) (20,170) --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Convertible notes -- 224,825 -- Payment of notes payable (57,120) -- -- Tax benefit from employee stock dispositions 4,492 5,269 2,265 Net proceeds from issuance of common stock 5,760 5,030 4,529 Repurchase of common stock (4,331) -- -- --------- --------- -------- Cash provided by (used for) financing activities (51,199) 235,124 6,794 --------- --------- -------- Net increase (decrease) in cash and cash equivalents (8,621) 37,770 24,807 Cash and cash equivalents at beginning of year 79,409 41,639 16,832 --------- --------- -------- Cash and cash equivalents at end of year $ 70,788 $ 79,409 $ 41,639 ========= ========= ======== Cash paid during the year for: Income taxes $ 62,347 $ 64,122 $ 21,106 Interest 13,225 6,392 -- Supplemental disclosure of non-cash activities: Cancellation of notes payable related to wafer capacity 63,400 -- -- Remaining obligation related to WaferTech 56,160 -- --
See accompanying notes to consolidated financial statements. 15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: COMPANY & BUSINESS Altera Corporation (Altera or the Company) designs, develops, manufactures, and markets CMOS programmable logic integrated circuits and associated engineering development software and hardware. The Company's major markets are communications, computing, and industrial applications. The Company's export sales were $231.7, $187.4, and $95.5 million for 1996, 1995, and 1994, respectively. Sales to Europe were $103.8, $84.2, and $42.6 million and sales to Japan were $94.8, $78.9, and $37.6 million in 1996, 1995, and 1994, respectively. In 1996, the two largest distributors accounted for 29% and 15% of sales. In 1995, the two largest distributors accounted for 21% and 15% of sales, whereas in 1994, they each accounted for 15% and 14% of sales, respectively. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. Altera has a fiscal year that ends on the Friday nearest December 31st. For presentation purposes, the consolidated financial statements and notes refer to the calendar month end. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all significant intercompany balances and transactions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts; actual results could differ from those estimates. CASH EQUIVALENTS & SHORT-TERM INVESTMENTS. Cash equivalents consist of highly liquid investments with original maturities of three months or less. Short-term investments are held as securities available for sale and are carried at their market value as of the balance sheet date which approximated cost. The amortized cost of debt securities are adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains or losses are determined on the specific identification method and are reflected in income. Net unrealized gains or losses are recorded directly in shareholders' equity except that those unrealized losses that are deemed to be other than temporary are reflected in income. INVENTORIES. Inventories are recorded at the lower of standard cost, which approximates actual cost on a first-in-first-out basis, or market. The inventories at December 31, 1996 and 1995, were comprised of the following components:
December 31 ---------------------- (In thousands) 1996 1995 - --------------------------------------------------------------- Purchased parts and raw materials $ 1,773 $ 2,067 Work in process 56,870 38,617 Finished goods 17,155 14,737 ======= ======= Total inventories $75,798 $55,421 ======= =======
12 16 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DEPRECIATION & AMORTIZATION. Depreciation and amortization are computed using the straight-line method. Estimated useful lives of two to five years are used for equipment and office furniture. Amortization of leasehold improvements is computed using the shorter of the remaining facility lease term or the estimated useful life of the improvements. As of December 31, 1996, the costs of the building include $1.7 million of capitalized interest incurred during the construction and development period. Property and equipment at December 31, 1996 and 1995, was comprised of the following components:
December 31 -------------------------- (In thousands) 1996 1995 - --------------------------------------------------------------------------- Land $ 19,925 $ 19,925 Building 32,955 1,605 Equipment 75,453 64,703 Office furniture and equipment 9,508 4,908 Leasehold improvements 3,493 3,512 --------- -------- Property and equipment, at cost 141,334 94,653 Accumulated depreciation and amortization (51,530) (39,807) ========= ======== Property and equipment, net $ 89,804 $ 54,846 ========= ========
INTANGIBLES. The Company evaluates the recoverability of its intangible assets in accordance with Statement of Financial Accounting Standard No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." FAS 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. REVENUE RECOGNITION. The Company recognizes revenue from product sales upon shipment. Product sales to distributors are made under agreements allowing a limited right-of-return and price adjustments under certain circumstances. Estimated returns and allowances are recorded at the time of shipment. Accrued liabilities include provisions for returns and allowances of $68.3 million and $54.5 million at December 31, 1996 and 1995, respectively. FOREIGN EXCHANGE CONTRACTS. The Company purchases the majority of its materials and services in U.S. dollars and its foreign sales are also billed in U.S. dollars. However, certain contracts for silicon wafer purchases are denominated in Japanese yen. At times, the Company enters into foreign exchange option or forward contracts to hedge against currency fluctuations which affect these transactions. As of December 31, 1996, the Company had no open 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. No assurance can be given that any of these arrangements will protect the Company from the effects on its operation of currency fluctuations. 23 17 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS INCOME PER SHARE. Primary income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the year. 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 subordinated notes issued in June 1995 are not common stock equivalents and, therefore, have been excluded from the computation of primary earnings per share. Fully diluted net income per share assumes the conversion of the convertible subordinated notes into shares of common stock, the elimination of the related interest requirements, net of income taxes, and the dilutive effect of the stock options. STOCK SPLITS. All share data have been retroactively restated to reflect a 2-for-1 split of the Company's outstanding common stock which was reflected in the stock price as of January 7, 1997 and was effective as to the shareholders of record on December 18, 1996. The share data had also been adjusted in 1995 to reflect a 2-for-1 stock split which was reflected in the stock price as of June 1, 1995 and was effective as to the shareholders of record on May 10, 1995. STOCK-BASED COMPENSATION PLANS. The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Under APB No. 25, compensation cost is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the exercise price of the option granted. Compensation cost for stock options, if any, is recognized ratably over the vesting period. The Company's policy is to grant options with an exercise price equal to the quoted market price of the Company's stock on the grant date. Accordingly, no compensation has been recognized for its stock option plans. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standards (FAS) 123, "Accounting for Stock-Based Compensation". See Note 9. FAIR VALUE OF FINANCIAL INSTRUMENTS. For certain of the Company's financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, notes payable and accounts payable, the carrying amounts approximate fair value due to their short maturities. The estimated fair value for the convertible notes (with a carrying amount of $230 million at December 31, 1996) is approximately $354 million. The fair value for the convertible notes is primarily based on quoted market prices. CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. The Company places its short-term investments in a variety of financial instruments and, by policy, limits the amount of credit exposure through diversification and highly rated securities. The Company sells its products to distributors and original equipment manufacturers throughout the world. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires collateral, such as letters of credit, whenever deemed necessary. 24 18 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DEPENDENCE ON WAFER SUPPLIERS. The Company does not directly manufacture finished silicon wafers. The Company's strategy has been to maintain relationships with semiconductor manufacturers for the production of its wafers. The Company has been successful in maintaining such relationships (Notes 5 and 6). However, there can be no assurance that the Company will be able to satisfy its future wafer needs from current or alternative manufacturing sources. This could result in possible loss of sales or reduced margins. NOTE 3: MARKETABLE SECURITIES At December 31, 1996 and 1995, the carrying value of the Company's portfolio of marketable securities approximated fair value. The portfolio consists of the following:
December 31 ----------------------- (In thousands) 1996 1995 ------------------------------------------------------------------------------- Money market funds $ 19,951 $ 48,800 Municipal bonds 218,295 104,600 U.S. Government and agency obligations 13,112 175,000 Corporate bonds 9,190 11,400 Other debt securities 8,432 20,100 ======== ========= $268,980 $ 359,900 ======== =========
At December 31, 1996 and 1995, the net unrealized holding gains and losses on securities were immaterial. The marketable securities at December 31, 1996, and 1995 by contractual maturity are shown below.
December 31 ------------------------- (In thousands) 1996 1995 -------------------------------------------------------------------- Due in one year or less $ 96,056 $164,000 Due after one year through two years 172,924 195,900 ======== ======== $268,980 $359,900 ======== ========
NOTE 4: ACQUISITION On October 1, 1994, Altera purchased Intel Corporation's Programmable Logic Device (PLD) product line, including certain directly associated capital equipment, a credit toward the purchase of inventory, and certain intellectual property. The PLD product line was purchased for a price of $37.8 million, consisting of $22.9 million in cash and 2,805,400 shares of the Company's common stock (valued at $14.9 million). The transaction was accounted for as a purchase. The excess of the purchase price over the fair market value of the net tangible assets acquired was allocated to research and development in process ($23.7 million), and to acquired technology ($7.0 million) that is being amortized over four years on a straight-line basis. At December 31, 1996 and 1995, the accumulated amortization related to the acquired technology amounted to $3.9 million and $2.2 million, respectively. 25 19 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Had the acquisition of the PLD product line occurred as of the beginning of 1994, unaudited sales, net income, and net income per share presented on a pro forma basis for the year ended December 31, 1994, would have been $224.5 million, $29.7 million, and $0.34, respectively. NOTE 5: INVESTMENTS AND OBLIGATIONS At December 31, 1996, Altera's long-term investments primarily relate to an investment in WaferTech, LLC (WaferTech) of $140.4 million, deposits with Taiwan Semiconductor Manufacturing Corporation (TSMC) for future wafer allocations of $57.1 million (Note 6) and the Company's investment in Cypress Semiconductor (Texas) Inc. (CSTI), a subsidiary of Cypress Semiconductor Corporation of $9.1 million. In June 1996, Altera, TSMC, and several other partners formed 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, Altera received an 18% equity ownership in the joint-venture company and certain rights to procure output from the fab at market price. The investment is to be made in three installments of which the first two were made in June and November of 1996 in equal amounts of $42.1 million. The remaining installment amounts to $56.2 million and is due in November 1997. In addition, the Company has an obligation to guarantee a pro rata share of debt incurred by WaferTech, up to a maximum of $45.0 million. 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 share of WaferTech's net income for 1996 was immaterial. Altera owns a 17% equity interest in CSTI and has the right to purchase a percentage of the wafers produced by CSTI approximately equal to the Company's percentage ownership of CSTI. The Company accounts for this investment under the cost method. NOTE 6: NOTES PAYABLE In 1995, the Company entered into several agreements with TSMC, whereby it agreed to make certain deposits to TSMC for future wafer capacity allocations extending into 2001. The Company made cash deposits amounting to $2.4 million in 1995 and issued promissory notes for $120.5 million representing partial prepayments for wafers to be supplied under these agreements. During the second quarter of 1996, the Company and TSMC renegotiated these agreements, resulting in the cancellation of all notes payable and a refund of certain prepayments, except for a $57.1 million prepayment made in January 1996 for wafer capacity from 1997 through 2000. Under the terms of the agreement related to the $57.1 million prepayment, TSMC agrees to provide the Company with wafers manufactured with TSMC processes and according to the Company's specifications, and the Company agrees to purchase and TSMC agrees to supply, a specific capacity of wafers per year through 2000. Subsequent billings for actual wafers used from TSMC will reduce the prepaid balance. The prepayments are generally 26 20 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS nonrefundable if the Company does not purchase the full prepaid capacity unless the Company identifies a third-party purchaser, acceptable to TSMC, for the capacity. NOTE 7: COMMITMENTS The Company leases its headquarters facilities under non-cancelable lease agreements. The major facility lease expires in July 1997. The lease requires the Company to pay property taxes, insurance, maintenance, and repair costs. Future minimum lease payments under all non-cancelable operating leases as of December 31, 1996, are $1.3 million in 1997, and none thereafter. Rental expense under all operating leases amounted to $4.0 million, $3.2 million, and $2.6 million in 1996, 1995, and 1994, respectively. The Company has a standby letter of credit facility in the amount of 1.5 billion yen (approximately $13 million) which has been fully utilized. The terms of this facility require immediate funding of any draws against any letters of credit issued under the facility. The facility requires the Company to comply with certain covenants regarding net worth and financial ratios. NOTE 8: CONVERTIBLE NOTES In June 1995, the Company issued $230 million of convertible subordinated notes due in June of 2002 and bearing an interest rate of 5.75%, payable semiannually. The notes are convertible into shares of the Company's common stock at a price of $25.59 per share. Discounts, commissions, and expenses, which are being amortized over the seven-year life of the notes, reduced the net proceeds to $224.8 million. Accumulated amortization at December 31, 1996 and 1995 amounted to approximately $1.2 million and $0.4 million respectively. The notes are callable by the Company no sooner than June of 1998. NOTE 9: STOCK-BASED COMPENSATION PLANS At December 31, 1996, the Company had four stock-based compensation plans, which are described below. The Company applies APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its three fixed stock option plans and its stock purchase plan. STOCK OPTION PLANS. There are 16.2 million shares of common stock reserved for issuance under the 1987 Stock Option Plan, 4.0 million shares of common stock are reserved for issuance under the 1996 Stock Option Plan and 940,000 shares of common stock are reserved for issuance under the Company's 1988 Director Stock Option Plan. The Director Stock Option Plan provides for the periodic issuance of stock options to members of the Company's Board of Directors who are not also employees of the Company. Under all Stock Option Plans, the exercise price of each option equals the market price of the Company's common stock on the date of grant and an option's maximum term is 10 years. Options generally vest over five years at annual increments as determined by the Board of Directors. 21 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The number of shares for which options were exercisable was approximately 2,960,000, 2,050,000, and 1,864,000 at December 31, 1996, 1995, and 1994, respectively. A summary of the Company's stock option activity and related weighted average exercise prices within each category for each of the years ended December 31, 1996, 1995 and 1994 relating to the Company's stock option plans are as follows:
1996 1995 1994 --------------------- --------------------- --------------------- (Share amounts in thousands) Shares Price Shares Price Shares Price ------ ------ ------ ------ ------ ------- Options outstanding at January 1, 10,059 $ 3.02 9,128 $ 2.57 8,412 $ 2.24 Stock options: Granted 3,433 26.25 2,346 22.60 2,561 7.40 Exercised (620) 28.54 (839) 2.91 (1,208) 2.27 Forfeited (372) 13.40 (576) 6.54 (637) 4.45 ====== ====== ====== ====== ===== ====== Options outstanding at December 31, 12,500 $ 5.07 10,059 $ 3.02 9,128 $ 2.57 ====== ====== ====== ====== ===== ======
The fair value of each option grant, as defined by FAS 123, is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated fair value grant date. To compute the estimated grant date fair value of the Company's stock option grants in 1996 and 1995, respectively, the Black-Scholes model was used with the following weighted-average assumptions: expected volatility of 36.4% and 34.6%, risk-free interest rates of 5.9% and 6.6%, expected lives from vesting date of 0.41 and 0.45 years, and dividend yields of 0%. The following table summarizes information about fixed stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ------------------------------------------------------- ------------------------------- Number Weighted-Average Weighted- Number Range of Outstanding Remaining Average Exercisable Weighted-Average Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price --------------- ------------ ---------------- -------------- ----------- ---------------- (in thousands) (in thousands) $1.81-$6.12 4,740 5.45 years $ 3.35 2,406 $ 2.75 $6.13-$9.25 2,015 7.45 $ 7.17 253 $ 7.27 $9.26-20.88 1,745 9.07 $17.37 100 $12.91 $20.89-$31.38 2,798 8.85 $24.30 192 $25.79 $31.39-$38.69 1,202 9.87 $34.92 9 $33.55
EMPLOYEE STOCK PURCHASE PLAN Under the 1987 Employee Stock Purchase Plan, the Company is authorized to issue up to 2.8 million shares of common stock to its full-time employees, nearly all of whom are eligible to 28 22 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS participate. Under the terms of the Plan, employees can choose each year to have up to 10 percent of their annual base earnings withheld to purchase the Company's common stock. The purchase price of the stock is 85 percent of the lower of the closing price at the beginning or at the end of each six-month offering period. Approximately 75 to 80 percent of eligible employees have participated in the Plan in the last two years. Sales under the Employee Stock Purchase Plan in 1996, 1995 and 1994 were 167,626, 326,646, and 306,356 shares of common stock at an average price of $21.49, $7.91 and $5.82 per share, respectively. At December 31, 1996, there were 351,332 shares available for future purchases under the Employee Stock Purchase Plan. Compensation cost (included in pro forma net income and net income per share amounts) is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes model with the following assumptions for 1996 and 1995, respectively: an expected life of six months for both years; expected volatility of 38.4% and 30.7%; risk-free interest rates of 5.1% and 6.0%; and dividend yields of 0%. The weighted-average fair value of those purchase rights granted in 1996 and 1995, as defined by FAS 123, was $5.55, and $4.35, respectively. The Company received a $4.5 million, $5.3 million, and $2.3 million tax benefit in 1996, 1995, and 1994, respectively, on the exercise of non-qualified stock options and on the disposition of stock acquired with an incentive stock option or through the Employee Stock Purchase Plan. PRO FORMA NET INCOME AND NET INCOME PER SHARE. Had the Company recorded compensation costs based on the estimated grant date fair value, as defined by FAS 123, for awards granted under its Stock Option Plans and Stock Purchase Plan, the Company's net income and income per share would have been reduced to the pro forma amounts below for the years ended December 31, 1996 and 1995:
1996 1995 ------- ------- Pro forma net income (in thousands) $99,885 $83,815 Pro forma net income per share: Primary $ 1.10 $ 0.92 Fully diluted $ 1.07 $ 0.92
The pro forma amounts reflect compensation expense related to 1996 and 1995 stock option grants only. In future years, the annual compensation expense will increase relative to the fair value of stock options granted in those future years. NOTE 10: COMMON STOCK REPURCHASE On July 15, 1996, the Board of Directors authorized the repurchase of up to 4 million shares of the Company's common stock. During July 1996, the Company repurchased 300,000 shares of common stock for a total price of $4.3 million. The repurchased shares were retired upon acquisition. 23 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: LITIGATION 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. The Delaware case was transferred to California in March 1996 on Xilinx's motion. The parties participated in court-ordered mediation in 1996 which to date has failed to result in settlement. 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 (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. The case was bifurcated to provide that a separate trial on the issue of the scope of the existing cross-license agreement between the parties will precede the trial on the infringement claims. In June 1996, a trial held to resolve Altera's claim that it is licensed to some or all of the AMD patents at issue in the case resulted in a jury verdict in Altera's favor. Due to the nature of the litigation with AMD and because the lawsuits have not been concluded, 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 Company's 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. 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. 30 24 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: INCOME TAXES The components of the provision for income taxes were as follows:
Year Ended December 31 ------------------------------------------ (In thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------ Current tax expense: United States $ 57,680 $ 64,931 $ 17,687 State 9,799 10,663 3,568 Foreign 586 400 200 -------- -------- -------- Total current tax expense 68,065 75,994 21,455 Deferred taxes (8,063) (24,974) (4,567) ======== ======== ======== Total provision for income taxes $ 60,002 $ 51,020 $ 16,888 ======== ======== ========
The 1994 tax provision includes taxes related to the acquisition of Intel's programmable logic business. Deferred tax assets (liabilities) were as follows:
December 31 ------------------------- (In thousands) 1996 1995 - ----------------------------------------------------------------------- Assets: Accrued expenses and reserves $ 38,404 $ 30,846 Acquisition costs 7,282 7,291 State taxes 3,675 3,325 Other 1,590 809 -------- -------- Gross deferred tax assets 50,951 42,271 Deferred tax liabilities (909) (186) Deferred tax asset valuation allowance (4,640) (4,746) ======== ======== Net deferred tax assets $ 45,402 $ 37,339 ======== ========
The valuation allowances of $4.6 and $4.7 million at December 31, 1996 and 1995, respectively, are attributable to deferred tax assets from the acquisition of Intel's programmable logic business. Sufficient uncertainty exists regarding the realizability of these assets and, accordingly, valuation allowances are required. The provision for taxes reconciles to U.S. statutory taxes as follows:
Year Ended December 31 ------------------------------------------ (In thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------- Tax provision at U.S. statutory rates $ 59,198 $ 48,262 $ 11,024 State taxes, net of federal benefit 6,172 6,315 2,319 Foreign sales corporation (1,146) (2,033) (995) Valuation allowance (106) (487) 5,233 Other, net (4,116) (1,037) (693) ======== ======== ======== Total provision for income taxes $ 60,002 $ 51,020 $ 16,888 ======== ======== ========
25 REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF ALTERA CORPORATION: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity, and cash flows present fairly, in all material respects, the financial position of Altera Corporation and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP ------------------------ San Jose, California January 22, 1997 EX-21.1 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
JURISDICTION YEAR NAME OF INCORPORATION ORGANIZED --------------------------------------- ---------------- --------- Altera GmbH Germany 1989 Altera Foreign Sales Corporation Barbados 1989 Nihon Altera KK Japan 1990 Altera France SARL France 1990 Altera Italia SARL Italy 1991 Altera (UK) Limited United Kingdom 1992 Altera Corporation (m) Sdn. Bhd. Malaysia 1995 Altera B.V.B.A. Belgium 1996 Altera AB Sweden 1996 Altera International, Inc. Cayman Islands 1997
24 EX-23.1 7 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-22877, No. 33-37159, No. 33-57350, No. 33-61085, and No. 333-06859) of Altera Corporation of our report dated January 22, 1997 appearing on page 32 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP San Jose, California March 21, 1997 21 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 70,788 210,062 68,486 2,399 75,798 472,987 141,334 51,530 778,212 177,967 230,000 0 0 90,644 279,601 778,212 497,306 497,306 191,958 191,958 137,255 0 12,284 169,137 60,002 109,135 0 0 0 109,135 1.19 1.15
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