-----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, WCe5mdgVgwnHvfjp/vsWCTHcE9DU6dXKH4lJeW0+B2XwtmzA/ETIxiLkIN1bP5Au FDknZPvOhwBKPqdM985cvQ== 0000891618-99-001260.txt : 19990331 0000891618-99-001260.hdr.sgml : 19990331 ACCESSION NUMBER: 0000891618-99-001260 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALTERA CORP CENTRAL INDEX KEY: 0000768251 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770016691 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16617 FILM NUMBER: 99578602 BUSINESS ADDRESS: STREET 1: 101 INNOVATION DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4085448000 MAIL ADDRESS: STREET 1: 101 INNOVATION DR CITY: SAN JOSE STATE: CA ZIP: 95134 10-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 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------- COMMISSION FILE NUMBER: 0-16617 ALTERA CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE (State or Other Jurisdiction of Incorporation or Organization) 77-0016691 (I.R.S. Employer Identification No.) 101 INNOVATION DRIVE, SAN JOSE, CALIFORNIA 95134 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (408) 544-7000 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 (Section 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. [ ] 2 The aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was approximately $5,006,483,241 as of March 1, 1999, based upon the closing sale price on the Nasdaq National Market for that date. There were 98,325,177 shares of the registrant's Common Stock issued and outstanding as of March 1, 1999. DOCUMENTS INCORPORATED BY REFERENCE Items 5 and 6 of Part II incorporate information by reference from the Annual Report to Stockholders for the fiscal year ended December 31, 1998. Items 11, 12 and 13 of Part III incorporate information by reference from the Proxy Statement for the Annual Meeting of Stockholders to be held on May 26, 1999. ================================================================================ 3 Except for the historical information presented, the matters discussed in this Form 10-K include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those projected in the forward-looking statements as a result of risk factors that include, but are not limited to, those discussed under the caption "Future Results" under Item 7 herein, as well as factors discussed elsewhere in this Form 10-K. PART I ITEM 1. BUSINESS. GENERAL Altera Corporation ("Altera" or the "Company") designs, manufactures and markets programmable logic devices ("PLDs") and associated development tools. Programmable logic devices are semiconductor integrated circuits ("chips" or "ICs") that offer on-site programmability to customers using the Company's proprietary software, which operates on personal computers and engineering workstations. Founded in 1983, Altera was the first supplier of CMOS programmable logic devices and is currently a global leader in this market. The Company offers a broad line of CMOS programmable logic devices that address high-speed, high-density and lower power applications. The Company's products serve a wide range of markets, including telecommunications, data communications, electronic data processing (EDP) and industrial applications. STRATEGY According to Dataquest, the Complementary Metal Oxide Semiconductor ("CMOS") logic market consists of the following segments: semi-custom or application specific integrated circuits ("ASICs"), standard logic, full custom devices and other forms of logic ICs, including chipsets. The ASIC segment is comprised of programmable logic, gate arrays and cell-based ICs (also referred to as standard cells). In a broad sense, all of these devices are indirectly competitive as they generally may be used in the same types of applications in electronic products. However, differences in cost, performance, density, flexibility, ease of use and time-to-market dictate the extent to which they may be directly competitive for particular applications. Programmable logic's primary advantage is that it allows for quicker design cycles meeting customers' needs for quick time-to-market. Programmable logic allows customers to experiment and iterate their designs in a relatively short amount of time and with minimum cost. In most instances, this is quicker and easier than achieving a design in a deterministic fashion. This advantage is amplified by the ability to have working silicon at the time the design is finalized. Another advantage of programmable logic is that, particularly for small volume applications, it lowers the per unit cost of producing customized components. While programmable logic inherently consumes more silicon (because of its generality and on-chip programming overhead), in many cases this higher per unit cost is more than offset by the high fixed costs of layout and mask-making required to produce a custom IC. The cost advantage is further enhanced by the flexibility of the inventory and the fact that customization occurs closer to the end application. Due to PLD cost decreases through high-volume manufacturing and the use of emerging process technologies, Altera has been able to introduce new product families that, as compared with their predecessors, provide more functionality at a much lower price for any given density. These new product families achieve the integration, density, performance and cost advantages of other ASIC solutions. The Company believes that its competitiveness within the ASIC segment in these areas, along with the inherent advantages of programmable logic discussed above, will enable it to compete for designs traditionally served by other ASICs. In the short term, the lower prices associated with the Company's new product offerings have slowed and will continue to slow its sales growth. However, Altera believes that these new product offerings will be important to sustaining long-term sales growth as they broaden the appeal of programmable logic. See "--Competition." 2 4 PRODUCTS Altera sells a wide range of products, with a total of more than 1000 product options among its PLD families. The Company offers PLDs in two fundamental technologies: its MAX products which use floating gate process technology and its FLEX and APEX products which use SRAM-based process technology. Altera's proprietary software, MAX+PLUS II and Quartus, provides design development and programming support for all its PLDs. Altera also offers hardware used in programming PLDs. Devices: Altera offers a wide range of general-purpose PLD families. Each device family offers unique features as well as differing density and performance specifications for implementing particular applications. Some of Altera's major device families include the following: MAX 7000: The MAX 7000 device family is one of the fastest and most widely used high-density programmable logic families in the industry. Devices in this family range from 600 to 10,000 usable gates and up to 256 pins. The MAX 7000 device family, which includes the 5.0-V MAX 7000S and 3.3-V MAX 7000A devices, is fabricated on an advanced CMOS EEPROM process, providing a high-density, high-speed, I/O-intensive programmable logic solution. MAX 7000S devices provide several enhanced features, including support for the JTAG boundary-scan test circuitry and in-system programmability ("ISP"). ISP functionality allows devices to be programmed after they are soldered onto the printed circuit board, thereby minimizing the possibility of lead damage or electrostatic discharge exposure. MAX 7000A devices operate at a 3.3-V supply voltage, offering lower power while providing the industry's fastest pin-to-pin speeds. MAX 9000: The MAX 9000 device family offers the efficient macrocell architecture of MAX 7000 devices with higher densities and performance. Devices in this family range from 6,000 to 12,000 usable gates and up to 356 pins. The EEPROM-based MAX 9000 devices are PCI-compliant and offer 5.0-V ISP. FLEX 8000: The SRAM-based FLEX 8000 device family uses the Altera-patented FastTrack Interconnect, a continuous routing structure that allows for fast, predictable interconnect delays. Devices in this family range from 2,500 to 16,000 usable gates and up to 304 pins. FLEX 8000 devices have a 5.0-V supply voltage and can interface with 3.3-V device through the MultiVolt I/O feature. These SRAM-based devices provide low standby power and in-system reconfigurability. FLEX 6000: Altera's SRAM-based FLEX 6000 family delivers the flexibility and time-to-market advantage of programmable logic at prices that are competitive with gate arrays. Devices in this family range from 10,000 to 24,000 usable gates and up to 256 pins and include devices that operate at both 5.0-V and 3.3-V supply voltages. Featuring the very efficient OptiFLEX architecture, FLEX 6000 devices provide a flexible and cost-effective alternative to gate arrays for high-volume production. Every feature in the OptiFLEX architecture is targeted at producing maximum performance and utilization in the smallest possible die area. FLEX 10K: Altera's SRAM-based FLEX 10K family offers a combination of logic and embedded memory on a single chip architecture. Devices in this embedded PLD family range from 10,000 to 250,000 usable gates and up to 600 pins. With these high densities, the FLEX 10K family may be used to address the increasing levels of integration needed to accommodate today's complex system-on-a-chip designs. FLEX 10K devices, offered in 2.5-V, 3.3-V and 5.0-V supply voltages, have a unique embedded architecture made up of both a logic array and an embedded memory array. APEX 20K: Altera's SRAM-based APEX 20K family offers complete system-level integration on a single device. Devices in this family are planned to range from 100,000 to 1,000,000 usable gates and up to 780 pins. With its high densities and performance enhancements, the APEX 20K family is expected to deliver the latest in design flexibility and efficiency for high-performance, System-on-a-Programmable-Chip design. APEX 20K devices, to be offered in 1.8-V and 2.5-V supply voltages, employ the innovative MultiCore architecture, which combines and enhances the strengths of its three previous PLD architectures. The APEX 20K devices first became available in March 1999 and are supported by Altera's Quartus development software. 3 5 Development Tools: The Company's development system software and hardware are used to design and implement logic designs on its PLDs. Altera's MAX+PLUS II and Quartus software runs under the Microsoft Windows 95 and NT operating environments on personal computers in addition to the UNIX environment on SUN, HP and IBM workstations. The Company also provides interfaces to many industry standard electronic design automation ("EDA") tools, including those offered by Cadence Design Systems, Inc., Mentor Graphics Corporation and Synopsys, Inc. The Company also sells hardware for programming its PLDs. 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. The Company also has domestic sales management offices in major metropolitan areas throughout the United States. The Company's direct sales personnel and independent sales representatives focus on major strategic accounts. Distributors generally focus selling activities on the broad base of small and medium-size customers, as well as demand fulfillment services to Altera's major strategic accounts. In the United States, Altera's distributors currently include Arrow Electronics Inc. and Wyle Electronics (a wholly-owned subsidiary of Raab Karcher AG). These distributors are responsible for creating customer demand from their base of customers, providing technical support and other value-added services and filling customers' orders. 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. The Company's international business is supported by a network of distributors throughout Europe and Asia. The Company has representation in every major European country, Israel, Australia, South America and various countries throughout the Pacific Rim including Japan. International sales management offices are located in the metropolitan areas of Hong Kong, Hsinchu (Taiwan), London, Munich, Ottawa, Paris, Seoul, Stockholm, Tokyo and Turin. Customer service and support are important aspects of the sales and marketing of the Company's products. Altera provides several levels of technical 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 Internet and electronic links to the customer's design station. Customer service is supported with inventory maintained both by Altera 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. Through 1998, 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. In the year ended December 31, 1998, worldwide sales through distributors accounted for approximately 90% of total sales. In 1998, the two largest distributors accounted for 30% and 21% of sales. In 1997, the two largest distributors accounted for 32% and 18% of sales, whereas in 1996, they each accounted for 29% and 15% of sales, respectively. No single end customer accounted for more than 10% of the Company's sales in 1998, 1997 or 1996. Export sales constituted 45%, 45% and 47% of sales in 1998, 1997 and 1996, respectively. COMPETITION The ASIC Segment: According to Dataquest, the CMOS logic market consists of the following segments: ASICs, standard logic, full custom devices and other forms of logic ICs, including chipsets. The ASIC segment is comprised of programmable logic, gate arrays and cell-based ICs (also referred to as standard cells). In a broad sense, all of these devices are indirectly competitive as they generally may be used in the same types of applications in electronic products. However, differences in cost, performance, density, flexibility, ease of use and time-to-market dictate the extent to which they may be directly competitive for particular applications. As PLDs have increased in density and performance and decreased in cost, they have become more directly competitive with other ASICs, especially gate arrays. With the introduction of the Company's FLEX 10K family and new APEX 20K family, which are Altera's 4 6 highest density PLDs, along with its FLEX 6000 devices, which are designed and priced to be very competitive with lower density gate arrays, the Company seeks to grow by directly competing with other companies in the ASIC segment. Many of the companies in the ASIC segment have substantially greater financial, technical and marketing resources than the Company. Consequently, there can be no assurance that the Company will be successful in competing in the ASIC segment of the CMOS logic market. The Programmable Logic Sub-Segment: The principal factors of competition in the programmable logic sub-segment include the capability of software development tools and system-level functional programming blocks, product performance and features, quality and reliability, pricing, technical service and support, the ability to respond rapidly to technical innovation and customer service. The Company believes it competes favorably with respect to these factors and that its proprietary device architecture and its installed base of development systems with proprietary software may provide some competitive advantage. However, as is true of the semiconductor industry as a whole, the PLD sub-segment 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. All of these factors may influence the Company's future operating results. The Company experiences significant direct competition from a number of other companies which are in the programmable logic sub-segment. The Company's competition in this market sub-segment is from suppliers of products that are marketed as either field programmable gate arrays ("FPGAs") or complex PLDs ("CPLDs"). Companies that currently compete with Altera in its core business may have proprietary wafer manufacturing ability, preferred vendor status with many of the Company's customers, extensive marketing power and name recognition, greater financial resources than those of the Company and other significant advantages over the Company. Additionally, the semiconductor industry as a whole includes many large domestic and foreign companies that have substantially greater financial, technical and marketing resources than the Company. The Company expects that as the dollar volume of the programmable logic sub-segment grows, the attractiveness of this sub-segment to larger, more powerful competitors will continue to increase. Substantial direct or indirect competition could have a material adverse effect on the Company's future sales and operating results. MANUFACTURING The Company does not directly manufacture its silicon wafers. Altera's wafers are produced using various semiconductor foundry wafer fabrication service providers. This enables Altera to take advantage of these suppliers' high volume economies of scale, as well as direct and more timely access to advancing process technology. Altera presently has its primary wafer supply arrangements with four semiconductor vendors: Sharp, TSMC, WaferTech and Cypress. The Company may negotiate additional foundry contracts and establish other sources of wafer supply for its products as such arrangements become economically useful or technically 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 quickly and without much notice. Furthermore, since only newer fabrication or substantially retrofitted facilities are able to manufacture wafers that incorporate leading edge technologies, any significant decrease in capacity of these facilities would have a material adverse effect on the Company's ability to obtain wafer supply for its newer products. Accordingly, there can be no assurance that any shortage in foundry manufacturing capacity will not result in production problems for the Company in the future. In June 1996, Altera, TSMC and several other partners formed a joint venture called WaferTech, LLC ("WaferTech") 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 and obligations to procure output from the fab at market prices. In January 1999, Altera purchased from another joint venture partner, Analog Devices, an additional 5% equity ownership interest in WaferTech for approximately $37.5 million. This further investment in WaferTech provides Altera with additional rights and obligations to future foundry output. 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. In May 1998, WaferTech secured a loan facility of up to $350 million which was subsequently reduced to $225 million in December 1998. WaferTech began its initial wafer production shipments in 5 7 October 1998. Based on WaferTech's production projections, the Company believes that it will meet its minimum purchase obligations from WaferTech through at least 1999. There can be no assurance that WaferTech will remain sufficiently capitalized or on schedule with its production projections, and WaferTech's failure to do so could have a material adverse effect on the Company's future operating results. The Company also owns a 17% equity interest in Cypress Semiconductor (Texas) Inc. ("CSTI"), a subsidiary of Cypress Semiconductor Corporation ("Cypress Semiconductor"). Pursuant to the agreements governing this investment, Altera can obtain up to a certain number of wafers from 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 its older architecture Classic, EPROM 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. The Company depends upon its foundry vendors 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. Wafer production yields are dependent on 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 experienced and expects to experience production yield problems from time to time. 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 continue to convert its fabrication process arrangements to larger wafer sizes and smaller circuit geometries, to more advanced process technologies or to new suppliers. Such conversions entail inherent technological risks that can adversely affect yields, costs and delivery lead time. 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 could 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. Such wafer testing is accomplished at TSMC, WaferTech, Sharp and the Company's Pilot Line facility in San Jose (which is used primarily for new product development). This testing is performed on equipment owned by the Company and consigned to the vendors. Resulting wafers are shipped to various Asian assembly suppliers, where good die are separated into individual chips that are then encapsulated in ceramic or plastic packages. As is the case with the Company's wafer supply business, the Company employs a number of independent suppliers for assembly purposes. This enables the Company to take advantage of subcontractor high volume manufacturing, related cost savings, speed and supply flexibility. It also provides the Company with timely access to cost-effective advanced process and package technologies. Altera purchases almost of all its assembly services from ASE (Malaysia) and ANAM (Korea). Following assembly, each of the packaged units receives final testing, marking and final inspection prior to shipment to customers. The Company obtains almost all of its final test and back end operation services from ASE, ANAM or ASAT (Hong Kong). Final testing by these assembly suppliers is accomplished through the use of Altera's proprietary test software and hardware consigned to such suppliers and of third-party commercial testers. These suppliers also handle shipment of the products to the Company's customers. Additionally, almost all 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 economic, social and political situations in countries where certain subcontractors are located are unpredictable and can be volatile. Any prolonged work stoppages or other inability of the Company to manufacture and assemble its products would have a material adverse effect on the Company's operating results. Furthermore, economic risks, such as extreme currency fluctuations, 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. 6 8 BACKLOG The Company's backlog of released orders as of December 31, 1998 was approximately $142.6 million as compared to approximately $114.0 million at December 31, 1997. The Company's backlog consists of OEM customer-released orders that are requested for delivery within the next six months and distributor orders that are 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 characterized by a high percentage of orders with near-term delivery 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. As discussed in the Notes to the Consolidated Financial Statements under Item 8 herein, the Company adopted a new revenue recognition method in the fourth quarter of 1997 with an effective date of January 1, 1997, which involves the deferral of revenue recognition on shipments to distributors until the product is resold to the end customers. Distributor orders accounted for approximately 90% of the Company's backlog as of December 31, 1998. For all of these reasons, backlog as of any particular date should not be used as a predictor of sales for any future period. RESEARCH AND DEVELOPMENT The Company's research and development activities have focused primarily on general-purpose programmable logic devices and on the associated development software and hardware. The Company has developed these related products in parallel to provide software support to customers simultaneous with circuit introduction. As a result of the Company's research and development efforts, it has introduced a number of new PLD families, such as the FLEX 6000 (which was introduced in 1997), FLEX 10KA, FLEX 10KE, MAX 7000A and MAX 7000S families. The Company has also redesigned a number of its products to accommodate their manufacture on new wafer fabrication processes. Additionally, the Company releases new versions of its proprietary software on a quarterly basis. The Company's research and development expenditures in 1998, 1997 and 1996 were $59.9 million, $54.4 million and $49.5 million, 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 short product life cycles and increasing competition within the CMOS 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. PATENTS AND LICENSES The Company owns numerous 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. Although the Company's 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 valuable new patents will be granted to the Company, that the Company's patents will provide meaningful protection from competition or that any additional products will be developed based on any of the licenses that the Company currently holds. The Company believes that its future success will depend primarily upon the technical competence and creative skills of its personnel, rather than on its patents, licenses or other proprietary rights. In the future, the Company may decide to incur litigation expenses to enforce its intellectual property rights against third parties. There is no assurance that any such litigation would be successful or that the Company's patents would be upheld if challenged. 7 9 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 third parties, 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 adverse effect on the Company's operating results. In addition, if patent litigation ensued, there can be no assurance that these third parties would not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of one or more of the Company's product families. EMPLOYEES As of December 31, 1998, the Company had 1,151 regular 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. ITEM 2. PROPERTIES. The Company's headquarters facility is located in San Jose, California on approximately 25 acres of land, which the Company purchased in June 1995. The campus for the headquarters facility consists of four interconnected buildings totaling approximately 500,000 square feet. Design, limited manufacturing, research, marketing and administrative activities are performed in these facilities. In 1998, the Company opened its 62,000 square foot design and test engineering facility in Penang, Malaysia, which is situated on land leased from the Penang Development Corporation. The Company also leases on a short-term basis office facilities for its domestic and international sales management offices. The Company believes that its existing facilities are adequate for its current needs. 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 counterclaimed against the Company in Delaware, asserting defenses and seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by Xilinx. Subsequently, the Delaware case has been transferred to California. In October 1998, both parties filed motions for summary judgment with respect to certain issues in the first two cases regarding infringement or non-infringement and validity or invalidity of the patents at issue in the respective cases. In the event that the court were to rule against the Company in certain of these motions, the Company could be adversely impacted by the potential monetary damages or injunctive relief that could ultimately be awarded to Xilinx. Due to the nature of the litigation with Xilinx and because the lawsuits are still in the pre-trial stage, the Company's management cannot estimate the total expense, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the allegations. Management cannot ensure that Xilinx will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of the Company's MAX 5000, MAX 7000, FLEX 8000 or MAX 9000 families of products, or succeed in invalidating any of the Company's patents. Although no assurances can be given as to the results of these cases, based on the present status, management does not believe that any of such results will have a material adverse effect on the Company's financial condition or results of operations. In August 1994, Advanced Micro Devices, Inc. ("AMD") brought suit against the Company seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by AMD. In September 1994, Altera answered the complaint asserting that it is licensed to use the patents which AMD claims are infringed and filed a counterclaim against AMD alleging infringement of certain patents held by the Company. In October 1997, upon completion of trials bifurcated from the infringement claims, the Court ruled that the Company is licensed under all patents asserted by AMD in the suit. In December 1997, AMD filed a Notice of Appeal of the Court's rulings. Due to the nature of the litigation with AMD, and because AMD has appealed the court rulings that the Company is licensed under all of the patents asserted by AMD in the suit, the Company's management cannot estimate the total expense, the possible loss, if any, or the range of loss that may ultimately be 8 10 incurred in connection with the allegations. Management cannot ensure that AMD will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of the Classic, MAX 5000, MAX 7000, FLEX 8000, MAX 9000, FLEX 10K and FLASHlogic product families, or succeed in invalidating any of the Company's patents remaining in the suit. Although no assurances can be given as to the results of this case, based on its present status, management does not believe that any of such results will have a material adverse effect on the Company's financial condition or results of operations. 9 11 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 1998 Annual Report to Stockholders for the year ended December 31, 1998 ("1998 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" in the Company's 1998 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS Altera designs, manufactures and markets high-performance, high-density, programmable logic devices and associated computer aided engineering logic development tools. FLEX and APEX products are the Company's SRAM-based line of embedded array programmable logic devices, and MAX products are the Company's line of EEPROM and EPROM based macrocell programmable logic devices. Beginning in 1998 the composition of the Company's product categories was changed and prior years' data reported here have been restated to reflect those changes. New products now consist of the Company's 3.3-volt (or lower) families, are manufactured on a 0.35-micron (or finer) geometry and are made up of the FLEX 10KA/10KE, FLEX 6000/6000A, MAX 7000A/7000B and APEX families. Mainstream products now include the MAX 7000S, MAX 9000 and FLEX 10K families. Mature products now consist of the Classic, MAX 5000, MAX 7000 and FLEX 8000 families. Other products include Tools, FLASHlogic, configuration devices, MPLDs and FSPs. SALES | 1998 sales of $654.3 million grew 3.7% over 1997 sales of $631.1 million and 31.6% over 1996 sales of $497.3 million. The slowdown in 1998 sales growth was largely due to a decline in the overall semiconductor and programmable logic markets. Product Transition The Company's New and Mainstream products have been developed and introduced to the marketplace over the last several years. These products have similar or improved features and comparable or higher densities than their predecessors, but advanced process technology enables the Company to produce these products at a lower cost than previous generations of products. Consistent with their lower cost structure, the Company has priced these products at a significant discount to the Company's Mature products in order to stimulate demand and broaden the appeal of programmable logic. In the short term, the reduced pricing on New and Mainstream products has dampened revenue growth and the Company's management expects that in the near term this effect will continue as customers shift demand to its newer, lower-priced offerings from the Mature products, which in 1998 comprised 44.9% of sales. Management of the Company believes that lower prices on its newer product families will enable its product offering to compete more favorably with gate array and standard cell technologies, which represent significant market opportunities. The Company believes that over time, additional unit sales will more than offset the lower selling prices, but there can be no assurances that this will occur. 10 12 New product sales in 1998 were more than ten times the sales in 1997 and reached 12.1% of total sales in 1998 as compared to 1.2% of total sales in 1997. Additionally, sales of Mainstream products almost doubled year over year to reach 34.0% of sales in 1998 against 18.4% of sales in 1997. New and Mainstream products together comprised 46.1% of 1998 sales compared to 19.7% of sales in 1997. In contrast to this, the Company's Mature and Other products, which combined represented 53.9% of sales in 1998 were 80.3% of 1997 sales. Sales Growth By Product Category:
Year Ended December 31, 1998 1997 - ------------------------------------------------------------------------ New 924.8% nm Mainstream 91.1% 258.3% Mature -34.3% 9.4% Other -1.1% 6.7% Total 3.7% 26.9%
Customer Sectors Accompanying this product transition was a sustained shift in customer mix towards the Communications market driven primarily by growth in the networking and telecommunications sectors. Communications represented 64.0% of the Company's business in 1998 as compared to 56.0% of the total in 1997. The broad-based Industrial market was 12.2% of total sales in 1998 and 12.3% in 1997 growing 3.2% year to year. The Electronic Data Processing, Consumer and Other markets comprised 17.4%, 2.8% and 3.5%, respectively and all declined as a percent of total sales in 1998. Geographic Areas North American sales increased 2.7% from 1997 and represented 54.9% of total sales in 1998. Europe grew 14.2%, accounting for 22.8% of sales in 1998. Sales to Japan were up 1.2% from 1997 and represented 18.1% of the Company's 1998 sales; end customer purchases from distributors, measured in yen, increased 12.5%. Asia Pacific sales declined 18.2% and were just 4.2% of 1998 sales, owing to significant turmoil in several of the economies comprising that region. In spite of a significant decline in Asia Pacific and overall weakness in the Japanese economy, sales to International grew 4.9% primarily due to strength in the European and Japanese Telecommunications and Networking sectors. In 1998 International sales were 45.1% of total Company sales. In 1997, North America sales grew 31.6% and were 55.4% of total sales. Europe sales grew 22.7% in 1997 and represented 20.7% of total sales. Japan experienced a 23.4% 1997 growth in sales and accounted for 18.5% of sales. Asia Pacific sales grew 11.8% in 1997 and were 5.4% of total Company sales. Sales Growth By Geographic Area:
Year Ended December 31, 1998 1997 - ----------------------------------------------------------------------------- North America 2.7% 31.6% Europe 14.2% 22.7% Japan 1.2% 23.4% Asia Pacific -18.2% 11.8% Total International 4.9% 21.5% Total 3.7% 26.9%
11 13 Major items in the statements of operations, expressed as a percentage of sales, were as follows:
Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Cost of sales 38.1% 37.5% 38.6% Gross margin 61.9% 62.5% 61.4% Research and development expenses 9.1% 8.6% 10.0% Selling, general and administrative expenses 17.3% 17.9% 17.6% Income from operations 35.5% 36.0% 33.8% Interest expense 1.0% 1.9% 2.5% Interest and other income, net 2.9% 2.3% 2.7% Provision for income taxes 12.1% 12.4% 12.1% Cumulative effect of change in accounting principle - 2.9% - Net income 23.6% 21.1% 21.9%
GROSS MARGIN | Gross margin as a percentage of sales was 61.9% in 1998, 62.5% in 1997 and 61.4% in 1996. Cost reductions, as a result of manufacturing process improvements, have been offset by reduced pricing. RESEARCH AND DEVELOPMENT EXPENSES | Research and development expenses as a percentage of sales were 9.1% in 1998, 8.6% in 1997 and 10.0% in 1996. 1998 absolute R&D spending increased by $5.5 million over 1997. 1998 spending increases relate to the development of new products including FLEX 10KE, MAX 7000A and APEX, as well as development of the Company's Quartus software. The relatively higher expenses in 1996 were due to prototype and pre-production expenses associated with the MAX 7000S, MAX 9000, and FLEX 10K product families. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | Selling, general and administrative expenses increased slightly to $113.2 million in 1998 from $112.8 million in 1997 and decreased slightly as a percentage of sales, falling to 17.3% in 1998 from 17.9% in 1997. The slight increase in terms of dollars spent from 1997 to 1998 was mainly driven by increased personnel expenses for marketing and administration and higher depreciation expenses associated with capital spending required to support the Company's information systems, partially offset by lower legal expenses. Selling, general and administrative expenses increased 28.5% to $112.8 million in 1997 from $87.7 million in 1996 and increased slightly as a percentage of sales, rising to 17.9% in 1997 from 17.6% in 1996. The increase was mainly driven by higher marketing and administrative headcount, higher commissions on increased sales volumes, new and expanded international offices and expenses associated with the replacement of the Company's main business information systems. Selling, general and administrative expenses include salary expenses related to field sales, marketing and administrative personnel, commissions and incentive expenses, advertising and promotional expenditures, and legal expenses. The direct sales force and field application engineers, who work in over twenty field sales offices worldwide, stimulate demand by assisting the customers in the use and proper selection of the Company's products. The customers then work with the Company's distributors for order fulfillment and logistical requirements, as over 90% of the Company's sales are made through distributors. The Company intends to continue to increase sales resources in markets and regions where it anticipates this will increase sales, enhance competitive position, or improve customer service. INCOME FROM OPERATIONS | Income from operations was $231.8 million in 1998, $227.0 million in 1997 and $168.1 million in 1996. As a percentage of sales, income from operations was 35.5%, 36.0% and 33.8% in 1998, 1997 and 1996, respectively. Income from operations decreased as a percentage of sales from 1997 to 1998 primarily due to a slight decrease in gross margin. The increase in income from operations as a percentage of sales from 1996 to 1997 was primarily due to improvements in gross margin and to a lesser degree reduced operating expenses (selling, general and administrative plus research and development) as a percentage of sales. INTEREST EXPENSE | Interest expense decreased to $6.4 million in 1998 from $11.7 million in 1997 and $12.3 million in 1996. Interest expense relates to the convertible subordinated notes issued in June 1995 and includes interest expense and amortization of debt issuance costs, net of capitalized interest related to the construction of the new headquarters. The decrease in interest expense from 1997 to 1998 is primarily attributable to the conversion of the Company's subordinated notes into common stock in June 1998. 12 14 INTEREST AND OTHER INCOME, NET | Interest and other income increased to $18.7 million in 1998 from $14.3 million in 1997 and $13.3 million in 1996. The increase over the three-year period resulted from increased cash balances available for investment throughout the year. PROVISION FOR INCOME TAXES | Altera's effective tax rate was 32.5% in 1998 compared to 34.0% in 1997 and 35.5% in 1996. The reduction from 1997 to 1998 was due in part to an increased amount of earned interest income from tax-exempt investments and a change in the geographic mix of income. The reduction in the rate from 1996 to 1997 was primarily due to an increase in research and development tax credits. EQUITY INVESTMENT | In June 1996, the Company, TSMC and several other partners formed WaferTech, LLC ("WaferTech"), a joint-venture company, to build and operate a wafer manufacturing plant in Camas, Washington. In return for a $140.4 million cash investment, the Company received an 18% equity ownership in the joint-venture company and certain rights and obligations to procure up to 27% of the factory's output at market prices. In January 1999, the Company purchased from Analog Devices, Inc. an additional 5% equity ownership interest in WaferTech for approximately $37.5 million, increasing its ownership interest to 23%. The Company accounts for this investment under the equity method based on the Company's ability to exercise significant influence on the operating and financial policies of WaferTech. The Company's equity in the net loss of WaferTech was $10.4 million for 1998 and was not material for 1997 and 1996. In October production began at the WaferTech joint venture. WaferTech is currently in the initial stages of production volumes. ACCOUNTING CHANGE | In October 1997, the Company changed its accounting method for recognizing revenue on sales to distributors with an effective date of January 1, 1997. The Company previously recognized revenue upon shipment to distributors net of appropriate reserves for sales returns and allowances. Following the accounting change, revenue recognition on shipments to distributors is deferred until the products are resold to end customers. The Company believes that deferral of revenue on distributor sales and related gross margins until the product is shipped by the distributors results in a more meaningful measurement of results of operations and is more consistent with industry practice and, therefore, is a preferable method of accounting. The cumulative effect prior to 1997 of the change in accounting method was a charge of $18.1 million (net of $9.3 million of income taxes) or $0.18 per diluted share in 1997. FUTURE RESULTS | Future operating results will depend on the Company's ability to develop, manufacture and sell complex semiconductor components and programming software that offer customers greater value than solutions offered by competing vendors. The Company's efforts in this regard may not be successful. The Company plans to sustain future growth by offering programmable chips for applications that are presently served by other ASIC vendors. These vendors have well-established market positions and a solution that has been proven technically feasible and economically competitive over several decades. There can be no assurance that the Company will be successful in displacing ASIC vendors in the targeted applications and densities. Furthermore, other programmable logic vendors are targeting these applications and may be successful in securing market share to the exclusion of the Company. Moreover, standard cell technologies are increasingly used by the Company's customers to achieve greater integration in their systems; this may not only impede the Company's efforts to penetrate the ASIC market but may also displace the Company's products in the applications that it presently serves. The Company's future growth will depend on its ability to continue to expand the programmable logic market. The Company is highly dependent upon subcontractors to manufacture silicon wafers and perform assembly, test and shipment to end customers. The Company is also dependent on its wafer foundry partners to improve process technologies in a timely manner to enhance the Company's product designs and cost structure. Their inability to do so could have a severe negative impact on the Company. The vast majority of the Company's products are manufactured and shipped to customers by subcontractors located in Asia, principally Japan, Taiwan, Korea, Hong Kong and Malaysia. Several of these countries are experiencing significant economic disruptions including volatile exchange rates, rising unemployment, insolvencies and government fiscal austerity programs. Disruptions or adverse supply conditions arising from market conditions, political strife, labor disruptions and other factors could have adverse consequences on the Company's future results. Natural or man-made disasters, normal process fluctuations and variances in manufacturing yields could have severe negative impact on the Company's operating capabilities. The Company has sought to diversify its operating risk by participating in the WaferTech joint venture to manufacture silicon wafers with other partners in Camas, Washington. In October 1998 production began at the WaferTech joint venture. WaferTech 13 15 is currently in the initial stages of production volumes and has yet to make a profit. Although the Company expects future WaferTech production volumes and profitability to increase, there is currently an oversupply of semiconductor fabrication capacity. There can be no assurances that the worldwide supply and demand for semiconductor wafers will be such that WaferTech will make a profit and that WaferTech will not continue to have an adverse impact on the Company's operating results. Also, a number of factors outside of the Company's control, including general economic conditions and cycles in world markets, exchange rate fluctuations or a lack of growth in the Company's end markets could adversely impact future results. An important component of the Company's growth, the networking equipment market, has been growing at a slower rate in recent years. Should this trend continue, the Company's growth in future years may be limited. Because of the foregoing and other factors that might affect the Company's operating results, past financial performance should not be considered an indicator of future performance, and investors should not use historical trends to anticipate future results. In addition, the cyclical nature of the semiconductor industry and other factors have resulted in a highly volatile price of the Company's common stock. NEW ACCOUNTING PRONOUNCEMENTS | In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes standards for accounting and reporting on derivative instruments for periods beginning after June 15, 1999 and early adoption is permitted. SFAS No. 133 requires that all derivative instruments be recognized in the balance sheet as either assets or liabilities and measured at fair value. Furthermore, SFAS No. 133 requires current recognition in earnings of changes in the fair value of derivative instruments depending on the intended use of the derivative and the resulting designation. The Company expects that its adoption of SFAS No. 133, which will become effective in fiscal year 2000, will not have a material effect on the Company's financial statements. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES | During 1998, the Company's operating activities generated net cash of $270.1 million which was primarily attributable to net income of $154.4 million adjusted by non-cash items including depreciation and amortization of $30.0 million, equity in loss of WaferTech of $10.4 million, a decrease in inventories and other assets of $42.5 million, and an increase in deferred income on sales to distributors and income taxes payable of $47.3 million. These items were offset by an increase in deferred income taxes of $6.6 million and a decrease in accounts payable and accrued liabilities of $7.1 million. INVESTING ACTIVITIES | During 1998, the net cash used by the Company in its investing activities was $116.7 million. The Company invested $24.0 million for manufacturing and data processing equipment and software and the construction of the Malaysian design and manufacturing center. Additionally, the Company purchased $93.3 million (net) of short-term investments. FINANCING ACTIVITIES | During 1998, the net cash used by the Company in its financing activities was $45.1 million. The Company repurchased 1.8 million shares of its common stock for $60.4 million, partially offset by net proceeds of $15.2 million from the issuance of 1.3 million shares of common stock to employees through various option and employee stock purchase plans. FINANCIAL CONDITION | The Company has historically financed its operations primarily through cash generated from operations. As of December 31, 1998, the Company had $579.1 million of cash, cash equivalents and short-term investments available to finance future growth. Management believes that capital expenditures in 1999 will approximate the expenditures in 1998. The Company believes the available sources of funds and cash expected to be generated from operations will be adequate to finance current operations and capital expenditures through at least 1999. YEAR 2000 COMPLIANCE | Most computer programs were designed to perform data computations on the last two digits of the numerical value of a year. When a computation referencing the year 2000 is performed, these systems may interpret "00" as the year 1900 and could either stop processing date-related computations or could process them incorrectly. Computations referencing the year 2000 might be invoked at any time, but are likely to begin occurring in the year 1999. 14 16 Pursuant to its year 2000 ("Y2K") compliance program, the Company has undertaken various initiatives intended to ensure that its computer equipment and software will function properly with respect to dates in the year 2000 and thereafter. As used herein, the term "computer equipment and software" includes systems that are commonly considered information technology ("IT") systems (e.g., accounting, data processing and telephone systems) as well as those that are not commonly considered IT systems (e.g., manufacturing equipment, building and facility operations systems). In addition, the Company has also reviewed the software products it sells, and has upgraded and will upgrade such products to offer full Y2K compliance. Based upon its identification and assessment efforts to date, the Company anticipates that by the end of June 1999, all computer equipment and software that are material to Altera's internal business operations and all software products that Altera sells will be fully compliant with Y2K standards, specifically DISC PD-2000-1 as published by the British Standards Institute. The Company has not incurred and does not anticipate that it will incur material expenditures for the remediation of any Y2K issues. The Company could be adversely impacted by Y2K issues faced by major distributors, suppliers, customers, vendors and financial service organizations ("Third Parties") with which the Company interacts. The most reasonably likely worst case scenario for the Company with respect to the Y2K problem is the failure of a major distributor or supplier to be Y2K compliant such that the distribution of Altera products or the supply of components for such products is interrupted temporarily. This could result in the Company not being able to produce or distribute product for a period of time, which in turn could result in lost sales and profits. Based solely on responses received from these Third Parties, the Company has no reason to believe that there will be any material adverse impact on the Company's financial condition or results of operations relating to any Y2K issues of such Third Parties. However, if the responses received from these third parties are not accurate or happen to change, then there could be an unforeseen material adverse impact on the Company's financial condition and results of operations. Management will continue to determine the impact, if any, that Third Parties who are not Y2K compliant may have on the financial condition or results of operations of the Company. The Company has charged its business resumption planning committee to evaluate Y2K business disruption scenarios, coordinate the establishment of Y2K contingency plans, and identify and implement preemptive strategies. Contingency plans for critical business processes will be developed by the end of June 1999. EMPLOYEES | In 1998, the number of employees increased 6.0% to 1,151 at year end. In 1997, there were 1,086 employees at year end. IMPACT OF CURRENCY AND INFLATION | The Company purchases the majority of its materials and services in U.S. dollars, and its foreign sales are transacted in U.S. dollars. However, Altera does have Japanese yen denominated purchase contracts with Sharp Corporation of Japan for processed silicon wafers. In recent years, the Company did not hold or purchase any foreign exchange contracts for the purchase or sale of Japanese yen. During the first half of 1998, the Company entered into a forward exchange contract to purchase Malaysian ringgit to meet a portion of its firm contractual commitments for the construction of its Malaysian design and manufacturing center. At the end of 1998 the Company had no open forward contracts. The Company may choose to enter into similar contracts from time to time should conditions appear favorable. Effects of inflation on Altera's financial results have not been significant. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As of December 31, 1998 and 1997, the Company's investment portfolio consisted of fixed income securities of $539.8 million and $360.3 million, respectively. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of December 31, 1998 and 1997, the decline in the fair value of the portfolio would not be material. Additionally, the Company has the ability to hold its fixed income investments until maturity and, therefore, the Company would not expect to recognize such an adverse impact in income or cash flows. The Company has international subsidiary operations and Japanese yen denominated wafer purchase contracts with Sharp Corporation of Japan and is, therefore, subject to foreign currency rate exposure. To date, the exposure to the Company related to exchange rate volatility has not been significant. If the foreign currency rates fluctuate by 10% from rates at December 31, 1998 and 1997, the effect on the Company's financial position and results of operations would not be material. However, there can be no assurance that there will not be a material impact in the future. 15 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page Consolidated Balance Sheets at December 31, 1998 and 1997 17 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 18 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 19 1996 Consolidated Statements of Stockholders' Equity for the years ended December 31, 20 1998, 1997 and 1996 Notes to the Consolidated Financial Statements 21 Report of Independent Accountants 32 Financial Statement Schedules All schedules have been omitted because they are not applicable, not required, or the information required is included in the financial statements or notes thereto. Supplementary Financial Data 33
16 18 CONSOLIDATED BALANCE SHEETS
December 31, (In thousands, except par value amount) 1998 1997 - -------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 131,029 $ 22,761 Short-term investments 448,077 354,808 --------------------------------- Total cash, cash equivalents, and short-term investments 579,106 377,569 Accounts receivable, less allowance for doubtful accounts of $8,007 and $3,008, respectively 56,138 55,251 Inventories 69,869 98,883 Deferred income taxes 69,644 63,076 Other current assets 24,776 21,423 --------------------------------- Total current assets 799,533 616,202 Property and equipment, net 152,320 152,417 Investments and other assets 141,478 183,899 --------------------------------- $ 1,093,331 $ 952,518 ================================= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 14,479 $ 20,649 Accrued liabilities 16,615 16,688 Accrued compensation 19,356 20,226 Deferred income on sales to distributors 161,160 128,268 --------------------------------- Total current liabilities 211,610 185,831 Convertible subordinated notes -- 230,000 --------------------------------- Total liabilities 211,610 415,831 --------------------------------- Commitments and contingencies (See Notes 5, 7 and 12) -- -- Stockholders' equity: Common stock; $.001 par value; 400,000 shares authorized; 97,635 and 89,185 shares issued and outstanding, respectively 98 89 Capital in excess of par value 314,182 123,544 Retained earnings 567,441 413,054 --------------------------------- Total stockholders' equity 881,721 536,687 --------------------------------- $ 1,093,331 $ 952,518 =================================
See accompanying notes to consolidated financial statements. 17 19 CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, (In thousands, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Sales $ 654,342 $ 631,114 $ 497,306 Cost of sales 249,474 236,958 191,958 ---------------------------------------------------- Gross profit 404,868 394,156 305,348 Research and development expenses 59,864 54,417 49,513 Selling, general and administrative expenses 113,161 112,784 87,742 ---------------------------------------------------- Income from operations 231,843 226,955 168,093 Interest expense (6,362) (11,701) (12,284) Interest and other income, net 18,702 14,317 13,328 ---------------------------------------------------- Income before income taxes, equity investment and cumulative effect of change in accounting principle 244,183 229,571 169,137 Provision for income taxes 79,356 78,054 60,002 ---------------------------------------------------- Income before equity investment and cumulative effect of change in accounting principle 164,827 151,517 109,135 Equity in loss of WaferTech, LLC 10,440 -- -- ---------------------------------------------------- Income before cumulative effect of change in accounting principle 154,387 151,517 109,135 Cumulative effect of change in accounting principle -- 18,064 -- ---------------------------------------------------- Net income $ 154,387 $ 133,453 $ 109,135 ==================================================== Per share: Basic Income before cumulative effect of change in accounting principle $ 1.65 $ 1.71 $ 1.25 Cumulative effect of change in accounting principle -- (0.20) -- ---------------------------------------------------- Net income $ 1.65 $ 1.51 $ 1.25 ==================================================== Diluted Income before cumulative effect of change in accounting principle $ 1.56 $ 1.55 $ 1.16 Cumulative effect of change in accounting principle -- (0.18) -- ---------------------------------------------------- Net income $ 1.56 $ 1.37 $ 1.16 ==================================================== Shares used in computing per share amounts: Basic 93,493 88,525 87,406 Diluted 101,589 102,616 100,813
See accompanying notes to consolidated financial statements. 18 20 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net income $ 154,387 $ 133,453 $ 109,135 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle -- 18,064 -- Equity in loss of WaferTech, LLC 10,440 -- -- Depreciation and amortization 30,038 27,105 20,884 Deferred income taxes (6,568) (8,368) (8,063) Changes in assets and liabilities: Accounts receivable, net (887) 13,235 (13,968) Inventories 29,014 (23,085) (20,377) Other assets 13,446 4,548 3,059 Accounts payable and accrued liabilities (7,113) 9,282 (7,220) Deferred income on sales to distributors 32,892 32,555 13,849 Income taxes payable 14,420 14,861 5,435 ---------------------------------------------------- Cash provided by operating activities 270,069 221,650 102,734 ---------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (23,950) (80,879) (45,172) Other long-term investments 552 (56,997) (86,240) Net change in short-term investments (93,269) (144,746) 75,748 ---------------------------------------------------- Cash used for investing activities (116,667) (282,622) (55,664) ---------------------------------------------------- Cash Flows from Financing Activities: Net proceeds from issuance of common stock 15,214 12,945 5,760 Repurchase of common stock (60,348) -- (4,331) Payment of notes payable -- -- (57,120) ---------------------------------------------------- Cash provided by (used for) financing activities (45,134) 12,945 (55,691) ---------------------------------------------------- Net increase (decrease) in cash and cash equivalents 108,268 (48,027) (8,621) Cash and cash equivalents at beginning of year 22,761 70,788 79,409 ---------------------------------------------------- Cash and cash equivalents at end of year $ 131,029 $ 22,761 $ 70,788 ==================================================== Cash paid during the year for: Income taxes $ 73,526 $ 77,853 $ 62,347 Interest 6,568 13,225 13,225 Supplemental disclosure of non-cash activities: Conversion of subordinated debt into common stock 226,787 -- -- Cancellation of notes payable related to wafer capacity -- -- 63,400 Remaining obligations related to WaferTech, LLC -- -- 56,160
See accompanying notes to consolidated financial statements. 19 21 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Number of and Capital Common In Excess of Retained (In thousands) Shares Par Value Earnings - -------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 87,117 $ 83,445 $ 171,744 Tax benefit resulting from employee stock transactions 4,492 Issuance of common stock 787 5,760 Repurchase of common stock (300) (3,053) (1,278) Net income 109,135 ---------------------------------------------------- Balance, December 31, 1996 87,604 90,644 279,601 Tax benefit resulting from employee stock transactions 20,044 Issuance of common stock 1,581 12,945 Net income 133,453 ---------------------------------------------------- Balance, December 31, 1997 89,185 123,633 413,054 Tax benefit resulting from employee stock transactions 8,969 Issuance of common stock 1,271 15,239 Repurchase of common stock (1,810) (60,348) Conversion of subordinated debt into common stock 8,989 226,787 Net income 154,387 ---------------------------------------------------- Balance, December 31, 1998 97,635 $ 314,280 $ 567,441 ====================================================
See accompanying notes to consolidated financial statements. 20 22 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1: The Company Altera Corporation (the "Company"), founded in 1983, is in the business of designing, developing, manufacturing and marketing CMOS programmable logic integrated circuits and associated engineering development software and hardware. The Company's major markets are communications, electronic data processing and industrial applications. On June 19, 1997, the Company was reincorporated in the State of Delaware. In connection with the reincorporation, as approved by the stockholders, the number of authorized shares of the Company's common stock was increased to four hundred million (400,000,000) and each share of common stock was assigned a par value of $.001. The accompanying financial statements have been restated to give effect to the re-incorporation. Note 2: Significant Accounting Policies BASIS OF PRESENTATION | The Company has a fiscal year that ends on the Friday nearest December 31st. For presentation purposes, the consolidated financial statements and accompanying notes refer to the Company's fiscal year end as December 31st. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all significant intercompany balances and transactions. USE OF ESTIMATES | The Company's management has made certain estimates and assumptions concerning the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the fiscal years presented to prepare its financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. RECLASSIFICATIONS | Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year's presentation. Such reclassifications had no effect on previously reported results of operations or retained earnings. CASH EQUIVALENTS AND 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 is 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 stockholders' equity except 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, 1998 and 1997 were comprised of the following:
December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------ Purchased parts and raw materials $ 65 $ 1,503 Work in process 46,207 67,442 Finished goods 23,597 29,938 ----------------------------- Total inventories $ 69,869 $ 98,883 =============================
21 23 PROPERTY AND EQUIPMENT | Property and equipment are carried at cost less accumulated depreciation and 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 and forty years for buildings. 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, 1997, the costs of the Company's new headquarters building included $4.0 million of capitalized interest incurred during the construction and development period. Property and equipment at December 31, 1998 and 1997 was comprised of the following components:
December 31, (In thousands) 1998 1997 - ----------------------------------------------------------------------------------- Land $ 20,496 $ 20,496 Building 80,338 75,111 Equipment and software 115,332 102,953 Office furniture and fixtures 10,287 9,767 Leasehold improvements 1,183 1,884 -------------------------------- Property and equipment, at cost 227,636 210,211 Accumulated depreciation and amortization (75,316) (57,794) -------------------------------- Property and equipment, net $ 152,320 $ 152,417 ================================
The Company evaluates the recoverability of its property and equipment and intangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This standard 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. 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. At December 31, 1997, the estimated fair value for the convertible notes (with a carrying amount of $230.0 million) was approximately $314.0 million. The fair value for the convertible subordinated notes was primarily based on quoted market prices. The subordinated notes were converted into common stock in June 1998. 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 by restricting its investments to 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. In 1998, the two largest distributors accounted for 30% and 21% of sales. In 1997, the two largest distributors accounted for 32% and 18% of sales, whereas in 1996, they each accounted for 29% and 15% of sales, respectively. At December 31, 1998, three distributors, each of which accounted for more than 10% of the Company's accounts receivable, accounted for 58% of total accounts receivable in aggregate. Two distributors combined accounted for 35% and 31% of accounts receivable at December 31, 1997 and 1996, 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 options or forward contracts to hedge against currency fluctuations that affect these and other transactions. As of December 31, 1998 and 1997, the Company had no open foreign exchange contracts for the purchase or sale of foreign currencies. The Company may choose to enter into such contracts in the future should conditions appear favorable. REVENUE RECOGNITION | The Company recognizes revenue from product sales upon shipment to OEMs and end-users. Reserves for sales returns and allowances are recorded at the time of shipment. The Company's sales to distributors are made under agreements allowing for returns or credits under certain circumstances and, effective the first day of 1997, the Company defers recognition of revenue on sales to distributors until products are resold by the distributor to the end-user. See Note 14. 22 24 DEPENDENCE ON WAFER SUPPLIERS | The Company does not directly manufacture finished silicon wafers. The Company's strategy has been to maintain relationships with wafer foundries. 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. 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." 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 SFAS No. 123, "Accounting for Stock-Based Compensation." See Note 10. COMPREHENSIVE INCOME | In June 1997, The Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components and is effective for periods beginning after December 15, 1997. The Company adopted this statement as of the first quarter of 1998. Comprehensive income approximated net income for all periods presented. NEW ACCOUNTING PRONOUNCEMENTS | In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes standards for accounting and reporting on derivative instruments for periods beginning after June 15, 1999 and early adoption is permitted. SFAS No. 133 requires that all derivative instruments be recognized in the balance sheet as either assets or liabilities and measured at fair value. Furthermore, SFAS No. 133 requires current recognition in earnings of changes in the fair value of derivative instruments depending on the intended use of the derivative and the resulting designation. The Company expects that its adoption of SFAS No. 133, which will become effective in fiscal year 2000, will not have a material effect on the Company's financial statements. 23 25 Note 3: Income Per Share Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period and excludes the dilutive effect of stock options. Diluted net income per share gives effect to all dilutive potential common shares outstanding during a period. In computing diluted net income per share, the tax benefit resulting from employee stock transactions and the average stock price for the period are used in determining the number of shares assumed to be purchased from exercise of stock options. A reconciliation of the numerators and denominators of the basic and diluted income per share is presented below:
Year Ended December 31, (In thousands, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Basic: Income before cumulative effect of change in accounting principle $ 154,387 $ 151,517 $ 109,135 Cumulative effect of change in accounting principle -- (18,064) -- --------------------------------------------------- Net income $ 154,387 $ 133,453 $ 109,135 =================================================== Weighted shares outstanding 93,493 88,525 87,406 =================================================== Per share: Income before cumulative effect of change in accounting principle $ 1.65 $ 1.71 $ 1.25 Cumulative effect of change in accounting principle -- (0.20) -- --------------------------------------------------- Net income $ 1.65 $ 1.51 $ 1.25 =================================================== Diluted: Income before cumulative effect of change in accounting principle $ 154,387 $ 151,517 $ 109,135 Effect of 5.75% convertible subordinated notes 4,039 7,224 7,440 --------------------------------------------------- Income before cumulative effect of change in accounting principle including the effect of dilutive securities 158,426 158,741 116,575 Cumulative effect of change in accounting principle -- (18,064) -- --------------------------------------------------- Net income $ 158,426 $ 140,677 $ 116,575 =================================================== Weighted shares outstanding 93,493 88,525 87,406 Effect of dilutive securities: Stock options 4,033 5,101 4,417 5.75% convertible subordinated notes 4,063 8,990 8,990 --------------------------------------------------- 101,589 102,616 100,813 =================================================== Per share: Income before cumulative effect of change in accounting principle $ 1.56 $ 1.55 $ 1.16 Cumulative effect of change in accounting principle -- (0.18) -- --------------------------------------------------- Net income $ 1.56 $ 1.37 $ 1.16 ===================================================
Note 4: Marketable Securities The Company's portfolio of marketable securities consists of the following:
December 31, (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------- Money market funds $ 6,833 $ 763 Municipal bonds 475,469 315,987 U.S. government and agency obligations 9,170 13,540 Corporate bonds 17,291 24,919 Certificates of deposit and other debt securities 31,086 5,055 ------------------------------ $ 539,849 $ 360,264 ==============================
24 26 The Company's portfolio of marketable securities by contractual maturity are as follows:
December 31, (In thousands) 1998 1997 - ---------------------------------------------------------------------------- Due in one year or less $ 163,231 $ 58,191 Due after one year through two years 376,618 302,073 ------------------------------ $ 539,849 $ 360,264 ==============================
At December 31, 1998 and 1997, the net unrealized gains and losses on securities were immaterial. Note 5: Joint Venture In June 1996, the Company, TSMC and several other partners formed WaferTech, LLC ("WaferTech"), a joint-venture company, to build and operate a wafer manufacturing plant in Camas, Washington. In return for a $140.4 million cash investment, the Company received an 18% equity ownership in the joint-venture company and certain rights and obligations to procure up to 27% of the factory's output at market prices. In January 1999, the Company purchased from Analog Devices, Inc. an additional 5% equity ownership interest in WaferTech for approximately $37.5 million, increasing its ownership interest to 23%. This increased investment in WaferTech provides the Company with additional rights and obligations to procure up to 35% of the factory's future output. WaferTech began wafer production in October 1998. Based on WaferTech's production projections, the Company believes that it will meet its minimum purchase obligations from WaferTech through at least 1999. 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 carrying value of the investment in WaferTech exceeded the Company's share of the net assets of WaferTech due to a portion of TSMC's equity contribution being paid through the grant of manufacturing and technology obligations and licenses along with certain real estate and equipment purchase options. This difference will be amortized over the useful lives of the assets which gave rise to the difference. The Company's equity in the loss of WaferTech was $10.4 million for 1998 and was not material for 1997 and 1996. The Company has an obligation to guarantee a pro rata share of debt incurred by WaferTech up to a maximum of $45 million. In May 1998, WaferTech secured a loan facility of up to $350 million which was subsequently reduced to $225 million in December 1998. At December 31, 1998, WaferTech's total assets were $804.1 million of which $25.1 million were current, and its total liabilities were $218.1 million of which $25.4 million were current. For the year ended December 31, 1998, WaferTech's net revenues were $6.8 million and the loss was $70.9 million. Note 6: Investments and Obligations At December 31, 1998 and 1997, the Company's long-term investments primarily relate to its investment in WaferTech of $123.4 million and $140.4 million, respectively. Long-term investments also include the long-term portion of deposits with Taiwan Semiconductor Manufacturing Company ("TSMC") for future wafer allocations of $16.8 million and $33.6 million at December 31, 1998 and 1997, respectively. In 1995, the Company entered into several agreements with TSMC, whereby it agreed to make a $57.1 million deposit to TSMC for future wafer capacity allocations extending into 2000. Under the terms of the agreement, TSMC agrees to provide the Company with wafers manufactured using 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. Billings for actual wafers used from TSMC 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. 25 27 Note 7: Commitments The Company leases certain of its sales facilities under non-cancelable lease agreements expiring at various times through 2004. The leases require the Company to pay property taxes, insurance, maintenance, and repair costs. Future minimum lease payments under all non-cancelable operating leases are as follows:
Years ending December 31, (In thousands) -------------------------------------------------- 1999 $ 2,459 2000 1,731 2001 333 2002 214 2003 170 Thereafter 7 ------------ $ 4,914 ============
The Company has the option to extend or renew most of its leases. Rental expense under all operating leases amounted to $2.5 million, $4.4 million and $4.0 million in 1998, 1997 and 1996, respectively. The Company has a standby letter of credit facility in the amount of 475 million yen (approximately $4.3 million at December 31, 1998). 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 Subordinated Notes In June 1995, the Company issued $230.0 million of convertible subordinated notes due in June 2002 and bearing an interest rate of 5.75%, payable semi-annually. The notes were convertible into shares of the Company's common stock at a price of $25.59 per share. Discounts, commissions, and expenses, which were amortized over the seven-year life of the notes, reduced the net proceeds to $224.8 million. Accumulated amortization at December 31, 1997 and 1996 amounted to approximately $2.0 million and $1.2 million, respectively. On May 15, 1998, the Company called for the redemption of the notes effective June 16, 1998. As a result, substantially all of the notes were converted into 8,988,649 shares of common stock with the remaining notes redeemed at a price of $1,033.06 per $1,000 principal amount of the notes. Total semi-annual interest paid on the notes during 1998 was $6.5 million. The unamortized debt issuance costs as of the redemption date of approximately $3.1 million was recorded as a reduction to additional paid-in-capital. Note 9: Stockholders' Equity COMMON STOCK REPURCHASES | On July 15, 1996, the Board of Directors authorized the repurchase of up to 2 million shares of the Company's common stock. During fiscal 1996, the Company repurchased a total of 300,000 (split-adjusted) shares of common stock for an aggregate price of $4.3 million. In June 1998, the Company's Board of Directors increased the number of shares authorized for repurchase to 6 million shares. During fiscal 1998, the Company repurchased a total of 1,810,000 shares of common stock for an aggregate cost of $60.4 million. Since the inception of the repurchase program through December 31, 1998, the Company has repurchased a total of 2,110,000 shares. All shares were retired upon acquisition. COMMON STOCK SPLITS | All share data have been 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 stockholders of record on December 18, 1996. 26 28 Note 10: Stock-Based Compensation Plans At December 31, 1998, the Company had five stock-based compensation plans, which are described below. The Company applies APB No. 25 in accounting for its plans. Accordingly, no compensation cost has been recognized for its four fixed stock option plans and its stock purchase plan. STOCK OPTION PLANS | As of December 31, 1998, the 1987 Stock Option Plan had 6.2 million shares reserved for issuance thereunder, the 1996 Stock Option Plan had 6.5 million shares reserved for issuance thereunder, the 1988 Director Stock Option Plan had 478,000 shares reserved for issuance thereunder, and the 1998 Director Stock Option Plan had 170,000 shares reserved for issuance thereunder. Upon the adoption of the 1996 Stock Option Plan, any shares reserved for issuance under the 1987 Stock Option Plan relating to ungranted stock options were cancelled. Upon the adoption of the 1998 Director Stock Option Plan, any shares reserved for issuance under the 1988 Director Stock Option Plan relating to ungranted stock options were cancelled. The 1998 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 stock on the date of grant and an option's maximum term is 10 years. Options granted prior to October 1997 generally vest over five years at annual increments as determined by the Board of Directors. In October 1997, the Board of Directors approved a proposal to shorten the vesting period for new grants under the 1996 Stock Option Plan whereby options granted subsequent to September 30, 1997 will generally vest over four years at annual increments as determined by the Board of Directors. The number of shares for which options were exercisable under all stock option plans was approximately 4,472,000, 3,488,000 and 2,960,000, at December 31, 1998, 1997 and 1996, 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, 1998, 1997 and 1996 are as follows:
1998 1997 1996 (In thousands, except price per share amounts) Shares Price Shares Price Shares Price - --------------------------------------------------------------------------------------------------------------------------------- Options outstanding at January 1, 12,433 $ 19.17 12,500 $ 5.07 10,059 $ 3.02 Stock options: Granted 2,207 40.12 2,016 43.32 3,433 26.25 Exercised (1,055) 8.40 (1,400) 6.05 (620) 28.54 Forfeited (848) 25.58 (683) 16.42 (372) 13.40 -------------------------------------------------------------------------------- Options outstanding at December 31, 12,737 $ 21.82 12,433 $ 19.17 12,500 $ 5.07 ================================================================================
The fair value of each option grant, as defined by SFAS No. 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 fair value on the grant date. To compute the estimated grant date fair value of the Company's stock option grants in 1998, 1997 and 1996, respectively, the Black-Scholes method was used with the following weighted-average assumptions: expected volatility of 48.0%, 40.6% and 36.4%, risk-free interest rates of 5.2%, 6.2% and 5.9%, expected lives from vesting date of 0.73, 0.56 and 0.41 years, and dividend yields of 0%. The weighted-average fair value per share of stock options granted in 1998, 1997 and 1996 were $16.84, $18.41 and $10.23, respectively. 27 29 The following table summarizes information about fixed stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable Number Weighted Weighted Number Weighted Range of Outstanding Average Average Exercisable Average Exercise Prices at 12/31/98 Remaining Exercise at 12/31/98 Exercise (In thousands) Contractual Life Price (In thousands) Price - --------------------------------------------------------------------------------------------------------------------- $ 1.81 - $ 6.12 2,719 3.51 years $ 3.52 2,441 $ 3.42 $ 6.13 - $ 9.25 1,566 5.49 7.15 855 7.18 $ 9.26 - $20.88 1,391 7.13 17.63 250 14.29 $20.89 - $31.38 3,640 7.84 26.76 618 25.70 $31.39 - $38.69 2,402 8.33 34.71 302 34.56 $38.70 - $49.57 142 9.47 42.23 -- -- $49.58 - $63.82 877 9.89 52.20 6 52.37 --------------------------------------------------------------------------------------- 12,737 6.80 $21.82 4,472 $10.00 =======================================================================================
Effective January 30, 1998, the Company offered employees, except all officers and director level employees, the right to re-price their stock options granted from January 1, 1995 through January 19, 1998. The re-priced options have an exercise price of $34.25, the fair value of the Company's common stock on the effective date, and the vesting schedule of such options was extended by three months. In connection with this action, approximately 1.3 million options were re-priced which previously had a weighted average exercise price of $48.50. EMPLOYEE STOCK PURCHASE PLAN | As of December 31, 1998, the 1987 Employee Stock Purchase Plan had 3.1 million shares of common stock reserved for issuance. Under the terms of the Employee Stock Purchase Plan, full-time employees, nearly all of whom are eligible to participate, 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 85 to 90 percent of eligible employees have participated in the plan in 1998, and approximately 75 to 80 percent of eligible employees participated in 1996 and 1997. Sales under the Employee Stock Purchase Plan in 1998, 1997 and 1996 were 221,563, 173,294 and 167,626 shares of common stock at an average price of $28.53, $25.46 and $21.49 per share, respectively. There were 256,475 shares available for future purchases under the Employee Stock Purchase Plan as of December 31, 1998. Pro forma compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes model with the following assumptions for 1998, 1997 and 1996, respectively: an expected life of six months for all years; expected volatility of 56.0%, 44.7% and 38.4%; risk-free interest rates of 5.3%, 5.3% and 5.1%; and dividend yields of 0%. The weighted-average estimated fair value per share of those purchase rights granted in 1998, 1997 and 1996 was $10.10, $11.65 and $5.55, respectively. The Company received a $9.0 million, $20.0 million and $4.5 million tax benefit in 1998, 1997 and 1996, 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 SFAS No. 123, for awards granted under its Stock Option Plans and Stock Purchase Plan, the Company's net income and net income per share would have been reduced to the pro forma amounts below for the years ended December 31, 1998, 1997 and 1996:
(In thousands, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ Pro forma net income $ 139,986 $ 116,054 $ 99,885 Pro forma net income per share: Basic $ 1.50 $ 1.31 $ 1.14 Diluted 1.44 1.21 1.08
28 30 The pro forma amounts reflect compensation expense related to 1998, 1997 and 1996 stock option grants only. In future years, the annual compensation expense will increase as a result of the fair value of stock options granted in those future years. Note 11: Income Taxes U.S. and foreign components of income before income taxes were:
Year Ended December 31, (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------- United States $ 207,273 $ 229,436 $ 168,302 Foreign 36,910 135 835 ---------------------------------------------- Income before income taxes $ 244,183 $ 229,571 $ 169,137 ==============================================
Unremitted earnings of the Company's foreign subsidiaries that are considered permanently invested outside the United States and on which no deferred taxes have been provided, aggregate to approximately $25.3 million at December 31, 1998. The provision for income taxes consists of:
Year Ended December 31, (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Current tax expense: United States $ 62,978 $ 70,399 $ 57,680 State 15,488 14,328 9,799 Foreign 7,458 1,695 586 ---------- ---------- ---------- Total current tax expense 85,924 86,422 68,065 Deferred taxes (6,568) (8,368) (8,063) ---------- ---------- ---------- Total provision for income taxes $ 79,356 $ 78,054 $ 60,002 ========== ========== ==========
The tax benefit associated with the Company's equity in the net loss of WaferTech (Note 5) reduced taxes currently payable by $5.0 million for 1998. The benefits for 1997 and 1996 were not material. Deferred tax assets (liabilities) were as follows:
December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------------- Assets: Accrued expenses and reserves $ 60,448 $ 56,592 Acquisition costs 6,613 7,273 State taxes 4,788 4,200 Other 3,856 1,726 ------------------------------- Gross deferred tax assets 75,705 69,791 Deferred tax liabilities (2,090) (2,084) Deferred tax asset valuation allowance (3,971) (4,631) ------------------------------- Net deferred tax assets $ 69,644 $ 63,076 ===============================
The valuation allowances of $4.0 and $4.6 million at December 31, 1998 and 1997 are attributable to deferred tax assets from the 1994 acquisition of Intel's programmable logic business. Sufficient uncertainty exists regarding the realizability of these assets and, accordingly, valuation allowances are required. 29 31 The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes are as follows:
Year Ended December 31, (In thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- Tax provision at U.S. statutory rates $ 85,464 $ 80,350 $ 59,198 State taxes net of federal benefit 8,061 7,290 6,172 Foreign income taxed at lower rates (6,830) -- -- Interest income on municipal obligations (5,014) (4,270) (2,975) Other net (2,325) (5,316) (2,393) -------------------------------------------------- Total provision for income taxes $ 79,356 $ 78,054 $ 60,002 ==================================================
Note 12: 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. Subsequently, the Delaware case has been transferred to California. In October 1998, both parties filed motions for summary judgment with respect to certain issues in the first two cases regarding infringement or non-infringement and validity or invalidity of the patents at issue in the respective cases. In the event that the court were to rule against the Company in certain of these motions, the Company could be adversely impacted by the potential monetary damages or injunctive relief that could ultimately be awarded to Xilinx. 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 October 1997, upon completion of trials bifurcated from the infringement claims, the Court ruled that the Company is licensed under all patents asserted by AMD in the suit. In December 1997, AMD filed a Notice of Appeal of the Court's rulings. Due to the nature of the litigation with AMD, and because AMD has appealed the court rulings that the Company is licensed under all of the patents asserted by AMD in the suit, the Company's management cannot estimate the total expense, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the allegations. Management cannot ensure that AMD will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of the Classic, MAX 5000, MAX 7000, FLEX 8000, MAX 9000, FLEX 10K and FLASHlogic product families, or succeed in invalidating any of the Company's patents remaining in the suit. Although no assurances can be given 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. 30 32 Note 13: Segment and Geographic Information The Company operates in a single industry segment comprising the design, development, manufacture, and sale of CMOS programmable logic integrated circuits and associated engineering development software and hardware. The Company's sales by major geographic area (based on destination) were as follows:
Year Ended December 31, (In thousands) 1998 1997 1996 - --------------------------------------------------------------------------------- North America: United States $ 336,295 $ 300,068 $ 235,560 Other 22,627 49,380 30,003 ------------ ------------ ------------ Total North America 358,922 349,448 265,563 Europe 149,391 130,827 106,661 Japan 118,342 116,981 94,786 Asia Pacific 27,687 33,858 30,296 ------------ ------------ ------------ Total $ 654,342 $ 631,114 $ 497,306 ============ ============ ============
The majority of the Company's long-lived assets were located in the United States. Long-lived assets included net property and equipment, long-term investments and assets. Long-lived assets that were outside the United States constituted less than 10% of the Company's total. There was no single end customer providing more than 10% of the Company's sales for years ended December 31, 1998, 1997 and 1996. Note 14: Accounting Change - Recognition of Revenue on Sales to Distributors In October 1997, the Company changed its accounting method for recognizing revenue on sales to distributors with an effective date of January 1, 1997. The Company previously recognized revenue upon shipment to distributors net of appropriate reserves for sales returns and allowances. Following the accounting change, revenue recognition on shipments to distributors is deferred until the products are resold to the end customers. The Company believes that deferral of revenue on distributor sales and related gross margins until the product is shipped by the distributors results in a more meaningful measurement of results of operations and is more consistent with industry practice and, therefore, is a preferable method of accounting. The cumulative effect prior to 1997 of the change in accounting method was a charge of $18.1 million (net of $9.3 million of income taxes) or $0.18 per diluted share in 1997. The estimated pro forma effect of the accounting change on prior years' results is as follows:
Year Ended December 31, (In thousands, except per share amounts) 1997 1996 - --------------------------------------------------------------------------------------------- As reported: Sales $ 631,114 $ 497,306 Net income 133,453 109,135 Diluted net income per share 1.37 1.16 Pro forma amounts with the change in accounting principle related to revenue recognition applied retroactively: Sales 631,114 497,006 Net income 151,517 109,090 Diluted net income per share 1.55 1.16
31 33 Report of Independent Accountants To the Stockholders and Board of Directors of Altera Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of Altera Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, 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. As discussed in Note 14 to the consolidated financial statements, in 1997 the Company changed its method of recognizing revenue. /s/ PricewaterhouseCoopers LLP San Jose, California January 19, 1999 32 34 Supplementary Financial Data Quarterly Financial Information (UNAUDITED)
(In thousands, except per share amounts) First Second Third Fourth Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------- 1998 Sales $ 157,216 $ 160,476 $ 164,218 $ 172,432 Gross profit 97,126 98,785 101,707 107,250 Net income 35,135 36,616 40,143 42,493 Basic net income per share 0.40 0.41 0.41 0.44 Diluted net income per share 0.37 0.38 0.40 0.42 - ------------------------------------------------------------------------------------------------------------------- 1997 Sales $ 146,043 $ 165,857 $ 162,126 $ 157,088 Gross profit 90,688 103,970 101,377 98,121 Cumulative effect of change in accounting principle 18,064 - - - Net income 17,538 40,454 38,811 36,650 Basic income per share: Income before cumulative effect of accounting change 0.41 0.46 0.44 0.41 Net income 0.20 0.46 0.44 0.41 Diluted income per share: Income before cumulative effect of accounting change 0.36 0.41 0.40 0.38 Net income 0.19 0.41 0.40 0.38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 33 35 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................... 58 Chairman of the Board of Directors, President and Chief Executive Officer C. Wendell Bergere............. 53 Vice President, General Counsel and Secretary Denis Berlan................... 48 Executive Vice President and Chief Operating Officer Erik Cleage.................... 38 Senior Vice President, Marketing John R. Fitzhenry.............. 49 Vice President, Human Resources Nathan Sarkisian............... 40 Senior Vice President and Chief Financial Officer Peter Smyth.................... 60 Vice President, Sales Charles M. Clough(1)........... 70 Director Michael A. Ellison(2)(3)....... 53 Director Paul Newhagen (1).............. 49 Director Robert W. Reed(3).............. 52 Director Deborah D. Rieman.............. 49 Director William E. Terry(1)(2)......... 65 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 stockholders 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, was appointed Vice President, Marketing in August 1990 and Senior Vice President, Marketing in January 1999. 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. 34 36 NATHAN SARKISIAN joined the Company in June 1992 as Corporate Controller. He was appointed Vice President, Finance and Chief Financial Officer in August 1995 and Senior Vice President and Chief Financial Officer in March 1998. 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. CHARLES M. CLOUGH has served as a director of the Company since August 1997. In August 1997, Mr. Clough retired from his position as Chairman of the Board of Directors of Wyle Electronics, a distributor of semiconductor products and computer systems. From 1982 to 1997, Mr. Clough held various management positions at Wyle Electronics, including President, Chief Executive Officer and Chairman. Wyle Electronics is one of the Company's authorized distributors in the United States. Prior to joining Wyle Electronics, he had spent 27 years with Texas Instruments holding a number of management and executive positions relating to semiconductor operations, including the head of Bipolar operations, European Semiconductor group and worldwide marketing. 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. PAUL NEWHAGEN, a co-founder of the Company, has served as a director of the Company since July 1987. In March 1998, Mr. Newhagen retired from his position as Vice President - Administration of the Company, a position he had held since December 1984. From June 1993 to November 1994, he served as a consultant to the Company. From 1983 to 1993, Mr. Newhagen held various management positions at the company, including Vice President of Finance and Administration, Chief Financial Officer and Secretary. 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. DEBORAH D. RIEMAN has served as a director of the Company since May 1996. Dr. Rieman 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. Rieman 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. 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 and Phase Metrics, Inc. The section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 26, 1999 (the "Proxy Statement") is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The section entitled "Executive Compensation" in the Company's Proxy Statement is incorporated herein by reference. 35 37 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 sections entitled "Director Compensation" and "Certain Business Relationships" in the Company's Proxy Statement are incorporated herein by reference. 36 38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)1. Financial Statements The information required by this item is included in Item 8 of Part II of this Form 10-K. 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 - ------- ------- 3.1 Certificate of Incorporation filed with the Delaware Secretary of State on March 25, 1997 (which became the Certificate of Incorporation of the Registrant on June 19, 1997).(15) 3.2 By-laws of the Registrant as adopted May 5, 1997 (which became the By-laws of the Registrant on June 19, 1997).(15) 4.1 Specimen copy of certificate for shares of Common Stock of the Registrant.(16) 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) 4.4 First Supplemental Indenture dated as of June 19, 1997 to Indenture dated as of June 15, 1995.(15) 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 Nonstatutory 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) 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) 10.25 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.(16) 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) 10.35 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) 37 39 EXHIBIT NUMBER EXHIBIT - ------- ------- 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) 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.(13) 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 Second Amended and Restated Limited Liability Company Agreement of Wafertech, LLC, a Delaware limited liability company, dated as of October 28, 1997.(16)(17) 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) 10.50 Agreement and Plan of Merger dated June 18, 1997.(15) #10.51(a)+ 1998 Director Stock Option Plan. #10.51(b)+ Form of Stock Option Agreement under 1998 Director Stock Option Plan. #10.52 Assignment and Assumption Agreement, dated as of January 29, 1999, by and between Registrant and Analog Devices, Inc. #11.1 Computation of Earnings per Share (included on page 24). #13.1 Annual Report to Stockholders for the fiscal year ended December 31, 1998 (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 PricewaterhouseCoopers LLP. #24.1 Power of Attorney (included on page 40). #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 (File No. 33-17717), as amended, 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. 38 40 (7) 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, 1993. (8) Incorporated by reference to identically numbered exhibits filed 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. (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 (File No. 33-61085), as amended, 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 June 30, 1996. (15) 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, 1997. (16) 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, 1997. (17) Exhibits to this document are incorporated by reference to the exhibits to the identically numbered document filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended June 30, 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. # Filed herewith. (b) Reports on Form 8-K. None. 39 41 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 By: /s/ NATHAN SARKISIAN ------------------------------------------ Nathan Sarkisian Senior Vice President and Chief Financial Officer March 30, 1999 POWER OF ATTORNEY Know all persons by these present, that each person whose signature appears below constitutes and appoints Nathan Sarkisian, his or her attorney-in-fact, with the power of substitution, for him or her 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 or her 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 March 30, 1999 - -------------------------------- Officer) and Chairman of the Board of Directors Rodney Smith /s/ NATHAN SARKISIAN Senior Vice President and Chief Financial Officer (Principal March 30, 1999 - -------------------------------- Financial and Accounting Officer) Nathan Sarkisian /s/ CHARLES M. CLOUGH - -------------------------------- Charles M. Clough Director March 30, 1999 /s/ MICHAEL A. ELLISON - -------------------------------- Michael A. Ellison Director March 30, 1999 /s/ PAUL NEWHAGEN - -------------------------------- Paul Newhagen Director March 30, 1999 /s/ ROBERT W. REED - -------------------------------- Robert W. Reed Director March 30, 1999 /s/ DEBORAH D. RIEMAN - -------------------------------- Deborah D. Rieman Director March 30, 1999 /s/ WILLIAM E. TERRY - -------------------------------- William E. Terry Director March 30, 1999
40 42 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT - ------- ------- 3.1 Certificate of Incorporation filed with the Delaware Secretary of State on March 25, 1997 (which became the Certificate of Incorporation of the Registrant on June 19, 1997).(15) 3.2 By-laws of the Registrant as adopted May 5, 1997 (which became the By-laws of the Registrant on June 19, 1997).(15) 4.1 Specimen copy of certificate for shares of Common Stock of the Registrant.(16) 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) 4.4 First Supplemental Indenture dated as of June 19, 1997 to Indenture dated as of June 15, 1995.(15) 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 Nonstatutory 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) 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) 10.25 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.(16) 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) 10.35 Master Distribution Agreement with Japan Macnics Corporation dated June 26, 1986, as amended effective March 18, 1987.(6) 43 EXHIBIT NUMBER EXHIBIT - ------- ------- 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) 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.(13) 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 Second Amended and Restated Limited Liability Company Agreement of Wafertech, LLC, a Delaware limited liability company, dated as of October 28, 1997.(16)(17) 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) 10.50 Agreement and Plan of Merger dated June 18, 1997.(15) #10.51(a)+ 1998 Director Stock Option Plan. #10.51(b)+ Form of Stock Option Agreement under 1998 Director Stock Option Plan. #10.52 Assignment and Assumption Agreement, dated as of January 29, 1999, by and between Registrant and Analog Devices, Inc. #11.1 Computation of Earnings per Share (included on page 24). #13.1 Annual Report to Stockholders for the fiscal year ended December 31, 1998 (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 PricewaterhouseCoopers LLP. #24.1 Power of Attorney (included on page 40). #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 (File No. 33-17717), as amended, 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. 44 (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 filed 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 filed 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. (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 (File No. 33-61085), as amended, 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 June 30, 1996. (15) 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, 1997. (16) 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, 1997. (17) Exhibits to this document are incorporated by reference to the exhibits to the identically numbered document filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended June 30, 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. # Filed herewith. EX-10.51.(A) 2 1998 DIRECTOR STOCK OPTION PLAN 1 EXHIBIT 10.51(A) 1998 DIRECTOR STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this 1998 Director Stock Option Plan are to attract and retain the best available personnel for service as Outside Directors (as defined herein) of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. Definitions. As used herein, the following definitions shall apply: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Common Stock" means the common stock of the Company. (d) "Company" means Altera Corporation, a Delaware corporation. (e) "Director" means a member of the Board. (f) "Employee" means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (g) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (h) "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 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 Board deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (i) "Inside Director" means a Director who is an Employee. (j) "Option" means a stock option granted pursuant to the Plan. (k) "Optioned Stock" means the Common Stock subject to an Option. (l) "Optionee" means a Director who holds an Option. (m) "Outside Director" means a Director who is not an Employee. 2 (n) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (o) "Plan" means this 1998 Director Stock Option Plan. (p) "Share" means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan. (q) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986. 3. Stock Subject to the Plan. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 170,000 Shares of Common Stock (the "Pool"). 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). 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 and Grants of Options under the Plan. (a) Except as otherwise provided herein, the Plan shall be administered by the Board. (b) Procedure for Grants. All grants of Options to Outside Directors under this Plan shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: (i) Except as provided in Section 11(c), no person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) Each Outside Director shall be automatically granted an Option to purchase 20,000 Shares (the "First Option") on the date on which such person first becomes an Outside Director, whether through election by the stockholders of the Company or appointment by the Board to fill a vacancy. (iii) Each Outside Director shall be automatically granted an Option to purchase 5,000 Shares (a "Subsequent Option") on the day of the annual stockholder meeting at which such Outside Director is reelected to an additional term; provided, however, that for the first grant of a Subsequent Option (the "First Subsequent Option"), each Outside Director shall be automatically granted an Option to purchase the number of Shares equal to 5,000 multiplied by a fraction, the numerator of which equals the number of whole months (rounded up to the next whole month) from the date the Outside Director first became an Outside Director to the date of the annual stockholders' meeting at which the Outside Director was granted the First Subsequent Option and the denominator of which equals twelve. (iv) The exercise price per Share for all Options granted under the Plan shall be 100% of the Fair Market Value per Share on the date of grant of the Option. (v) The terms of a First Option granted hereunder shall be as follows: (A) the term of the First Option shall be ten (10) years. (B) the First Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof. (C) subject to Section 10 hereof, the First Option shall become exercisable as to twenty-five percent (25%) of the Shares subject to the First Option on the first anniversary of its date of grant and as 2 3 to 1/48th of the Shares subject to the First Option at the end of each month thereafter, provided that the Optionee continues to serve as a Director on such dates. (vi) The terms of a Subsequent Option granted hereunder shall be as follows: (A) the term of the Subsequent Option shall be ten (10) years. (B) the Subsequent Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Sections 8 and 10 hereof. (C) subject to Section 10 hereof, the Subsequent Option shall vest and become exercisable as to 1/12th of the Shares subject to the Subsequent Option at the end of each month beginning after all prior Option grants under the Plan have vested, provided that the Optionee continues to serve as a Director on such dates. Notwithstanding the prior sentence, the First Subsequent Option shall vest and become exercisable beginning after the Annual Option grant made under the Plan has fully vested as to an amount equal to the number of Shares subject to the First Subsequent Option divided by the number of whole months (rounded up to the nearest whole month) from the date the Outside Director first became an Outside Director to the date of the annual stockholders' meeting at which the Outside Director was granted the First Subsequent Option. (vii) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased under Options to exceed the Pool, then the remaining Shares available for Option grant shall be granted under Options to the Outside Directors on a pro rata basis. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the Board or the stockholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. (viii) Powers of the Board. Subject to the provisions and restrictions of the Plan, the Board shall have the authority, in its discretion: (i) to determine, upon review of relevant information and in accordance with Section 2(h) of the Plan, the fair market value of the Common Stock; (ii) to determine the exercise price per share of Options to be granted, which exercise price shall be determined in accordance with Section 4(b) of the Plan; (iii) to interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to the Plan; (v) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted hereunder; (vi) to increase or decrease the number of Shares subject to either the First Option or Subsequent Option pursuant to Section 11(c) herein; (vii) to increase the length of time an Option remains exercisable after the termination of an Optionee's status as a Director; and (viii) to make all other determinations deemed necessary or advisable for the administration of the Plan. (ix) Effect of Board's Decision. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan. (x) Suspension or Termination of Option. If the President or his designee reasonably believes that an Optionee has committed an act of misconduct, the President may suspend the Optionee's right to exercise any option pending a determination by the Board of Directors (excluding the Outside Director accused of such misconduct). If the Board of Directors (excluding the Outside Director accused of such misconduct) determines an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Optionee nor his estate shall be entitled to exercise any option whatsoever. In making such determination, the Board of Directors (excluding the Outside Director accused of such misconduct) shall act fairly and shall give the Optionee an opportunity to appear and present evidence on Optionee's behalf at a hearing before a committee of the Board. 5. Eligibility. Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4 hereof. 3 4 The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate the Director's relationship with the Company at any time. 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the stockholders of the Company as described in Section 16 of the Plan. It shall continue in effect until terminated under Section 11 of the Plan. 7. Form of Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) 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, (iv) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (v) any combination of the foregoing methods of payment. 8. Exercise of Option. (a) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4 hereof; provided, however, that no Options shall be exercisable until stockholder approval of the Plan in accordance with Section 16 hereof has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7 of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment shall 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 10 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be 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 Continuous Status as a Director. Subject to Section 10 hereof, in the event an Optionee's status as a Director terminates (other than upon the Optionee's death or total and permanent disability (as defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her Option, but only within three (3) months (or such other period of time determined by the Board at the time of grant) following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term); provided, however, that in the event that a sale of the Option Stock received upon exercise of this Option would subject the Director to liability under Section 16 of the Securities and Exchange Act of 1934, as amended, then the Option will terminate on the earlier of (i) the fifteenth day after the last date upon which such sale would result in liability, or (ii) two hundred ten (210) days following the date of such termination of status as a Director. To the extent that the Optionee was not entitled to exercise an Option on the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (c) Disability of Optionee. In the event Optionee's status as a Director terminates as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but only within three (3) months following the date of such termination, and only to the extent that the Optionee was 4 5 entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of termination, or if he or she does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (d) Death of Optionee. In the event of the death of an Optionee: (i) during the term of the Option who is at the time of his death a Director of the Company and who shall have been in Continuous Status as a Director since the date of grant of the Option, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the expiration of the Option's term), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status a Director for six (6) months after the date of death. (ii) within thirty (30) days after the termination of Continuous Status as a Director, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the expiration of the Option's term), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. 9. Non-Transferability of Options. The 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 or pursuant to a qualified domestic relations order as defined by the Code, Title I of the Employee Retirement Income Security Act, or the rules thereunder. An Option may be exercised, during the lifetime of the Optionee, only by the Optionee. 10. Adjustments Upon changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Option, the number of Shares 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 covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares 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 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." 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 subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it shall terminate immediately prior to the consummation of such proposed action. The Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his or her Option as to all or any part of the Optioned Stock including Shares as to which the Option would not otherwise be exercisable. (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, outstanding Options may be assumed or equivalent options may be substituted by the successor corporation or a Parent or Subsidiary thereof (the "Successor Corporation"). If an Option is assumed or substituted for, the Option or equivalent option shall continue to be exercisable as provided in Section 4 hereof for so long as the Optionee serves as a Director or a director of the Successor Corporation. Following such assumption or substitution, if the Optionee's status as a Director or director of the Successor Corporation, as applicable, is terminated other than upon a voluntary resignation by the Optionee, the Option or equivalent option shall become fully exercisable, including as to Shares for which it would not 5 6 otherwise be exercisable. Thereafter, the Option or equivalent option shall remain exercisable in accordance with Sections 8(b) through (d) above. If the Successor Corporation does not assume an outstanding Option or substitute for it an equivalent option, the Option shall become fully vested and exercisable, including as to Shares for which it would not otherwise be exercisable. In such event the Board shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and upon the expiration of such period the Option shall terminate. For the purposes of this Section 10(c), an Option shall be considered assumed if, following the merger or sale of assets, the Option 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). If such consideration received in the merger or sale of assets is 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. 11. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with any applicable law, regulation or stock exchange rule, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required including any increase in the number of Shares subject to the Plan, other than in connection with an adjustment under Section 10(a) of the Plan. (b) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. (c) Adjustment of First and Subsequent Options. The Board may, at any time, amend the Plan to increase or decrease the number of Shares subject to either the First Option or the Subsequent Option without obtaining stockholder approval. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4 hereof. 13. Conditions Upon Issuance of Shares. 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 pursuant thereto 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, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. 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 by any of the aforementioned relevant provisions of law. 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 6 7 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. 14. 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. 15. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve. 16. Stockholder Approval. The Plan shall be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under applicable state and federal law and any stock exchange rules. 7 EX-10.51.(B) 3 FORM OF STOCK OPTION AGREEMENT 1 EXHIBIT 10.51(B) 1998 DIRECTOR STOCK OPTION PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same Defined meanings in this Option Agreement. 1. NOTICE OF STOCK OPTION GRANT You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number __________ Date of Grant __________ Vesting Commencement Date __________ Exercise Price per Share __________ Total Number of Shares Granted __________ Total Exercise Price __________ Type of Option __________ Expiration Date __________ 2. VESTING SCHEDULE. Shares in each period will become fully vested on the date shown (see Section 3). Shares Vesting Type Start Vest Date Full Vest Date Agreed to subject to all of the terms and conditions of this Option Agreement and of the 1998 Director Stock Option Plan, and conditioned upon due and valid execution of this Option Agreement by the Optionee. OPTIONEE: ALTERA CORPORATION By: Title: Vice President 1 2 3. Exercise of Option. This Option shall be exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows: (i) Right to Exercise. (a) Subject to subsections 3(i)(b), (c) and (d) below, this Option shall be exercisable in installments cumulatively with respect to 8.34% of the shares for each month beginning after the Optionee's First Option is fully vested or, in the event that any previously granted Subsequent Options are outstanding at the time this Option is granted, following the complete vesting of any Subsequent Option previously granted. (b) This Option may not be exercised for a fraction of a share. (c) In the event of Optionee's death, disability or other termination of employment or consulting relationship, the exercisability of the Option is governed by Sections 7, 8 and 9 below. (d) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in Section 11 below. (ii) Method of Exercise. This Option shall be exercisable by written notice which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the exercise price. This Option shall be deemed exercised upon receipt by the Company of such written notice accompanied by the exercise price. No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 4. Optionee's Representations. In the event the Shares purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, concurrently with the exercise of all or any portion of this Option, deliver to the Company his Investment Representation Statement in the form acceptable to the Company. 5. Method of Payment. Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Board: (i) cash; (ii) check; or (iii) surrender of other shares of Common Stock of the Company of a value equal to the exercise price of the Shares as to which the Option is being exercised. 6. Restrictions on Exercise. This Option may not be exercised until such time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of 2 3 Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 7. Termination of Status as a Director. In the event of the termination of the Outside Director's Continuous Status as a Director, he/she may, but only within thirty (30) days after the date of such termination (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), exercise this Option to the extent that he was entitled to exercise it at the date of such termination. To the extent that he/she was not entitled to exercise this Option at the date of such termination, or if he/she does not exercise this Option within the time specified herein, the Option shall terminate. 8. Disability of Optionee. Notwithstanding the provisions of Section 7 above, in the event of termination of Optionee's Continuous Status as a Director as a result of his total and permanent disability (as defined in Section 22(e)(3) of the Code), he/she may, but only within three (3) months from the date of such termination (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), exercise his Option to the extent he/she was entitled to exercise it at the date of such termination. To the extent that he/she was not entitled to exercise the Option at the date of termination, or if he/she does not exercise such Option (which he/she was entitled to exercise) within the time specified herein, the Option shall terminate. 9. Death of Optionee. In the event of the death of Optionee: (i) during the term of this Option and while a Director of the Company and having been in Continuous Status as a Director since the date of grant of the Option, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had Optionee continued living and remained in Continuous Status as a Director six (6) months after the date of death; or (ii) within thirty (30) days after the termination of Optionee's Continuous Status as a Director, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. 10. Non-Transferability of Option. This Option may not be transferred in any manner other than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 11. Term of Option. This Option may not be exercised more than ten (10) years from the date of grant of this Option, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 12. Taxation Upon Exercise of Option. Optionee understands that, upon exercise of this Option, he/she will recognize income for tax purposes in an amount equal to the excess of the then fair market value of the shares over the exercise price. The Company may require the Optionee to make a cash payment to cover any applicable withholding tax liability as a condition of exercise of this Option. Upon a resale of such shares by the Optionee, any difference between the sale price and the fair market value of the shares on the date of exercise of the Option will be treated as capital gain or loss. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS A DIRECTOR. OPTIONEE 3 4 FURTHER ACKNOWLEDGES AND AGREES THAT THIS OPTION, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A DIRECTOR FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL. By your signature and the signature of the Company's representative on page one of this Option Agreement, Optionee acknowledges receipt of a copy of the Plan and certain information related thereto and represents that he/she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan. 4 EX-10.52 4 ASSIGNMENT AND ASSUMPTION AGREEMENT 1 EXHIBIT 10.52 WAFERTECH, LLC ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is made as of January 21, 1999 by and between Analog Devices, Inc., a Massachusetts corporation ("ADI"), and Altera Corporation, a Delaware corporation ("Altera"). WHEREAS, ADI and Altera are members of WaferTech, LLC, a Delaware limited liability company (the "Company"), and parties to the Second Amended and Restated Limited Liability Company Agreement of WaferTech, LLC dated as of October 28, 1997 (the "LLC Agreement"); WHEREAS, ADI proposes to transfer to Altera a Five Percent (5%) Membership Interest in the Company, corresponding to Eleven Million Two Hundred Fifty Thousand (11,250,000) Preferred Shares (the "Interest"); WHEREAS, the Preferred Members have unanimously consented to the transfer of the Interest by ADI to Altera pursuant to a Unanimous Written Consent dated November 30, 1998; NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Capitalized Terms Capitalized terms not otherwise defined in this Agreement have the meanings assigned to them in the LLC Agreement. 2. Assignment and Assumption In consideration of (i) the payment of the purchase price in the amount of Thirty-Seven Million Five Hundred Thousand Six Hundred Forty United States Dollars (U.S.$37,500,640) (the "Purchase Price") by Altera to ADI as provided herein and (ii) the assumption by Altera of the obligations associated with the Interest as set forth in the LLC Agreement and Purchase Agreement, ADI hereby irrevocably assigns, transfers and conveys to Altera all right, title and interest in and to, and all benefits and burdens of the ownership of, the Interest. Altera hereby assumes the obligations associated with the Interest as set forth in the LLC Agreement and Purchase Agreement. 2 3. Payment Altera shall pay the Purchase Price to ADI by the transfer of immediately available funds denominated in U.S. dollars for value before 2:00 p.m. EST January 29, 1999 to the following account: Analog Devices, Inc. BankBoston Boston, Massachusetts Account No. 521-79901 ABA No. 011-000-390 The assignment and assumption contemplated by Section 2 of this Agreement shall become effective immediately upon receipt by ADI of the full amount of the Purchase Price in the abovementioned account. Upon receipt of the Purchase Price, ADI shall deliver to Altera a written receipt therefor in the form of Exhibit A attached hereto. 4. ADI's Representations and Warranties. ADI hereby represents and warrants to Altera that: (i) ADI has the full right, power, and authority to execute this Agreement and to sell the Interest to Altera. (ii) The Interest is owned by ADI free and clear of any and all liens, encumbrances, charges, assessments and restrictions (other than restrictions on transfer imposed by the LLC Agreement and restrictions on transfer generally imposed on securities under Federal or state securities laws). (iii) Upon transfer of the Interest to Altera pursuant to this Agreement, Altera will, as a result, receive good title to the Interest, free and clear of any and all liens, encumbrances, claims, charges, assessments, and restrictions (other than restrictions on transfer imposed by the LLC Agreement and restrictions on transfer generally imposed on securities under Federal or state securities laws). (iv) All corporate action on the part of ADI, its directors and stockholders necessary for the authorization, execution, delivery and performance by ADI of this Agreement has been taken. (v) The execution, delivery and performance of and compliance with this Agreement and the sale of the Interest hereunder will not result in any violation of, or conflict with, or constitute a default under, ADI's charter or bylaws or any of ADI's material agreements -2- 3 (including but not limited to the LLC Agreement), or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon the Interest being transferred. (vi) No consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of ADI is required in connection with the valid execution and delivery of this Agreement, the sale of the Interest hereunder or the consummation of any other transaction contemplated hereby. (vii) (a) ADI has consulted its own independent tax advisors with respect to the transactions contemplated by this Agreement to the extent it deemed necessary and advisable; (b) ADI is not relying in any respect on WaferTech or any Managing Member, employee or other agent or representative of WaferTech to provide any advice with respect to the Federal, state, local or foreign tax consequences of the transactions contemplated hereby; and (c) ADI shall bear its own tax consequences, if any, associated with the transactions contemplated hereby and shall not seek any reimbursement in connection with any such tax consequences from Altera, WaferTech or any of their affiliates. 5. Altera's Representations and Warranties. Altera hereby represents and warrants to ADI that: (i) Altera has the full right, power, and authority to execute this Agreement and to purchase the Interest from ADI. (ii) Altera understands and acknowledges that any further transfer of the Interest by Altera is restricted under the LLC Agreement. (iii) Altera is acquiring the Interest for its own account for investment, and not with a view to distribution. 6. Effect on Ancillary Agreements. The parties acknowledge and agree that the transfer of the Interest pursuant to this Agreement will affect the Percentage Interests of ADI and Altera and, consequently, their respective rights and obligations under the Purchase Agreement, as well as their respective rights and obligations under the LLC Agreement, including under Section 19.2 thereof with respect to Future Purchase Agreements. -3- 4 7. Miscellaneous. (a) Further Assurances. Each of the parties agrees to promptly execute and deliver any and all further agreements, documents, or instruments necessary to effectuate this Agreement and the transaction referred to herein or reasonably requested by the other party to perfect or evidence its rights hereunder. (b) Survival of Representations and Warranties. The representations and warranties contained in this Agreement shall survive the transfer of the Interest made pursuant to this Agreement. (c) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument, binding on the parties, and the signature of any party to any counterpart shall be deemed a signature to, and may be appended to, any other counterpart. (d) Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. ANALOG DEVICES, INC. By: /s/ Joseph E. McDonough ------------------------------------- Name Joseph E. McDonough ------------------------------------ Its V.P. Finance, C.F.O. ------------------------------------- ALTERA CORPORATION By: /s/ Nathan M. Sarkisian ------------------------------------- Name Nathan M. Sarkisian ------------------------------------ Its Senior V.P. & C.F.O. ------------------------------------- -4- 5 Exhibit A RECEIPT Analog Devices, Inc. ("ADI") hereby acknowledges receipt of the sum of Thirty-Seven Million Five Hundred Thousand Six Hundred Forty United States Dollars (U.S$37,500,640) from Altera Corporation ("Altera") constituting full payment of the purchase price payable under the Assignment and Assumption Agreement between ADI and Altera dated as of January 21, 1999. Accordingly the transfer of the Interest contemplated by the aforesaid Assignment and Assumption Agreement is effective as of the date hereof. IN WITNESS WHEREOF, this Receipt has been executed as of the date set forth below. Date: January 29, 1999 ANALOG DEVICES, INC. By: /s/ Joseph E. McDonough ------------------------------------- Name Joseph E. McDonough ------------------------------------ Its V.P. Finance, C.F.O. ------------------------------------- -5- EX-13.1 5 ANNUAL REPORT TO STOCKHOLDERS FOR FYE 12/31/1998 1 EXHIBIT 13.1 ABOUT YOUR INVESTMENT Stock Ownership Profile The Company estimates that at December 31, 1998, there were more than 36,000 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:
1994 1995 1996 1997 1998 - ---- ---- ---- ---- ---- 26.2 26.2 29.6 21.4 39.0
Excludes R&D in-process write-off associated with the acquisition of Intel's programmable logic business in 1994 and the cumulative effect of change in accounting principle in 1997. Trading Volume The average trading volume in the Company's stock decreased 7% in 1998 over 1997, as measured by Nasdaq. Trading volume in 1998 averaged 2.6 million shares per day, compared to 2.8 million per day in 1997, and 4.4 million in 1996, 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. Officers, Directors Institutional Investors 80% & Employees 5% Individuals 15% [Pie Chart] Estimated Stock Ownership [Graph] Comparative Stock Performance [Bar Graph] Average Daily Trading Volume 2 SELECTED CONSOLIDATED FINANCIAL DATA
FIVE-YEAR SUMMARY YEARS ENDED DECEMBER 31, (in thousands, except per share amounts) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Statements of Operations Data: - ------------------------------------------------------------------------------------------------------------------------------------ Sales $ 654,342 $631,114 $497,306 $401,598 $198,796 Cost of sales 249,474 236,958 191,958 158,808 77,672 ---------------------------------------------------------------- Gross profit 404,868 394,156 305,348 242,790 121,124 Research and development expenses 59,864 54,417 49,513 33,849 45,994 Selling, general and administrative expenses 113,161 112,784 87,742 74,658 45,771 ---------------------------------------------------------------- Income from operations $ 231,843 $226,955 $168,093 $134,283 $ 29,359 ---------------------------------------------------------------- Income before income taxes, equity investment and cumulative effect of change in accounting principle $ 244,183 $229,571 $169,137 $137,891 $ 31,496 ---------------------------------------------------------------- Income before equity investment and cumulative effect of change in accounting principle $ 164,827 $151,517 $109,135 $ 86,871 $ 14,608 Equity in loss of WaferTech, LLC 10,440 -- -- -- -- ---------------------------------------------------------------- Income before cumulative effect of change in accounting principle 154,387 151,517 109,135 86,871 14,608 Cumulative effect of change in accounting principle -- 18,064 -- -- -- ---------------------------------------------------------------- Net income $ 154,387 $133,453 $109,135 $ 86,871 $14,608 ---------------------------------------------------------------- Income per share before cumulative effect of change in accounting principle: Basic $ 1.65 $ 1.71 $ 1.25 $ 1.00 $ 0.18 Diluted 1.56 1.55 1.16 0.95 0.17 Net income per share: Basic $ 1.65 $ 1.51 $ 1.25 $ 1.00 $ 0.18 Diluted 1.56 1.37 1.16 0.95 0.17 Shares used in computing income per share: Basic 93,493 88,525 87,406 86,625 83,253 Diluted 101,589 102,616 100,813 95,931 86,490 Balance Sheet Data: - ------------------------------------------------------------------------------------------------------------------------------------ Working capital $ 587,923 $430,371 $295,020 $346,242 $121,479 Total assets 1,093,331 952,518 778,212 715,554 213,882 Long-term debt -- 230,000 230,000 288,600 -- Stockholders' equity 881,721 536,687 370,245 255,189 158,019 Book value per share 9.03 6.02 4.23 2.93 1.84 [FOUR BAR GRAPHS] (Dollars in millions) (percentage of sales) (percentage of sales) (dollars in millions) R&D In-Process Charge - ------------------------ ------------------------ ------------------------ ------------------------------ RESEARCH AND GROSS SG&A INCOME FROM DEVELOPMENT MARGIN OPERATIONS - ------------------------ ------------------------ ------------------------ ------------------------------
3 CORPORATE DIRECTORY Board of Directors Corporate Officers Corporate Headquarters Rodney Smith Rodney Smith 101 Innovation Drive Chairman, President, and President and Chief Executive Officer San Jose, California 95134 Chief Executive Officer (408) 544-7000 Altera Corporation C. Wendell Bergere Vice President, General Counsel, Independent Accountants Charles M. Clough and Secretary PricewaterhouseCoopers LLP Former Chairman, President, and San Jose, California Chief Executive Officer Denis Berian Wyle Electronics Executive Vice President and Stock Listing Chief Operating Officer Altera's common stock trades on Michael A. Ellison The Nasdaq Stock Market(R) under Chief Executive Officer Erik R. Cleage the symbol "ALTR". Steller, Inc. Vice President, Marketing For the past two years, the quarterly Paul Newhagen John R. Fitzhenry high and low closing sales prices for Former Vice President, Vice President, Human Resources the common stock were: Administration Altera Corporation Nathan Sarkisian 1998 1997 Senior Vice President and ------------------------------------------ Robert W. Reed Chief Financial Officer Quarter High Low High Low Former Senior Vice President ------------------------------------------ Intel Corporation Peter Smyth First 44-1/4 28-3/4 48-1/8 35-7/8 Vice President, Sales Second 44-5/8 28-1/4 54 42-1/16 William E. Terry Third 43 29 64-7/8 49-3/8 Former Director and Fourth 61-7/8 29-1/2 53-3/4 30-9/16 Executive Vice President Hewlett-Packard Company Registar/Transfer Agent Deborah Rieman, Ph.D. BankBoston, NA President and Chief Executive Officer c/o EquiServe CheckPoint Software Technologies, Inc. P.O. Box 8040 Boston, MA 02266-8040 Appointed Officers (800) 730-6001 Bahram Ahanin Bruce Mielke www.equiserve.com Vice President, CAD and Vice President, Product Engineering Design Automation WEB SITE Thomas B. Murchie For current information on Altera Melonie C. Brophy Vice President, Operations Corporation, visit our web site at Vice President, Finance, http://www.altera.com. and Treasurer Timothy J. Propeck Vice President, North America Sales ADDITIONAL INFORMATION Donald Faria Please direct all requests to: Vice President, Customer Marketing Timothy J. Southgate Investor Relations and Applications Vice President, Software Engineering 101 Innovation Drive San Jose, California 95134 Frank L. Hannig Clifton S. Tong (408) 544-7707 Vice President and Vice President, Product Marketing Chief Information Officer Earnings releases may be requested Nigel Toon from Altera's Fax-on-Demand service Lance M. Lissner Vice President and at (800) 789-2587 in the United States Vice President, Business Managing Director -- Europe and Canada and at (408) 894-0466 Development and Investor Relations from other international locations. John E. Turner Vice President, Design Engineering
Copyright (c) 1999 Altera Corporation, Altera, The Programmable Solutions Company, APEX 20K, FLEX, FLEX 10K, FLEX 10KA, FLEX 10KE, FLEX 8000, FLEX 6000, MAX, MAX 9000, MAX 9000A, MAX 7000, MAX 7000S, MAX 7000A, MAX 7000B, MAX 5000, Classic, FLASHlogic, Quartus, MAX+PLUS II, MegaCore, AMPP, System-on-a-Programmable-Chip, and individual device designations are trademarks and/or service marks of Altera Corporation in the United States and other countries. Altera Corporation acknowledges the trademarks of other organizations for their respective products or services mentioned in this document. All rights reserved. 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 s.r.l. 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 Altera International Limited Hong Kong 1997 Altera Taiwan Co., Ltd. Taiwan 1997
EX-23.1 7 CONSENT OF PRICEWATERHOUSECOOPERS 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, No. 333-06859, No. 333-32555 and No. 333-62917) of Altera Corporation of our report dated January 19, 1999 appearing on page 33 of this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP San Jose, California March 26, 1999 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 131,029 448,077 56,138 8,007 69,869 799,533 227,636 75,316 1,093,331 211,610 0 0 0 98 881,623 1,093,331 654,342 654,342 249,474 249,474 173,025 0 6,362 244,183 79,356 154,387 0 0 0 154,387 1.65 1.56 For purposes of this Exhibit, Primary means Basic.
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