-----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, RH21PaUI/M90w3+G2mj86jjtg7Dn7TDjyCKmW3uUJTswQI86IsfhkVosLJzP17ox /S0/eDp7jW6Bruq78SH0fQ== 0001095811-01-500338.txt : 20010312 0001095811-01-500338.hdr.sgml : 20010312 ACCESSION NUMBER: 0001095811-01-500338 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010308 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: 1563265 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 f70153e10-k.txt FORM 10-K FISCAL YEAR ENDED DECEMBER 31, 2000 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, 2000 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 is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $6,885,949,000 as of February 28, 2001, based upon the closing sale price on the Nasdaq National Market for that date. There were 388,666,822 shares of the registrant's common stock issued and outstanding as of February 28, 2001. 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, 2000. 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 1, 2001. 2 Except for the historical information presented, the matters discussed in this Report include forward-looking statements, as further described under Item 7 and elsewhere in this Report. Forward-looking statements can be identified by the use of forward-looking words, such as "may," "could," "expect," "believe," "plan," "anticipate," "continue," or other similar words. PART I ITEM 1. BUSINESS. GENERAL Altera Corporation, referred to as "we," "us" or "our," designs, manufactures and markets programmable logic devices, or PLDs, and associated development tools. Programmable logic devices are semiconductor integrated circuits that our customers can program using our proprietary software, which operates on personal computers and engineering workstations. Founded in 1983, we were one of the first suppliers of complementary metal oxide semiconductor, or CMOS, programmable logic devices and are currently a global leader in this market. We offer a broad line of CMOS programmable logic devices that address high-speed, high-density and low-power applications. Our products serve a wide range of markets, including telecommunications, data communications, electronic data processing and industrial applications. STRATEGY Three principal types of digital integrated circuits are used in most electronic systems: microprocessors, memory and logic. Microprocessors are used for control and computing tasks, memory is used to store programming instructions and data, and logic is used to manage the interchange and manipulation of digital signals within a system. While system designers employ a relatively small number of standard architectures to meet their microprocessor and memory needs, they require a wide variety of logic circuits to differentiate their end products. According to Dataquest, the CMOS logic market consists of the following segments: - Semi-custom or application-specific integrated circuits, or ASICs - Standard logic - Full custom devices - Other forms of logic integrated circuits, including chipsets The ASIC segment is comprised of programmable logic, gate arrays and cell-based integrated circuits (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 general application and on-chip programming overhead), in many cases, depending on the complexity of the design and total unit requirements, this higher per unit cost is more than offset by the high fixed costs of layout and mask-making required to produce a custom integrated circuit. Further, because unprogrammed PLDs are standard devices, we, our distributors and subcontract manufacturers -- not our customers -- hold stocks of inventory, thereby enhancing the cost advantage of PLDs for our customers. Our strategy is to compete with other companies in the ASIC segment of the CMOS logic market by providing a total solution for our customers' programming logic needs. To accomplish this goal, we offer our customers: - PLDs with the speed, density and package types to meet their specific needs - State-of-the-art development tools that are easy to use and compatible with other industry standard electronic design automation, or EDA, tools - Optimized system-level megafunctions to speed their design process - A complete customer support system 2 3 We have been able to introduce new product families that, as compared to their predecessors, provide more functionality at a much lower price for any given density because high-volume manufacturing and emerging process technologies have resulted in cost decreases. We believe these new product families achieve the integration, density, performance and cost advantages of other ASIC solutions. We believe that our competitiveness within the ASIC segment in these areas, along with the inherent advantages of programmable logic discussed above, will enable us to compete for designs traditionally served by other ASIC devices. PRODUCTS We sell a wide range of products, with a total of more than 1,000 product options among our PLD families. We offer PLDs in two fundamental technologies: our MAX(R) products, which use floating-gate process technology, and our FLEX(R), APEX(TM), ACEX(TM) and Excalibur(TM) products, which use static random access memory, or SRAM, process technology. Our proprietary development tools, the MAX+PLUS(R) II and Quartus(TM) II software, provide design development and programming support for our PLDs. We also offer hardware used in programming PLDs. Devices: We offer 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 our major device families include the following: MAX 7000, MAX 7000S, MAX 7000A and MAX 7000B: The MAX 7000, MAX 7000S, MAX 7000A and MAX 7000B device families are among the fastest and most widely used high-density programmable logic families in the industry. Devices in these families range from 600 to 10,000 usable gates and up to 256 pins and provide several enhanced features, including support for the industry standard Joint Test Action Group boundary-scan test, or BST, circuitry and in-system programmability, or 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 when reprogrammed. The MAX 7000 device families, which includes the 5.0-V MAX 7000 devices and the 5.0-V, ISP-based MAX 7000S devices, the 3.3-V MAX 7000A device family and what we believe is the industry's fastest programmable logic solution, the 2.5-V MAX 7000B device family, are fabricated on advanced CMOS electrically erasable programmable read-only memory, or EEPROM, processes, providing a high-density, high-speed, I/O-intensive programmable logic solution. Devices in these families are supported by our MAX+PLUS II development software. MAX 3000A: The MAX 3000A devices, which are targeted at high volume, low cost applications, range from 600 to 5,000 usable gates and up to 158 pins. The MAX 3000A devices include support for BST circuitry and ISP, are fabricated on advanced CMOS EEPROM processes and are supported by our MAX+PLUS II development software. FLEX 8000: The SRAM-based FLEX 8000 device family uses our patented FastTrack(R) Interconnect structure, 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, can interface with 3.3-V devices through the MultiVolt(TM) I/O feature, provide low standby power and are supported by our MAX+PLUS II development software. FLEX 6000: Our 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(R) 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. Devices in this family are supported by our MAX+PLUS II and Quartus II development software. FLEX 10K, FLEX 10KA and FLEX 10KE: Our SRAM-based FLEX 10K, FLEX 10KA and FLEX 10KE device families offer a combination of logic and embedded memory on a single-chip architecture. Devices in these PLD families range from 10,000 to 250,000 usable gates and up to 672 pins. With these high densities, the 5.0-V FLEX 10K, the 3.3-V FLEX 10KA and the 2.5-V FLEX 10KE families may be used to address the increasing levels of integration needed to accommodate today's complex designs. The FLEX 10K family includes 0.5- and 0.42-micron devices, the FLEX 10KA family includes 0.35- and 0.3-micron devices and the FLEX 10KE family includes 0.25- and 0.22-micron devices. Devices in these families are supported by our MAX+PLUS II development software. APEX 20K, APEX 20KE and APEX 20KC: Our SRAM-based APEX 20K, APEX 20KE and APEX 20KC device families offer complete system-level integration on a single device, and the APEX 20KC is the first PLD family utilizing copper for all layers of metal interconnect. Devices in these families range from 30,000 to over 1.5 million usable gates and up to 1,020 pins. With high densities and performance enhancements, the APEX 20K, APEX 20KE and APEX 20KC families deliver the latest in design flexibility and efficiency for high-performance, system-on-a-programmable-chip, or SOPC, design. APEX 20K devices, which operate at a 2.5-V supply voltage, and the 3 4 APEX 20KE and APEX 20KC devices, which operate at a 1.8-V supply voltage, employ the innovative MultiCore(TM) architecture, which combines the strengths of our look-up table, product term block and enhanced embedded memory block structures. The APEX 20K, APEX 20KE and APEX 20KC devices are supported by our Quartus II development software. ACEX 1K: Our SRAM-based ACEX 1K device family, which combines look-up tables and embedded array blocks, offers complete system-level integration on a single device. Devices in this family range from 10,000 to 100,000 usable gates and up to 484 pins. Operating at 2.5-V supply voltage, the ACEX 1K devices are supported by our MAX+PLUS II development software. EXCALIBUR EMBEDDED PROCESSOR SOLUTIONS: The Excalibur solutions consist of three embedded processor families, our Nios(TM) soft core embedded processor solution, the ARM(R)-based embedded processor solution and the MIPS-based(TM) embedded processor solution. Our Nios soft core embedded processor, which was available in August 2000 and is supported by our Quartus II development software, is the industry's first reduced instruction set computer, or RISC, embedded processor commercially released by a major PLD vendor as a viable alternative to discrete processor solutions. The ARM-based embedded processor PLD family uses technology licensed from ARM Limited and will consist of multiple devices that each contain an ARM-based RISC processor core. The MIPS-based embedded processor PLD family uses technology licensed from MIPS Technologies, Inc. and will consist of multiple devices that each contain a MIPS-based RISC processor core. We expect the ARM-based and MIPS-based embedded processor PLD families to be available in the first half of 2001. Development Tools: Customers use our development system software and hardware to design and implement logic designs on our PLDs. Our MAX+PLUS II and Quartus II software development tools run under the Microsoft Windows-based operating environments on personal computers in addition to the UNIX environment on SUN, HP and IBM workstations. We also provide interfaces to many industry-standard EDA tools, including those offered by Cadence Design Systems, Inc., Mentor Graphics Corporation, Synopsys, Inc. and Synplicity, Inc. We also sell hardware for programming our PLDs. In January 2001, we released the Quartus II development software, which we believe delivers superior designer productivity and supports system-level designs and integration with third-party tools. MARKETING, SALES AND CUSTOMERS We market our products in the United States, Canada, Europe, Asia, South America and Australia through a network of direct sales personnel and electronics distributors. In the United States and Canada, we also rely on a network of independent sales representatives. From time to time, we expect that we may add or delete independent sales representatives or distributors from our selling organization as we deem appropriate to the level of business. Throughout the United States, we have domestic sales management offices in major metropolitan areas. Our 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 our major strategic accounts. Our distributor in the United States currently is Arrow Electronics, Inc. In 2000, Arrow acquired Wyle Electronics, which also had served as one of our domestic distributors. Arrow is responsible for creating customer demand from its base of customers, providing technical support and other value-added services and filling customers' orders. Our international business is supported by a network of distributors throughout Europe, Asia, South America and Australia. We have representation in every major European country, Israel, Australia, South America and various countries throughout the Pacific Rim. In addition, we maintain international sales support offices in the metropolitan areas of Oosterhout (Netherlands), Helsinki, Hong Kong, Hsinchu (Taiwan), London, Ottawa, Paris, Seoul, Shanghai, Stockholm, Stuttgart, Tokyo and Turin. Customer support and service are important aspects of selling and marketing our products. We provide several levels of technical user support, including applications assistance, design services and customer training. Our 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. In 2000, we expanded our customer support services by establishing an Applications Engineering Center near San Diego, California to provide technical support to our customers. Customer service is supported with inventory maintained both by us and at distributors' locations to provide short-term delivery of chips. Through 2000, all international sales were denominated in U.S. dollars. Our international sales are subject to those risks common to all international activities, including governmental regulation, possible imposition of tariffs or other trade barriers and currency fluctuations. In the year ended December 31, 2000, worldwide sales through distributors accounted for over 95% of total sales. In 2000, two distributors accounted for more than 10% of sales; one accounted for 58% of sales, and the other accounted for 11% of sales. In 1999, three distributors 4 5 accounted for more than 10% of sales. These three distributors accounted for 34%, 19% and 13% of sales, whereas in 1998, they accounted for 30%, 21% and 11% of sales. The percentage increase for our largest distributor in 2000 compared to previous years is attributable to the combination of Arrow and Wyle, our two largest distributors in 1999 and 1998. No single end customer accounted for more than 10% of our sales in 2000, 1999 or 1998. International sales constituted 43% of sales in 2000, 44% of sales in 1999 and 45% of sales in 1998. For a detailed description of our sales by geographic region, see Item 7 and Note 14 to our consolidated financial statements. COMPETITION The ASIC Segment: The ASIC segment of the CMOS logic market is comprised of programmable logic, gate arrays and cell-based integrated circuits (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 our FLEX 10K family and new APEX 20K, APEX 20KE and APEX 20KC device families, which are our highest density PLDs, along with our FLEX 6000 devices, which are designed and priced to be very competitive with lower density gate arrays, we seek 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 we do. We cannot assure you that we 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 of the ASIC market 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 - Customer service We believe that we compete favorably with respect to these factors and that our proprietary device architecture and our 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 our future operating results. We experience significant direct competition from other companies that are in the programmable logic sub-segment. Our competition in this market sub-segment is from suppliers of products that are marketed as either field-programmable gate arrays, or FPGAs, or complex PLDs, or CPLDs. In the high density CPLD market, we directly compete primarily with Xilinx, Inc. and Lattice Semiconductor Corporation. Companies that currently compete with us in our core business may have preferred vendor status with many of our customers, extensive marketing power, name recognition and other significant advantages over us. Additionally, the semiconductor industry as a whole includes many large domestic and foreign companies that have substantially greater financial, technical and marketing resources than we do. We expect 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 our future sales and operating results. 5 6 MANUFACTURING Wafer Supply: We do not directly manufacture our silicon wafers. Our wafers are produced using various semiconductor foundry wafer fabrication service providers. This enables us to take advantage of these suppliers' high volume economies of scale, as well as direct and more timely access to advancing process technology. We presently have our primary wafer supply arrangements with two semiconductor vendors: Taiwan Semiconductor Manufacturing Company, or TSMC, and Sharp Corporation. We may negotiate additional foundry contracts and establish other sources of wafer supply for our 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 our ability to obtain wafer supply for our newer products. Accordingly, we cannot assure you that any shortage in foundry manufacturing capacity will not result in production problems for us in the future. In December 2000, we sold our 23% equity ownership interest in WaferTech, LLC to a subsidiary of TSMC for approximately $350 million in cash. WaferTech was formed in 1996 as a joint venture among us, TSMC and several other partners to build and operate a wafer manufacturing plant in Camas, Washington. As a result of the sale, we were released from all of our obligations under the operating agreement. We expect WaferTech to continue to supply wafers to us through TSMC. Accordingly, we do not believe that the sale of our ownership interest in WaferTech will have an adverse effect on our ability to obtain sufficient quantities of wafers in the future. We depend upon our foundry vendors to produce wafers at acceptable yields and to deliver them to us in a timely manner. The manufacture of advanced CMOS semiconductor wafers is a highly complex process, and we have from time to time experienced difficulties in obtaining acceptable yields and timely deliveries from our suppliers. Good production yields are particularly important to our business, including our 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, we have experienced and expect to experience production yield problems from time to time. Difficulties in production yields can often occur when we begin production of new products or transition to new processes. These difficulties can potentially result in significantly higher costs and lower product availability. For example, in the second quarter of 1999, difficulties with a vendor's manufacturing process limited the availability of packaging material (piece parts) used in certain of our new and proprietary FineLine BGA(TM), or ball-grid array, packages causing limited production. This in turn limited shipments of our new FLEX 10KE product family. Our management expects to continue to introduce new and established products using new process technologies, and we may encounter similar start-up difficulties during the transition to such process technologies. Further, production throughput times vary considerably among our wafer suppliers, and we may experience delays from time to time in processing some of our products which also may result in higher costs and lower product availability. We expect that, as is customary in the semiconductor business, in order to maintain or enhance our competitive position, we will continue to convert our fabrication process arrangements to larger wafer sizes, smaller circuit geometries and more advanced process technologies. Such conversions entail inherent technological risks that can adversely affect yields, costs and delivery lead time. In addition, if for any reason we 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 our operating results. Testing and Assembly: After wafer manufacturing is completed, each wafer is tested using a variety of test and handling equipment. Such wafer testing is accomplished at Sharp, TSMC and our San Jose pilot line facility, which is used primarily for new product development. This testing is performed on equipment owned by us 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 our wafer supply business, we employ a number of independent suppliers for assembly purposes. This enables us to take advantage of subcontractor high volume manufacturing, related cost savings, speed and supply flexibility. It also provides us with timely access to cost-effective advanced process and package technologies. We purchase almost all of our assembly services from AMKOR (Korea and the Philippines), ASAT (Hong Kong), ASE (Malaysia) and Fujitsu (Japan). Following assembly, each of the packaged units receives final testing, marking and inspection prior to shipment to customers. We obtain almost all of our final test and back-end operation services from AMKOR, ASAT and ASE. Final testing by these assembly suppliers is 6 7 accomplished through the use of our proprietary test software and hardware, which is consigned to or owned by such suppliers and/or third-party commercial testers. These suppliers also handle shipment of the products to our customers or distributors. Additionally, almost all of the manufacturing, assembly, testing and packaging of our development system hardware products are performed by outside contractors. Although our 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 to manufacture and assemble our products would have a material adverse effect on our operating results. Furthermore, the risks of earthquakes or power shortages and economic risks, such as extreme currency fluctuations, adverse changes in tax laws, tariff or freight rates or interruptions in air transportation, could have a material adverse effect on our operating results. BACKLOG Our backlog of released orders as of December 31, 2000 was approximately $510.8 million as compared to approximately $309.4 million at December 31, 1999. Our backlog consists of original equipment manufacturer, or 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. We produce standard products that may be shipped from inventory within a short time after receipt of an order. Our business has been characterized by a high percentage of orders with near-term delivery schedules. At times, due to high demand and supply constraints in certain products, lead times can lengthen, causing an increase in backlog. However, orders constituting our 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, and we defer recognition of revenue on shipments to distributors until the product is resold to the end customer. Historically, backlog has been a poor predictor of future customer demand. For all of these reasons, backlog as of any particular date should not be used as a predictor of sales for any future period. Effective January 1, 2001, our policy for determining backlog will change from a six-month period for OEM customer-release orders to a three-month period. We do not expect that this change will have a material effect on our backlog, as our distributor orders accounted for over 98% of our backlog as of December 31, 2000. RESEARCH AND DEVELOPMENT Our total research and development activities have focused primarily on general-purpose programmable logic devices and on the associated development software and hardware. We have developed these related products in parallel to provide software support to customers upon device introduction. As a result of our research and development efforts, we have introduced a number of new PLD families, such as the FLEX 10KE, FLEX 10KA, MAX 3000A, MAX 7000A, MAX 7000B, APEX 20K, APEX 20KE, APEX 20KC and ACEX 1K device families. We have also redesigned a number of our products to accommodate their manufacture on new wafer fabrication processes. In 2001, we also released the Quartus II development tool, which is our fourth-generation software. Additionally, we typically release new versions of our proprietary software on a quarterly basis. Our research and development expenditures were $178.7 million in 2000, $86.1 million in 1999 and $59.9 million in 1998. Excluding a $6.3 million one-time charge for acquired in-process research and development, our research and development expenditures in 2000 were $172.4 million. We have not capitalized research and development or software costs to date. We intend 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, we cannot assure you that these products will achieve significant market acceptance. If we are unable to successfully define, develop and introduce competitive new products, and enhance our existing products, our future operating results would be adversely affected. PATENTS AND LICENSES We own numerous United States patents and have additional pending United States patent applications on our semiconductor products. Although our patents and patent applications may have value in discouraging competitive entry into our market segment, we cannot assure you that any valuable new patents will be granted to us, or that our patents will provide meaningful protection from competition. We believe that our future success will depend primarily upon the technical competence and creative skills of our personnel, rather than on our patents, licenses, or other proprietary rights. We have in the past incurred, and in the future may continue to incur, litigation expenses to enforce our intellectual property rights against third parties. We cannot assure you that any such litigation would be successful or that our patents would be upheld if challenged. 7 8 In the normal course of business, we from time to time receive and make inquiries with respect to possible patent infringements. As a result of inquiries received from third parties, it may be necessary or desirable for us to obtain licenses relating to one or more of our current or future products. We cannot assure you that such licenses could be obtained, and, if obtainable, could be obtained on conditions which would not have a material adverse effect on our operating results. In addition, if patent litigation ensued, we cannot assure you 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 our product families. DIRECTORS AND EXECUTIVE OFFICERS Our directors and executive officers and their ages are as follows:
NAME AGE POSITION ---- --- -------- Rodney Smith ................. 60 Chairman of the Board of Directors John P. Daane ................ 37 President, Chief Executive Officer and Director C. Wendell Bergere ........... 55 Vice President, General Counsel and Secretary Denis Berlan ................. 50 Executive Vice President and Chief Operating Officer Erik Cleage .................. 40 Senior Vice President, Marketing John R. Fitzhenry ............ 51 Vice President, Human Resources Michael Jacobs ............... 41 Senior Vice President, Worldwide Sales Lance M. Lissner ............. 51 Senior Vice President, Business Development Nathan Sarkisian ............. 42 Senior Vice President and Chief Financial Officer Charles M. Clough(1) ......... 72 Director Michael A. Ellison(2)(3) ..... 55 Director Paul Newhagen (1) ............ 51 Director Robert W. Reed(3) ............ 54 Director and Vice Chairman of the Board of Directors Deborah D. Rieman ............ 51 Director William E. Terry(1)(2) ....... 67 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 our directors or executive officers. RODNEY SMITH has served as our Chairman of the Board of Directors since joining us in November 1983 and as our President and Chief Executive Officer from November 1983 to November 2000. Prior to November 1983, he held various management positions with Fairchild Semiconductor Corporation, a semiconductor manufacturer. JOHN P. DAANE has served as our President and Chief Executive Officer since November 2000 and as one of our directors since December 2000. Prior to joining us, Mr. Daane spent 15 years at LSI Logic Corporation, a semiconductor manufacturer, most recently as Executive Vice President, Communications Products Group. C. WENDELL BERGERE joined us in August 1995 as Vice President, General Counsel and Secretary. 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 us 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., or AMD, a semiconductor manufacturer, and by Lattice Semiconductor Corporation, a semiconductor manufacturer, in engineering management capacities. 8 9 ERIK CLEAGE joined us 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 us in May 1995 as Vice President, Human Resources. From February 1983 to May 1995, he was employed by Apple Computer, Inc., a manufacturer of personal computers, in various human resource management positions. MICHAEL JACOBS joined us in January 2000 as Senior Vice President, Worldwide Sales. From April 1997 to January 2000, Mr. Jacobs was Vice President, North American Sales at Analog Devices, Inc., a semiconductor manufacturer, and from December 1985 to April 1997, he held various management positions at National Semiconductor Corporation, a semiconductor manufacturer. LANCE M. LISSNER joined us in May 1998 as Vice President of Business Development and Investor Relations and was appointed Senior Vice President, Business Development in November 2000. Prior to that time, Mr. Lissner was a corporate officer of Measurex Corporation, a developer of computer-integrated measurement, control and information systems, where he was employed since 1973 and held various positions in sales, marketing, engineering, and business development. NATHAN SARKISIAN joined us 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 us, Mr. Sarkisian held various accounting and financial positions at Fairchild and at Schlumberger Limited, an oil field services company. CHARLES M. CLOUGH has served as one of our directors 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 was one of our authorized distributors in the United States prior to its acquisition by Arrow. 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 one of our directors since April 1984 and has been a private venture capital investor since November 2000. From October 1994 to October 2000, Mr. Ellison was the Chief Executive Officer of Steller, Inc., a distributor of electronic parts. From January 1982 to December 1992, he was a General Partner of Cable & Howse Ventures, a venture capital investment firm. PAUL NEWHAGEN, one of our co-founders, has served as one of our directors since July 1987. In March 1998, Mr. Newhagen retired from his position as our Vice President, Administration, a position he had held since December 1994. From June 1993 to November 1994, he served as a consultant to us. From 1983 to 1993, Mr. Newhagen held various management positions with us, including Vice President of Finance and Administration, Chief Financial Officer and Secretary. ROBERT W. REED has served as one of our directors since October 1994 and as our Vice Chairman of the Board of Directors since January 2001. 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, PH.D., has served as one of our directors since May 1996. Dr. Rieman currently manages a private investment fund and consults to technology start-up companies. From July 1995 to May 1999, Dr. Rieman was the President and Chief Executive Officer of CheckPoint Software Technologies, Inc., an Internet security software company. Prior to joining CheckPoint, Dr. Rieman held various executive and marketing positions with Adobe Systems Inc., a computer software company, Sun Microsystems Inc., a computer networking company, and Xerox Corp., a diversified electronics manufacturer. Dr. Rieman also serves as a director of Corning Inc. and Alchemedia Corp. WILLIAM E. TERRY has served as one of our directors since August 1994. Mr. Terry is a former director and Executive Vice President of the Hewlett-Packard Company, a diversified electronics manufacturing company. In 36 years 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. EMPLOYEES As of December 31, 2000, we had 1,947 regular employees. Our success is dependent in large part upon the continued service of our key management, technical, sales and support employees and on our ability to continue to attract and retain additional qualified employees. The competition for such employees is intense and the loss of key employees could have an adverse effect on us. 9 10 ITEM 2. PROPERTIES. Our headquarters facility is located in San Jose, California on approximately 25 acres of land, which we purchased in June 1995. The campus for the headquarters facility currently consists of four interconnected buildings totaling approximately 500,000 square feet. Design, limited manufacturing, research, marketing and administrative activities are performed in these facilities. We plan to expand our headquarters facility by constructing a fifth building totaling approximately 135,000 square feet and a multi-level garage totaling approximately 260,000 square feet. We expect to commence construction of the multi-level garage in the first quarter of 2001, followed by construction of the fifth building. In 1998, we opened our 62,000 square foot design and test engineering facility in Penang, Malaysia and, in July 2000, we began construction of a 178,000 square foot facility on adjacent land. Both properties are situated on land leased on a long-term basis from the Penang Development Corporation. We also lease on a short-term basis office facilities for our domestic and international sales management offices and our European Technology Center (UK), Toronto Technology Center and Ottawa Technology Center. We believe that our existing facilities and planned future expansions are adequate for our current and foreseeable future needs. ITEM 3. LEGAL PROCEEDINGS. We are a party to lawsuits and may in the future become a party to lawsuits involving various types of claims, including, but not limited to, unfair competition and intellectual property matters. Legal proceedings tend to be unpredictable and costly and may be affected by events outside of our control. We cannot assure you that litigation will not have an adverse effect on our financial position or results of operations. Our major litigation matters as of December 31, 2000 are described below. In June 1993, Xilinx, Inc. sued us for monetary damages and injunctive relief based on our alleged infringement of certain patents held by Xilinx. In June 1993, we sued Xilinx for monetary damages and injunctive relief based on Xilinx's alleged infringement of certain patents held by us. In April 1995, we 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 our patents. In May 1995, Xilinx counter-claimed against us in Delaware, asserting defenses and seeking monetary damages and injunctive relief based on our alleged infringement of certain patents held by Xilinx. Subsequently, the Delaware case was 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 our suit, the court granted that one of our patents is invalid, granted that one patent is not infringed, and granted another patent is not literally infringed but denied non-infringement under the doctrine of equivalence. In October and November 2000, Xilinx's suit went to trial and Xilinx withdrew its claim against our MAX 5000, MAX 7000 and MAX 9000 family products. Upon completion of trial, the jury rendered a verdict that our FLEX 8000 family products infringe the two Xilinx patents and that the patents are valid. We have filed post trial motions to overturn the verdicts or to seek a new trial. In a press release dated November 17, 2000, Xilinx announced it will seek an injunction against us to stop all shipments of our "FLEX product" and our "derivative programmable logic devices" that Xilinx claims infringe the two Xilinx patents. The court ordered continued mediation following the jury verdict. Due to the nature of the litigation with Xilinx and because the Xilinx lawsuit has not yet reached the damages trial stage, our management cannot estimate the total expense, the possible loss, if any, or the range of loss that we may ultimately incur in connection with the verdict. Our management cannot ensure that Xilinx will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of our products, including but not limited to our FLEX 8000 family products, or succeed in invalidating our other patents. Although we cannot make any assurances as to the results of these cases, we believe that the jury verdict is in error and intend to pursue our post trial motions with the court to reverse the verdict and will file an appeal if our motions are denied. We continue to believe that we have meritorious defenses to the claims asserted in the Xilinx suit and intend to continue to defend ourselves vigorously in this matter. The foregoing is a forward-looking statement subject to the risks and uncertainties of the legal proceedings, including events occurring during the post trial motions and appeals outside of our control and unpredictability as to its ultimate outcome. In May 2000, we sued Xilinx, seeking monetary damages and injunctive relief based on Xilinx's alleged infringement of certain patents held by us. In July 2000, Xilinx filed a counterclaim against us alleging infringement of certain patents held by Xilinx. The court has issued an order setting the claim construction hearing for our claims in April 2001. Due to the nature of the litigation with Xilinx and because the lawsuit is still in the pre-trial stage, our management cannot estimate the total expenses, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the counterclaim allegations. Although we cannot make any assurances as to the results of this case, we believe that we have meritorious defenses to Xilinx's counterclaim and intend to pursue our claims and defend ourselves vigorously in this matter. The foregoing is a forward-looking statement subject to risks and uncertainties of the legal proceeding, including events occurring during litigation proceedings outside of our control and unpredictability as to its ultimate outcome. In November 2000, Xilinx filed a complaint against us with the International Trade Commission, or ITC, to bar us from importing or selling products into the United States that Xilinx asserts infringe three Xilinx patents not previously asserted. Xilinx also requested a permanent cease and desist order and other penalties, as the ITC may deem appropriate. The ITC has commenced an investigation based on Xilinx's complaint. Due to the nature of the litigation with Xilinx and because the lawsuit is still in the pre-trial stage, our management cannot estimate the total expenses, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the claim allegations. 10 11 Although we cannot make any assurances as to the results of this case, we believe that we have meritorious defenses to Xilinx's claims and intend to defend ourselves vigorously in this matter. The foregoing is a forward-looking statement subject to risks and uncertainties of the legal proceeding, including events occurring during litigation proceedings outside of our control and unpredictability as to its ultimate outcome. In August 1994, Advanced Micro Devices, Inc., or AMD, sued us seeking monetary damages and injunctive relief based on our alleged infringement of certain patents held by AMD. In September 1994, we answered the complaint asserting that we are licensed to use the patents which AMD claims are infringed and filed a counterclaim against AMD alleging infringement of certain patents held by us. In October 1997, upon completion of trials bifurcated from the infringement claims, the District Court ruled that we are licensed under all patents asserted by AMD in the suit. In December 1997, AMD filed a Notice of Appeal of the District Court's rulings. In April 1999, the Federal Circuit Court ruled in AMD's favor on its appeal, finding that we are not licensed to AMD's patents, and remanded the case back to the District Court for further proceedings. In 1999, Lattice Semiconductor Corporation entered into an agreement with AMD that includes assuming both the claims against us and the claims against AMD and has replaced AMD in the suit with Vantis, a wholly owned subsidiary of Lattice. Due to the nature of the litigation, our 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. We cannot ensure that Lattice will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of the Classic(TM), MAX 7000, FLEX 8000, MAX 9000 and FLEX 10K product families, or succeed in invalidating any of our patents remaining in the suit. Although we cannot make any assurances as to the results of this case, we intend to pursue our claims and defend ourselves vigorously in this matter. The foregoing is a forward-looking statement subject to risks and uncertainties of the legal proceeding, including the events occurring during litigation proceedings outside of our control and unpredictability as to its ultimate outcome. In May 2000, we sued Lattice seeking monetary damages and injunctive relief based on Lattice's alleged infringement of certain patents held by us. In July 2000, Lattice filed a counterclaim against us alleging infringement of certain patents held by Lattice. Due to the nature of the litigation with Lattice and because the lawsuit is still in the pre-trial stage, our management cannot estimate the total expenses, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the counterclaim allegations. Although we cannot make any assurances as to the results of this case, we intend to pursue our claims and defend ourselves vigorously in this matter. The foregoing is a forward-looking statement subject to risks and uncertainties of the legal proceeding, including events occurring during litigation proceedings outside of our control and unpredictability as to its ultimate outcome. In November 1999, we sued Clear Logic Inc. alleging that Clear Logic is unlawfully appropriating our registered mask work technology in violation of the federal mask work statute and that Clear Logic has unlawfully interfered with our relationships and contracts with our customers. The lawsuit seeks compensatory and punitive damages and an injunction to stop Clear Logic from unlawfully using our mask work technology and from interfering with our customers. Clear Logic has answered the complaint by denying that it is infringing our mask work technology and denying that it has unlawfully interfered with our relationships and contracts with our customers. Clear Logic has also filed a counterclaim against us for unfair competition under California law alleging that we have made false statements to our customers regarding Clear Logic. Due to the nature of the litigation with Clear Logic and because the lawsuit is still in the pre-trial stage, our management cannot estimate the total expenses, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the counterclaim allegations. Although we cannot make any assurances as to the results of this case, we intend to pursue our claims and defend ourselves vigorously in this matter. The foregoing is a forward-looking statement subject to risks and uncertainties of the legal proceeding, including events occurring during litigation proceedings outside of our control and unpredictability as to its ultimate outcome. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 11 12 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 our 2000 Annual Report to Stockholders for the year ended December 31, 2000, or the 2000 Annual Report, are incorporated herein by reference. We believe factors such as quarter-to-quarter variances in financial results, announcements of new products, new orders and order rate variations by us or our competitors could cause the market price of our 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 our common stock. ITEM 6. SELECTED FINANCIAL DATA. The section entitled "Selected Consolidated Financial Data" in our 2000 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following Management's Discussion and Analysis of Consolidated Financial Condition and Consolidated Results of Operation, as well as information contained elsewhere in this Report, contains statements that constitute "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. These statements include statements regarding the intent, belief or current expectations of us, our directors or our officers with respect to, among other things: (1) the ability of our product offerings to compete in the ASIC market, (2) the competitive advantages of our products, (3) the outcome of current litigation in which we are involved and (4) the expected success of our new product lines. The success of our business operations is, in turn, dependent on factors such as market acceptance of our current and future products, our ability to timely and continually introduce new products and make our current products better, the ability of our subcontractors to manufacture, assemble, test and ship products efficiently and on a timely basis, our ability to obtain sufficient quantities of wafers to meet demand, general competitive conditions within the semiconductor industry and general economic conditions as set forth under "Future Events; Risk Factors" below and elsewhere in this Report. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties and actual results may differ materially from those projected in the forward-looking statements as a result of various factors. OVERVIEW We design, manufacture and market high-performance, high-density, programmable logic devices and associated computer aided engineering logic development tools. Programmable logic devices are semiconductor chips that may be programmed on-site, using software tools that run on personal computers or engineering workstations. User benefits include ease of use, lower risk and fast time-to-market. Our CMOS-based programmable logic devices address high-speed, high-density and low-power applications in the telecommunications, data communications, computer peripheral and industrial markets. FLEX and APEX products are our SRAM-based line of embedded array programmable logic devices, and MAX products are our line of EEPROM- and EPROM-based macrocell programmable logic devices. We classify our products into the following categories. All prior year data have been restated to reflect the following compositions: - New products consist of APEX 20KE, APEX 20KC, MAX 7000B, ACEX 1K, Excalibur families - Mainstream products include MAX 7000A, MAX 3000A, FLEX 6000, FLEX 10KA, FLEX 10KE, APEX 20K families - Mature and other products include Classic, MAX 5000, MAX 7000, MAX 7000S, MAX 9000, FLEX 8000, FLEX 10K and FLASHlogic(R) families, Tools, MPLDs, configuration devices and Northwest Logic design services In general, customers prefer products with lower supply voltages because they use less power and dissipate less heat, normally resulting in lower overall system cost. Lower supply voltages result from more advanced fabrication processes and yield higher performance at a lower cost. Thus, supply voltage correlates with product maturity: lower supply voltages represent newer products. 12 13 RESULTS OF OPERATIONS SALES | Sales were $1,376.8 million in 2000, $836.6 million in 1999 and $654.3 million in 1998. Sales increased 64.6% in 2000 from 1999 and 27.9% in 1999 from 1998. Increases in sales, in both years, were primarily due to higher unit sales in all product categories. The increases in sales were partially offset by decreases in average unit selling prices. Sales of New products, which began shipping during the fourth quarter of 1999, were $52.1 million in 2000 and marginal in 1999. Sales of Mainstream products were $656.1 million, 158.8% higher than 1999 sales of $253.6 million. Sales of Mature and other products were $668.6 million, 14.7% higher than 1999 sales of $583.0 million. As a percentage of sales, New products, mostly introduced in 2000, represented 3.8% of sales in 2000. Mainstream products represented 47.6% of sales in 2000 as compared to 30.3% in 1999 and 12.1% in 1998. Mature and other products represented 48.6% of sales in 2000 as compared to 69.7% in 1999 and 87.9% in 1998. Our 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 us to produce these products at a lower cost than previous generations of products. Consistent with their lower cost structure, we have priced these products at a significant discount to our more mature products in order to stimulate demand and broaden the appeal of programmable logic. As a result, we experienced a shift in customer demand to our newer, lower-priced offerings from the more mature products. New and Mainstream products were 51.4% of total sales in 2000 as compared to 30.3% in 1999 and 12.1% in 1998. Our management believes that lower prices on our newer product families will enable our product offering to compete more favorably with gate array and standard cell technologies, which represent significant market opportunities. During 2000, additional unit sales more than offset the lower selling prices and our management believes that over time this will continue, but we cannot assure you that this will occur. In 2000, unit sales of Mainstream products increased 284.6%, while average unit selling prices decreased 32.7%. In October 1999, we sold to Cypress Semiconductor Corporation the exclusive right to manufacture, market and sell our MAX 5000 programmable logic device product family and our equity interest in Cypress Semiconductor (Texas), Inc. We recorded a pre-tax gain of $10.3 million. The sale of the MAX 5000 family did not materially affect our fiscal year 2000 revenues. Excluding the MAX 5000 product family, sales grew 66.5% in 2000 and 29.8% in 1999. Year over Year Sales Growth by Product Category:
Years Ended December 31, ------------------------ 2000 1999 - ------------------------------------------------------- New N/A N/A Mainstream 158.8% 221.5% Mature and other 14.7% 1.3% Total 64.6% 27.9%
Customer Sectors During 2000, we experienced strong sales in the communications market segment driven primarily by the networking and telecommunications sectors. The communications market segment represented 67.2% of our business in 2000 as compared to 66.3% in 1999 and 64.0% in 1998. The electronic data processing market segment was 17.3% of sales in 2000 as compared to 15.8% in 1999 and 17.4% in 1998. The industrial market segment was 10.4% percent of sales in 2000 as compared to 11.4% in 1999 and 12.2% in 1998. The consumer market segment was 2.0% in 2000 as compared to 3.0% in 1999 and 2.8% in 1998, and other markets were 3.1% in 2000 as compared to 3.5% in both 1999 and 1998. Our management believes that future revenue growth will be driven by product demand in the communications market segment, but we cannot assure you that this will occur. Geographic Areas North America sales were $786.8 million in 2000, 67.6% higher than 1999 sales of $469.4 million. International sales included sales in Europe, Japan and Asia Pacific and were $590.0 million in 2000, 60.7% higher than $367.2 million in 1999. During 2000, sales in Europe were $300.2 million, an increase of 87.6% from $160.0 million in 1999. In Japan, sales were $206.9 million, an increase of 30.6% from $158.5 million in 1999 and sales in Asia Pacific were $82.9 million, an increase of 70.1% from $48.7 million in 1999. 13 14 In 1999, North America sales grew 30.8% from 1998, while sales in Europe grew 7.1%, Japan grew 33.9% and Asia Pacific grew 75.9%. Sales for 1999 in total grew 27.9% primarily due to strength in North American and Japanese networking and telecommunications sectors. As a percentage of total sales, sales in North America, Europe and Asia Pacific increased, while sales in Japan declined in 2000 compared to 1999. North America sales increased to 57.1% of sales from 56.1% in 1999 and 54.9% in 1998, Europe increased to 21.8% from 19.1% in 1999 and was 22.8% in 1998, Asia Pacific increased to 6.0% from 5.8% in 1999 and 4.2% in 1998, while Japan decreased to 15.1% from 19.0% in 1999 and 18.1% in 1998. Year over Year Sales Growth by Geographic Area:
Years Ended December 31, ------------------------ 2000 1999 - ---------------------------------------------------------- North America 67.6% 30.8% Europe 87.6% 7.1% Japan 30.6% 33.9% Asia Pacific 70.1% 75.9% Total International 60.7% 24.3% Total 64.6% 27.9%
Major items in the statements of operations, expressed as a percentage of sales, were as follows:
Years Ended December 31, -------------------------- 2000 1999 1998 - ------------------------------------------------------------------------------------------ Cost of sales 33.9% 36.0% 38.1% Gross margin 66.1% 64.0% 61.9% Total research and development expenses 13.0% 10.3% 9.1% Selling, general and administrative expenses 15.2% 17.1% 17.3% Income from operations 37.9% 36.6% 35.5% Gain on sale of WaferTech 12.9% -- -- Interest and other income, net 3.4% 4.4% 1.9% Provision for income taxes 17.9% 13.3% 12.1% Net income 36.1% 26.8% 23.6%
GROSS MARGIN | Gross margin, as a percentage of sales, was 66.1% in 2000, 64.0% in 1999 and 61.9% in 1998. The increases in gross margin were primarily attributable to cost reductions as a result of manufacturing process improvements. Yields on newer, lower voltage products continued to improve for the year ended December 31, 2000. This includes improvements in the APEX 20K, APEX 20KE, FLEX 10KE and FLEX 10KA product families. We continue to spend a significant amount of financial resources to improve production yields on both new and established products. Difficulties in production yields can occur when we begin production of new products, transition to new processes or when our principal wafer supplier, TSMC, moves production of a product from one manufacturing plant to another. These difficulties can potentially result in significantly higher costs and lower product availability. For example, from the fourth quarter of 1999 through the first half of 2000, process control issues associated with WaferTech's volume ramp up resulted in low die yields on FLEX 10KA and FLEX 10KE products leading to reduced product availability in these families. As a result, we were unable to support distributor stocking at desired levels and in some cases could not meet end customer demand. Our management expects to continue to introduce new and established products using new process technologies and may encounter similar start-up difficulties during the transition to such process technologies. Further, production throughput times vary considerably among our wafer suppliers, and we may experience delays from time to time in processing some of our products which also may result in higher costs and lower product availability. RESEARCH AND DEVELOPMENT EXPENSES | Research and development expenses for the year ended December 31, 2000 were $178.7 million, or 13.0% of sales, compared to $86.1 million, or 10.3% of sales in 1999 and $59.9 million, or 9.1% of sales in 1998. For the year ended December 31, 2000, excluding the $6.3 million one-time acquired in-process research and development charge, research and development expenses were $172.4 million, or 12.5% percent of sales. Historically, the level of research and development expenses as a 14 15 percentage of sales has fluctuated in part due to the timing of the purchase of masks and wafers used in the development of new products. We expect that, in the long term, research and development expenses will increase in absolute dollars primarily due to our efforts to develop new products. Research and development expenses include expenditures for labor, masks, prototype wafers, the amortization of deferred stock-based compensation resulting from acquisitions, and expenses for the development of process technology, new packages, and software to support new products and design environments. Excluding the one-time charge, research and development expenses increased $86.3 million, or 100.2% in 2000 and $26.2 million, or 43.7% in 1999. The increases in absolute dollars were primarily a result of increased headcount, additional spending on masks, prototype wafers, package development and the development of our Quartus software and Excalibur embedded processor solutions. During 2000, we recorded deferred stock-based compensation of $41.3 million for the acquisitions of DesignPRO Inc. and Right Track CAD Inc. which is being amortized to research and development expense over a period of two to four years. Amortization of deferred stock-based compensation included in research and development expenses was $8.3 million for the year ended December 31, 2000. We expect to continue to make significant investments in the development of APEX 20K, APEX 20KE, APEX 20KC, Quartus software, Excalibur embedded processor solutions and future products. During the first quarter of 1999, we shipped APEX 20K, a new family of devices, and Quartus, our new fourth generation software design tool. During the fourth quarter of 1999, we began shipping our APEX 20KE family of devices. The rollout of the 1.8-volt APEX 20KE product family progressed further during the second quarter of 2000, during which time we began shipping four new devices including the APEX EP20K1500E, the highest density programmable device available in commercial quantities. The APEX 20KE family offers advanced features over the APEX 20K family including lower power consumption, faster performance, expanded I/O support and smaller die sizes. APEX 20K and APEX 20KE devices utilize a new architecture for programmable logic and address higher density designs. APEX 20K and APEX 20KE devices are supported exclusively by our Quartus software. Also during the second quarter of 2000, we announced our new Excalibur embedded processor solutions. Excalibur solutions combine programmable logic, memory and a processor core, allowing users to integrate an entire system on a single programmable logic device. These solutions provide programmable flexibility and system-level integration while bringing advanced processor technology to the broad marketplace. Furthermore, during the fourth quarter of 2000 and the first quarter of 2001, we released upgraded versions of our Quartus software which provide improved place-and-route technology and enhanced device support. Our management expects APEX 20K and APEX 20KE devices, Quartus software and Excalibur solutions to be successful in the marketplace; however, the commercial success of these products depends on market acceptance of the use of APEX 20K and APEX 20KE devices in high-density designs, as well as the acceptance of the Quartus design software and Excalibur solutions. We cannot assure you that any of our products will achieve market acceptance. We also continue to focus our efforts on the development of new programmable logic chips, related development software and hardware and advanced semiconductor wafer fabrication processes. However, we cannot assure you that we will accomplish our goals in the development and subsequent introduction of new products and manufacturing processes. Also, we cannot assure you that our new products will achieve market acceptance, that the new manufacturing processes will be successful, or that our suppliers will provide us with the quality and quantity of wafers and materials that we require. We must continue to develop and introduce new products in a timely manner to help counter the semiconductor industry's historical trend of declining prices as products mature. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | Selling, general and administrative expenses for the year ended December 31, 2000 were $210.0 million, or 15.2% of sales, compared to $143.2 million, or 17.1% of sales in 1999 and $113.2 million, or 17.3% of sales in 1998. Although total selling, general and administrative expenses increased, they decreased as a percentage of sales because of strong revenue growth. 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. Selling, general and administrative expenses also include costs related to the direct sales force and field application engineers who work in over forty field sales offices worldwide and stimulate demand by assisting customers in the use and proper selection of our products. The customers then work with our distributors for order fulfillment and logistical requirements, as over 95% of our sales are made through distributors. Our management 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. Selling, general and administrative expenses increased $66.8 million, or 46.6% in 2000 and $30.0 million, or 26.5% in 1999. The increases in absolute dollars were mainly driven by increased headcount for sales, marketing and administration personnel, higher advertising and legal expenses, and higher commission and incentive expenses associated with increased sales. IN-PROCESS RESEARCH AND DEVELOPMENT | During 2000, we recorded a non-recurring charge of $6.3 million to in-process research and development related to the purchase of DesignPRO and Right Track. We determined this non-recurring charge using valuation techniques generally used by appraisers in the high-technology industry. We immediately expensed this non-recurring charge in the period of acquisition because technological feasibility had not been established and no alternative use had been identified. See Note 5. 15 16 INCOME FROM OPERATIONS | Income from operations was $521.2 million, or 37.9% of sales, for the year ended December 31, 2000 compared to $306.0 million, or 36.6% of sales in 1999 and $231.8 million, or 35.5% of sales in 1998. The year over year increases in operating income, as a percentage of sales, were primarily due to improvements in gross margin and a decrease in selling, general and administrative expenses, partially offset by increased research and development expenses. INTEREST AND OTHER INCOME, NET | Interest and other income was $46.1 million, or 3.4% of sales for the year ended December 31, 2000 compared to $37.1 million, or 4.4% of sales in 1999 and $12.3 million, or 1.9% of sales in 1998. For the year ended December 31, 1999, interest and other income included a one-time pre-tax gain of $10.3 million from the sale of the MAX 5000 family and our equity interest in Cypress Semiconductor (Texas), Inc. Excluding the one-time gain, interest and other income was $26.8 million, or 3.2% of sales. Excluding the one-time gain, the increase from 1999 to 2000, in both absolute dollars and as a percentage of sales, was primarily due to the increase in interest income related to higher investment balances and higher interest rates. Interest and other income consists mainly of interest income on investments in high-quality fixed income securities. In 1998, interest and other income included interest expense related to the convertible subordinated notes issued in June 1995 that was comprised of interest expense and amortization of debt issuance costs, net of capitalized interest related to the construction of our new headquarters. In June 1998, the subordinated notes were converted into common stock resulting in a decrease in interest expense during that year. No interest expense has been incurred since the conversion. PROVISION FOR INCOME TAXES | Our effective tax rate was 33.2% in 2000 and 32.5% in 1999 and 1998. Excluding the one-time gain on the sale of WaferTech, which was taxed at our marginal rate, our effective tax rate for 2000 was 31.0%. The reduction of the effective tax rate, excluding the one-time gain, primarily resulted from a change in the geographic source of income. EQUITY INVESTMENT | In June 1996, we formed WaferTech, LLC, a joint venture company, with TSMC and several other partners to build and operate a wafer manufacturing plant in Camas, Washington. In return for a $140.4 million cash investment, we received an 18% equity ownership in WaferTech and certain obligations and rights to procure up to 27% of WaferTech's output at market prices. In January 1999, we purchased from Analog Devices, Inc. an additional 5% equity ownership interest in WaferTech for approximately $37.5 million, increasing our ownership interest to 23%. This increased investment in WaferTech provided us with additional obligations and rights to procure up to 35% of WaferTech's future output. In October 1999, the partners in WaferTech contributed $100.0 million in additional equity to support capital expansion plans and working capital requirements of WaferTech. Our share of that contribution was $23.0 million; we maintained our same ownership interest and rights to acquire WaferTech's output. We accounted for our investment under the equity method based on our ability to exercise significant influence over WaferTech's operating and financial policies. On December 27, 2000, we sold our 23% ownership interest in WaferTech to a subsidiary of TSMC for $350.4 million in cash. The one-time pre-tax gain on the sale of WaferTech was $178.1 million. For the year ended December 31, 2000, our equity in the loss of WaferTech was $1.4 million as compared to a loss of $7.6 million in 1999 and $10.4 million in 1998. WaferTech began production of silicon wafers in October 1998 and achieved volume production in 1999. In past years, WaferTech had experienced lower than forecast production yields resulting in lower than forecast output. During the year ended December 31, 2000, WaferTech's production volumes and yields increased over the prior year and met our targeted levels. Although we sold our equity interest in WaferTech in December 2000, we expect to continue utilizing WaferTech as one of our suppliers of silicon wafers. FUTURE RESULTS; RISKS FACTORS | In addition to other information contained elsewhere in this Report, the following important factors, among others, have affected and, in the future, could affect, our actual results of operations and could cause our actual results to differ materially from those expressed in forward-looking statements made by us. Our financial results depend on our ability to compete successfully in the highly competitive semiconductor industry. Our industry is intensely competitive. Future operating results will depend on our ability to develop, manufacture and sell complex semiconductor components and programming software that offer customers greater value than solutions offered by competing vendors. We may not succeed in developing, manufacturing or selling competitive products. We are developing programmable chips for applications that are presently served by other ASIC vendors. Many of these vendors have substantially greater financial, technical and marketing resources than we do and have well-established market positions and a solution that has been proven technically feasible and economically competitive over several decades. We cannot assure you that we 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 from us. Moreover, our customers increasingly use standard cell technologies to achieve greater integration in their systems; this may not only impede our efforts to penetrate the ASIC market, but may also displace our products in the applications that we presently serve. 16 17 Our future success depends on our ability to define, develop and sell new products. As a semiconductor company, we operate in a dynamic market characterized by rapid product obsolescence. We continue to focus our efforts on developing new programmable logic chips, related development software and hardware and advanced semiconductor wafer fabrication processes. We cannot assure you that we will be able to continue to develop and introduce new products and manufacturing processes or that our products and processes will achieve market acceptance or be successful. If we do not successfully define, develop and introduce competitive new products and enhance existing products in response to both evolving demands of the marketplace and competitive product offerings, our future operating results could be adversely affected. We depend on independent subcontractors, located primarily in Asia, for the supply and quality of our finished silicon wafers. We depend significantly upon subcontractors to manufacture silicon wafers and assemble, test and ship product to end customers. We also depend on all of our subcontractors, and especially our principal foundry partner, TSMC, to improve process technologies in a timely manner to enhance our product designs and cost structure. Our success depends, in part, on TSMC's ability to remain successful in its highly competitive industry. Their inability to do so could have a severe negative impact on us. The vast majority of our products are manufactured and shipped to customers by subcontractors located in Asia, principally Hong Kong, Japan, Korea, Malaysia, the Philippines and Taiwan. Disruptions or adverse supply conditions arising from market conditions, political strife, labor disruptions and other factors could adversely affect our future results. Market demand for silicon wafers increased significantly through the third quarter of 2000, while supply of such wafers increased at a much slower rate. This resulted in a firmer pricing environment, less responsiveness to requests for expedited delivery by wafer suppliers, and in some cases, unsatisfied demand. In general, the lead time to increase market wafer supply by building additional wafer fabrication facilities is approximately two years and in periods where demand for wafers increases rapidly for a prolonged period, market shortages tend to occur. We believe that under circumstances of wafer scarcity it is important to have close business relationships with wafer suppliers in order to receive the desired quantity of product. We believe that we enjoy close working relationships with our principal wafer supplier, TSMC. In the latter half of 2000, business conditions changed. Our management no longer believes demand exceeds the foundry industry's ability to supply silicon wafers. Our management further believes that the foundry's ability to supply our desired quantity of silicon wafers will remain through at least the first half of 2001. However, we cannot assure you that we will succeed in securing our total desired output from TSMC or that the possibility of future wafer scarcity will not impair or prevent any future growth of our business. Natural or man-made disasters, normal process fluctuations and variances in manufacturing yields could have a severe negative impact on our operating capabilities. For example, in September 1999, a major earthquake struck Taiwan resulting in widespread physical damage and loss of life. The earthquake halted wafer fabrication production at our primary vendor, TSMC, for several days and then only limited production began. Nearly two weeks passed before full production resumed, and a portion of the inventory in the production process was scrapped as a result of damage incurred during the earthquake. We have sought to diversify our operating risk by obtaining silicon wafers manufactured by WaferTech, located in Camas, Washington. WaferTech began production of silicon wafers in October 1998 and achieved volume production in 1999. In past quarters, WaferTech had experienced lower than forecast production yields resulting in lower than forecast output. During 2000, WaferTech's production volumes and yields increased over prior periods and met our targeted levels. Although we sold our equity interest in WaferTech in December 2000, we expect to continue utilizing WaferTech as one of our suppliers of silicon wafers. See also "Manufacturing -- Wafer Supply" in Part I of this Report for additional factors related to wafer supply that may affect our operating results. We depend on independent subcontractors for the assembly and testing of our semiconductor products. Although our 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 political strife, prolonged work stoppages or other inability to manufacture and assemble our products would have a material adverse effect on our operating results. We may be unable to adequately protect our intellectual property rights and may face significant future litigation expenses. We own numerous patents and patent applications and have technology licensing agreements giving us rights to design, manufacture and package products using certain patents owned by others. We cannot assure you that our intellectual property rights will provide meaningful protection from competition or that we will rely on such rights in developing additional products. We may be unable to adequately protect our intellectual property rights and may face significant future litigation expenses. We have in the past incurred, and in the future may continue to incur, litigation expenses to enforce our intellectual property rights against third parties. We cannot assure you that any such litigation would be successful or that our patents would be upheld if challenged. In the normal course of business, we from time to time receive and make inquiries with respect to possible patent infringements. As a result of inquiries received from third parties, it may be necessary or desirable for us to obtain licenses relating to one or more of our current or future products. We cannot assure you that such licenses could be obtained, and, if obtainable, could be obtained on conditions which would not have a material adverse effect on our operating results. In addition, if patent litigation ensued, we cannot assure you that these third parties would 17 18 not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of one or more of our product families. The results of present litigation could adversely affect our operating results. We are a party to lawsuits and may in the future become a party to lawsuits involving various types of claims, including, but not limited to, unfair competition and intellectual property matters. Legal proceedings tend to be unpredictable and costly and may be affected by events outside of our control. There is no assurance that litigation will not have an adverse effect on our financial position or results of operations. Our major litigation matters are described under Item 3 and Note 13. We depend on international sales for a significant portion of our revenue. During each of the last three years, international sales constituted nearly half of our total sales. Risks related to our foreign operations include government regulation of exports, tariffs and other potential trade barriers, adverse changes in tax laws, freight costs or interruptions in air transportation, reduced protection for intellectual property rights in some countries, and generally longer receivable collection periods. Our business is also subject to the risks associated with the imposition of legislation and regulations relating specifically to the import or export of semiconductor products. We cannot predict whether quotas, duties, taxes or other charges or restrictions will be imposed by the United States or other countries upon the importation or exportation of our products in the future or what, if any, effect such actions would have on our financial condition and results of operations. Our financial results are affected by the cyclical nature of the semiconductor industry. The semiconductor industry is highly cyclical. In the past, the semiconductor industry has been subject to significant downturns as a result of diminished demand for semiconductor products, general reductions in semiconductor inventory levels by customers, excess production capacity and accelerated declines in average selling prices. If these or other conditions in the semiconductor industry occur in the future, there could be an adverse effect on our operating results. Our quarterly operating results may fluctuate. Our quarterly operating results may fluctuate in the future as a result of a number of factors, including: - The cyclical nature of the semiconductor industry - The cyclical nature of demand for our customers' products - General economic conditions in the countries where we sell our products - Price competition - The timing of our and our competitors' new product introductions - Product obsolescence - The scheduling, rescheduling and cancellation of large orders by our customers - Our ability to develop new process technologies and achieve volume production at the foundries of TSMC, Sharp or WaferTech - Changes in manufacturing yields - Adverse movements in exchange rates, interest rates or tax rates - The availability of adequate supply commitments from our wafer foundries and assembly and test subcontractors Our future success depends on our ability to successfully compete with other technology firms in attracting and retaining key technical and management personnel. Our future success depends in large part upon the continued service of our key management, technical, sales and support employees and on our ability to continue to attract and retain additional qualified employees. The competition for such employees is intense and the loss of key employees could have an adverse effect on our operating results. Our stock price may be subject to significant volatility. In recent years, the stock market has experienced extreme price volatility and the price of our common stock has been subject to wide fluctuations. The overall stock market, the prices of semiconductor stocks in general and the price of our stock may continue to fluctuate greatly. We believe that factors such as quarter-to-quarter variances in financial results, announcements of new products, new orders and order rate variations by us or our competitors could cause the market price of our 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 our common stock. 18 19 NEW ACCOUNTING PRONOUNCEMENTS | In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 133, or SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes standards for accounting and reporting on derivative instruments for periods beginning after June 15, 2000. 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. In June 2000, the FASB issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities - An Amendment of SFAS No. 133." SFAS No. 138 amends the accounting and reporting standards for certain derivatives and hedging activities. Our adoption of SFAS No. 133, which became effective January 1, 2001, will not have a material effect on our financial statements. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES | During 2000, our operating activities generated net cash of $550.4 million, which was primarily attributable to net income of $496.9 million adjusted by non-cash items including an increase in income taxes payable of $240.4 million, an increase in deferred income on sales to distributors of $232.6 million, an increase in accounts payable and accrued liabilities of $73.4 million, depreciation and amortization of $40.1 million, amortization of deferred stock-based compensation of $9.8 million, a decrease in other assets of $9.4 million and the one-time write-off of $6.3 million for acquired in-process research and development. These items were partially offset by an increase in inventories of $209.3 million, an increase in deferred income taxes of $93.5 million and an increase in accounts receivable of $78.8 million. Cash from operating activities was also offset by the gain on the sale of WaferTech of $178.1 million. Total cash proceeds related to the WaferTech sale of $350.4 million was included as a cash inflow under investing activities. During 1999, our operating activities generated net cash of $402.8 million, which was primarily attributable to net income of $224.0 million adjusted by non-cash items including an increase in income taxes payable of $76.4 million, an increase in deferred income on sales to distributors of $66.4 million, an increase in accounts payable and accrued liabilities of $33.7 million, depreciation and amortization of $29.4 million, a decrease in other assets of $19.2 million, equity in loss of WaferTech of $7.6 million and a decrease in inventories of $5.4 million. These items were partially offset by an increase in accounts receivable of $34.0 million, an increase in deferred income taxes of $15.1 million and the gain on the sale of the MAX 5000 product family of $10.3 million. INVESTING ACTIVITIES | During 2000, the net cash provided by investing activities was $290.3 million, which was driven by cash proceeds of $350.4 million from the sale of our equity interest in WaferTech and net sales of short-term investments of $43.0 million. These items were partially offset by cash payments of $11.5 million for the acquisitions of DesignPRO and Right Track and the purchase of long-term investments totaling $4.0 million. In addition, we invested $87.5 million primarily in land, manufacturing and data processing equipment and software, and building improvements in our headquarters and Penang facilities. During 1999, the net cash used for investing activities was $314.9 million. We purchased $233.3 million (net) of short-term investments and made long-term investments, mainly in WaferTech, totaling $62.4 million. Additionally, we invested $29.8 million primarily for manufacturing and data processing equipment and software. These items were partially offset by proceeds of $10.7 million received from the sale of the MAX 5000 product family and our equity interest in Cypress Semiconductor (Texas), Inc. FINANCING ACTIVITIES | During 2000, the net cash used for financing activities was $508.6 million, which was driven by the repurchase of 17.1 million shares of our common stock for $555.5 million. The repurchase was partially offset by net proceeds of $39.9 million from the issuance of 8.2 million shares of our common stock to employees through various option and employee stock purchase plans. In addition, we received $7.0 million from the sale of put warrants. During 1999, the net cash used for financing activities was $54.7 million, which was driven by the repurchase of 4.3 million shares of our common stock for $87.1 million. The repurchase was partially offset by net proceeds of $29.9 million from the issuance of 10.9 million shares of our common stock to employees through various option and employee stock purchase plans. In addition, we received $2.4 million from the sale of put warrants. FINANCIAL CONDITION | Since our inception, we have used a combination of equity and debt financing and cash generated from operations to support our operating activities. As of December 31, 2000, we had $1,133.6 million of cash, cash equivalents and short-term investments available to finance our operating activities and future growth. Our management believes that capital expenditures will increase in 2001 primarily due to anticipated higher expenditures in manufacturing and data processing equipment as well as building improvements in our headquarters and Penang facilities. We believe the available sources of funds and cash we expect to generate from operations will be adequate to finance current operations, capital expenditures and common stock repurchases for at least the next year. 19 20 EMPLOYEES | The number of employees was 1,947 in 2000, 1,398 in 1999 and 1,151 in 1998, reflecting an increase of 39.3% in 2000 and 21.5% in 1999. IMPACT OF CURRENCY AND INFLATION | We purchase the majority of our materials and services in U.S. dollars, and transact our foreign sales in U.S. dollars. We have, in the past, entered into forward contracts to hedge against currency fluctuations and to meet contractual commitments denominated in foreign currencies. During 2000, we entered into a forward exchange contract to purchase Malaysian ringgit to meet a portion of our firm contractual commitments to be paid in ringgits. The contract will be settled in June 2001. We may enter into similar contracts from time to time should conditions appear favorable. Inflation has not significantly impacted our financial results. As of December 31, 1999, we had no open foreign exchange contracts for the purchase or sale of foreign currencies. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our investment portfolio consisted of fixed income securities of $1,028.8 million as of December 31, 2000 and $776.5 million as of December 31, 1999. 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, 2000 and December 31, 1999, the decline in the fair value of the portfolio would not be material. Additionally, we have the ability to hold our fixed income investments until maturity and, therefore, we would not expect to recognize an adverse impact on income or cash flows. We have international subsidiaries and branch operations and are, therefore, subject to foreign currency rate exposure. To date, our exposure to exchange rate volatility has not been significant. If foreign currency rates fluctuate by 10% from rates at December 31, 2000 and December 31, 1999, our financial position and results of operations would not be materially affected. However, we cannot assure you there will not be a material impact in the future. 20 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE Consolidated Balance Sheets at December 31, 2000 and 1999 22 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 23 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 24 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 25 Notes to the Consolidated Financial Statements 26 Report of Independent Accountants 39 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 40
21 22 CONSOLIDATED BALANCE SHEETS
December 31, ----------------------------- (In thousands, except par value amount) 2000 1999 - ----------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 496,385 $ 164,257 Short-term investments 637,224 681,409 ----------------------------- Total cash, cash equivalents and short-term investments 1,133,609 845,666 Accounts receivable, less allowance for doubtful accounts of $5,998 and $6,865, respectively 168,940 90,101 Inventories 273,562 64,027 Deferred income taxes 178,750 84,747 Other current assets 14,498 22,344 ----------------------------- Total current assets 1,769,359 1,106,885 Property and equipment, net 207,858 155,217 Investments and other assets 26,917 177,497 ----------------------------- $ 2,004,134 $ 1,439,599 ============================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 86,409 $ 32,272 Accrued liabilities 26,992 26,758 Accrued compensation 46,144 25,301 Deferred income on sales to distributors 460,314 227,760 Income taxes payable 136,345 9,435 ----------------------------- Total current liabilities 756,204 321,526 ----------------------------- Commitments and contingencies (See Notes 8 and 13) Stockholders' equity: Common stock; $.001 par value; 700,000 shares authorized; 389,265 and 397,260 shares issued and outstanding, respectively 389 397 Capital in excess of par value 389,184 326,241 Retained earnings 908,196 791,435 Deferred stock-based compensation (49,101) -- Accumulated other comprehensive loss (738) -- ----------------------------- Total stockholders' equity 1,247,930 1,118,073 ----------------------------- $ 2,004,134 $ 1,439,599 =============================
See accompanying notes to consolidated financial statements. 22 23 CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, ------------------------------------------ (In thousands, except per share amounts) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- Sales $1,376,815 $ 836,623 $ 654,342 Cost of sales 466,994 301,322 249,474 ------------------------------------------ Gross margin 909,821 535,301 404,868 Research and development expenses 172,373 86,065 59,864 Selling, general and administrative expenses 209,979 143,214 113,161 Acquired in-process research and development expense 6,305 -- -- ------------------------------------------ Income from operations 521,164 306,022 231,843 Gain on sale of WaferTech, LLC 178,105 -- -- Interest and other income, net 46,145 37,055 12,340 ------------------------------------------ Income before income taxes and equity investment 745,414 343,077 244,183 Provision for income taxes 247,107 111,499 79,356 Equity in loss of WaferTech, LLC 1,400 7,584 10,440 ------------------------------------------ Net income $ 496,907 $ 223,994 $ 154,387 ========================================== Per share: Basic net income per share $ 1.25 $ 0.57 $ 0.41 Diluted net income per share $ 1.19 $ 0.54 $ 0.39 Shares used in computing per share amounts: Basic 396,849 396,158 373,972 Diluted 416,629 414,928 406,356
See accompanying notes to consolidated financial statements. 23 24 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ----------------------------------------- (In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 496,907 $ 223,994 $ 154,387 Adjustments to reconcile net income to net cash provided by operating activities: Equity in loss of WaferTech, LLC 1,400 7,584 10,440 Gain on sale of WaferTech, LLC (178,105) -- -- Gain on sale of MAX 5000 product family -- (10,275) -- Depreciation and amortization 40,065 29,416 30,038 Write-off of acquired in-process research and development 6,305 -- -- Amortization of deferred stock-based compensation 9,764 -- -- Deferred income taxes (93,531) (15,103) (6,568) Changes in assets and liabilities: Accounts receivable, net (78,839) (33,963) (887) Inventories (209,268) 5,375 29,014 Other assets 9,449 19,232 13,446 Accounts payable and accrued liabilities 73,361 33,671 (7,113) Deferred income on sales to distributors 232,554 66,425 32,892 Income taxes payable 240,353 76,423 14,420 ----------------------------------------- Cash provided by operating activities 550,415 402,779 270,069 ----------------------------------------- Cash Flows from Investing Activities: Purchases of property and equipment (87,508) (29,821) (23,950) Proceeds from sale of WaferTech, LLC 350,384 -- -- Net change in short-term investments 42,976 (233,332) (93,269) Acquisitions of DesignPRO and Right Track (11,535) -- -- Net change in other long-term investments (4,000) (1,928) 552 Investment in WaferTech, LLC -- (60,500) -- Proceeds from sale of MAX 5000 product family -- 10,700 -- ----------------------------------------- Cash provided by (used for) investing activities 290,317 (314,881) (116,667) ----------------------------------------- Cash Flows from Financing Activities: Net proceeds from issuance of common stock 39,871 29,945 15,214 Repurchase of common stock (555,453) (87,053) (60,348) Proceeds from sale of put warrants 6,978 2,438 -- ----------------------------------------- Cash used for financing activities (508,604) (54,670) (45,134) ----------------------------------------- Net increase in cash and cash equivalents 332,128 33,228 108,268 Cash and cash equivalents at beginning of year 164,257 131,029 22,761 ----------------------------------------- Cash and cash equivalents at end of year $ 496,385 $ 164,257 $ 131,029 ========================================= Cash paid during the year for: Income taxes $ 106,777 $ 45,335 $ 73,526 Interest -- -- 6,568 Supplemental disclosure of non-cash activities: Issuance of common stock and options for acquisitions 59,928 2,927 -- Conversion of subordinated debt into common stock -- -- 226,787
See accompanying notes to consolidated financial statements. 24 25 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Accumulated Number of and Capital Deferred Other Total Common In Excess of Retained Stock-based Comprehensive Stockholders' (In thousands) Shares Par Value Earnings Compensation Loss Equity - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 356,740 $ 123,633 $ 413,054 $ -- $ -- $ 536,687 Net income -- -- 154,387 -- -- 154,387 Tax benefit resulting from employee stock transactions -- 8,969 -- -- -- 8,969 Issuance of common stock 5,085 15,239 -- -- -- 15,239 Repurchase of common stock (7,240) (60,348) -- -- -- (60,348) Conversion of subordinated debt into common stock 35,955 226,787 -- -- -- 226,787 ----------------------------------------------------------------------------- Balance, December 31, 1998 390,540 314,280 567,441 -- -- 881,721 Net income -- -- 223,994 -- -- 223,994 Tax benefit resulting from employee stock transactions -- 64,101 -- -- -- 64,101 Issuance of common stock 10,934 29,945 -- -- -- 29,945 Issuance of common stock for acquisition 116 2,927 -- -- -- 2,927 Repurchase of common stock (4,330) (87,053) -- -- -- (87,053) Proceeds from sales of put warrants -- 2,438 -- -- -- 2,438 ----------------------------------------------------------------------------- Balance, December 31, 1999 397,260 326,638 791,435 -- -- 1,118,073 Components of comprehensive income: Net income -- -- 496,907 -- -- 496,907 Change in unrealized loss on available- for-sale investments, net of tax expense of $472 -- -- -- -- (738) (738) --------- Total comprehensive income -- -- -- -- -- 496,169 Tax benefit resulting from employee stock transactions -- 113,859 -- -- -- 113,859 Issuance of common stock 8,201 39,871 -- -- -- 39,871 Issuance of common stock and options for acquisitions 934 59,928 -- (41,259) -- 18,669 Deferred stock-based compensation resulting from issuance of options and restricted stock -- 17,606 -- (17,606) -- -- Amortization of deferred stock-based compensation -- -- -- 9,764 -- 9,764 Repurchase of common stock (17,130) (175,307) (380,146) -- -- (555,453) Proceeds from sales of put warrants -- 6,978 -- -- -- 6,978 ----------------------------------------------------------------------------- Balance, December 31, 2000 389,265 $ 389,573 $ 908,196 $(49,101) $ (738) $ 1,247,930 =============================================================================
See accompanying notes to consolidated financial statements. 25 26 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1: The Company Altera Corporation, referred to as "we," "us" or "our," was founded in 1983 and is incorporated in the State of Delaware. We design, manufacture and market high-performance, high-density programmable logic devices and associated computer aided engineering logic development tools. Programmable logic devices are semiconductor chips that can be programmed on-site, using software tools that run on personal computers or engineering workstations. Our CMOS-based programmable logic devices address high-speed, high-density and low-power applications in the telecommunications, data communications, computer peripheral and industrial markets. Note 2: Significant Accounting Policies BASIS OF PRESENTATION | We have a fiscal year that ends on the Friday nearest December 31st. For presentation purposes, the consolidated financial statements and accompanying notes refer to our fiscal year end as December 31st. The consolidated financial statements include our accounts as well as our wholly owned subsidiaries after elimination of all significant intercompany balances and transactions. USE OF ESTIMATES | Our 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 our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. COMMON STOCK SPLIT | On April 21, 1999, we declared a two-for-one stock split in the form of a 100 percent stock dividend to holders of record of our common stock on May 4, 1999. Dividend shares were distributed to stockholders on May 19, 1999. On July 13, 2000, we declared a two-for-one stock split in the form of a 100 percent stock dividend to holders of record of our common stock on July 26, 2000. Dividend shares were distributed to stockholders on August 10, 2000. All prior period share and income per share data have been retroactively restated to give effect to the stock splits for all periods presented. 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. The amortized cost of 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, 2000 and 1999 were comprised of the following:
December 31, ---------------------- (In thousands) 2000 1999 - ------------------------------------------------------------- Raw materials and work in process $203,681 $ 40,612 Finished goods 69,881 23,415 ---------------------- Total inventories $273,562 $ 64,027 ======================
26 27 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 three 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. Property and equipment at December 31, 2000 and 1999 was comprised of the following components:
December 31, ------------------------- (In thousands) 2000 1999 - ------------------------------------------------------------------------ Land $ 30,474 $ 20,753 Building 89,419 80,893 Equipment and software 183,315 130,016 Office furniture and fixtures 17,392 11,755 Leasehold improvements 3,190 1,623 ------------------------- Property and equipment, at cost 323,790 245,040 Accumulated depreciation and amortization (115,932) (89,823) ------------------------- Property and equipment, net $ 207,858 $ 155,217 =========================
We evaluate the recoverability of our property and equipment and intangible assets in accordance with Statement of Financial Accounting Standards No. 121, or 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 our financial instruments, including cash and cash equivalents, short-term investments, accounts receivable and accounts payable, the carrying amounts approximate fair value due to their short maturities. CONCENTRATIONS OF CREDIT RISK | Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. We place our short-term investments in a variety of financial instruments and, by policy, limit the amount of credit exposure through diversification and by restricting our investments to highly rated securities. We sell our products to distributors and OEMs throughout the world. We perform ongoing credit evaluations of our customers' financial condition and, generally, require collateral, such as letters of credit, whenever deemed necessary. On August 7, 2000, our two principal North American distributors merged as Arrow Electronics, Inc. acquired Wyle Electronics. In 2000, our two largest distributors, each of which accounted for more than 10% of total sales, accounted for 58% and 11% of sales. Prior to the merger, we had three distributors each accounting for more than 10% of total sales. In 1999, they accounted for 34%, 19% and 13% of sales, whereas in 1998, they accounted for 30%, 21% and 11% of sales. At December 31, 2000, one distributor accounted for 45% of total accounts receivable. At December 31, 1999, three distributors, each of which accounted for more than 10% of our accounts receivable, accounted for 49% of total accounts receivable in aggregate. FOREIGN EXCHANGE CONTRACTS | We purchase the majority of our materials and services in U.S. dollars and our foreign sales are billed in U.S. dollars. We have, in the past, entered into forward contracts to hedge against currency fluctuations and meet contractual commitments denominated in foreign currencies. During 2000, we entered into a forward exchange contract to purchase Malaysian ringgit to meet a portion of our firm contractual commitments to be paid in ringgits. The contract will be settled in June 2001. We may enter into similar contracts from time to time should conditions appear favorable. Inflation has not significantly impacted our financial results. As of December 31, 1999, we had no open foreign exchange contracts for the purchase or sale of foreign currencies. REVENUE RECOGNITION | We recognize revenue from product sales upon shipment to OEMs and end users. Reserves for sales returns and allowances are recorded at the time of shipment. Our sales to distributors are made under agreements allowing for returns or credits under certain circumstances. We defer recognition of revenue on sales to distributors until products are resold by the distributor to the end user. 27 28 DEPENDENCE ON WAFER SUPPLIERS | We do not directly manufacture finished silicon wafers. Our strategy has been to maintain relationships with wafer foundries. We have been successful in maintaining such relationships. See Notes 6 and 7. Although our management believes that the foundries' ability to supply our wafer needs will remain through at least the first half of year 2001, we cannot assure you that we will be able to satisfy our future wafer needs from current or alternative manufacturing sources. This could result in possible loss of sales or reduced margins. STOCK-BASED COMPENSATION PLANS | We account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, or 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 our 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. We provide additional pro forma disclosures as required under SFAS No. 123, "Accounting for Stock-Based Compensation." See Note 11. COMPREHENSIVE INCOME | We adopted Statement of Financial Accounting Standard No. 130, or SFAS No. 130, "Reporting Comprehensive Income" as of the first quarter of 1998. SFAS No. 130 establishes standards for reporting and disclosure of comprehensive income and its components. In 2000, comprehensive income, including net income and unrealized loss on available-for-sale investments, was $496.2 million. In 1999 and 1998, comprehensive income approximated net income. FOREIGN CURRENCY TRANSLATION | The U.S. dollar is the functional currency for each of our foreign subsidiaries. Assets and liabilities that are not denominated in the functional currency are remeasured into U.S. dollars and the resulting gains or losses are included in "Interest and other income, net." NEW ACCOUNTING PRONOUNCEMENTS | In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 133, or SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes standards for accounting and reporting on derivative instruments for periods beginning after June 15, 2000. 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. In June 2000, the FASB issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities - An Amendment of SFAS No. 133." SFAS No. 138 amends the accounting and reporting standards for certain derivatives and hedging activities. Our adoption of SFAS No. 133, which became effective January 1, 2001, will not have a material effect on our financial statements. 28 29 Note 3: Income Per Share Basic 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 and restricted stock. Diluted income per share reflects the dilution of potential common shares outstanding during a period. In computing diluted income per share, the tax benefit resulting from employee stock transactions, unamortized deferred stock-based compensation and the average stock price for the period are used in determining the number of shares assumed to be repurchased with the proceeds from the exercise of stock options. For the three year period ended December 31, 2000, we excluded certain stock options from the calculation of diluted income per share because they were anti-dilutive, but these options could be dilutive in the future. A reconciliation of basic and diluted income per share is presented below:
Years Ended December 31, ------------------------------------ (In thousands, except per share amounts) 2000 1999 1998 - --------------------------------------------------------------------------------------------------- Basic: Net income $496,907 $223,994 $154,387 ==================================== Weighted shares outstanding 396,849 396,158 373,972 ==================================== Net income per share $ 1.25 $ 0.57 $ 0.41 ==================================== Diluted: Net income $496,907 $223,994 $154,387 Effect of 5.75% convertible subordinated notes -- -- 4,039 ------------------------------------ Income before effect of convertible subordinated notes $496,907 $223,994 $158,426 ==================================== Weighted shares outstanding 396,849 396,158 373,972 Effect of dilutive securities: Stock options and restricted stock 19,780 18,770 16,132 5.75% convertible subordinated notes -- -- 16,252 ------------------------------------ 416,629 414,928 406,356 ==================================== Net income per share $ 1.19 $ 0.54 $ 0.39 ====================================
29 30 Note 4: Marketable Securities Our portfolio of marketable securities at December 31 consists of the following:
2000 1999 ------------------------------------------------------- ----------- Gross Gross Unrealized Unrealized (In thousands) Cost Gains Losses Fair Value Fair Value - ------------------------------------------------------------------------------------------------------------------------- Money market funds $ 46,128 $ -- $ -- $ 46,128 $ 5,919 Municipal bonds 475,025 537 (80) 475,482 485,926 U.S. government and agency obligations 133,973 208 (29) 134,152 41,011 Corporate bonds 213,847 662 (2,687) 211,822 161,319 Certificates of deposit and other debt securities 161,050 187 (8) 161,229 82,282 ------------------------------------------------------- ----------- $ 1,030,023 $ 1,594 $ (2,804) $ 1,028,813 $ 776,457 ======================================================= =========== Included in: Cash and cash equivalents $ 391,589 $ 95,048 Short-term investments 637,224 681,409 ----------- ------------ $ 1,028,813 $ 776,457 =========== ============
Our portfolio of marketable securities by contractual maturity is as follows:
December 31, -------------------------- (In thousands) 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- Due in one year or less $ 423,984 $ 250,372 Due after one year through two years 604,829 526,085 -------------------------- $ 1,028,813 $ 776,457 ==========================
At December 31, 2000, unrealized loss on securities before tax was $1.2 million. At December 31, 1999, the fair market value of securities approximated cost. Note 5: Acquisitions We completed the acquisitions of all outstanding capital stock of DesignPRO Inc., a developer and provider of intellectual property cores and custom design solutions, on April 19, 2000, Right Track CAD Inc., a developer of architectural and computer aided design tools for advanced programmable logic devices, on May 1, 2000, and Northwest Logic, Inc., a provider of system design services and intellectual property specializing in telecommunications, data communications and embedded processor systems design, on September 11, 2000. We issued 934,381 shares of our common stock and paid approximately $11.5 million in cash, net of cash acquired of $0.3 million, for all of the capital stock of DesignPRO, Right Track and Northwest Logic. In addition, we granted options to purchase 323,146 shares of our common stock in exchange for all of the stock options outstanding of DesignPRO and Right Track. The fair value of our shares issued was approximately $45.3 million and the fair value of our options granted was approximately $14.6 million. Certain shares issued were subject to our repurchase rights under certain circumstances. These rights lapse over a two to four year period. We incurred direct acquisition costs of approximately $0.4 million, which were included in the purchase price. Total consideration for the three acquisitions was $72.1 million. The acquisitions were accounted for under the purchase method of accounting. The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based in part on an independent appraisal of their respective fair values. Total consideration paid in connection with the acquisitions was attributable to the following (in thousands): 30 31
Amortization Amount Period -------------------------- Deferred stock-based compensation $ 41,259 2 to 4 years Market ready technology 21,446 3 to 6 years In-process research and development 6,305 -- Other intangible assets 2,481 3 years Tangible assets and working capital 590 -- -------- $ 72,081 ========
No supplemental pro forma information is presented due to the immaterial effect on prior period results of operations. The allocation of amounts to market ready technology and in-process research and development were consistent with widely recognized appraisal practices. Our analysis resulted in a valuation of market ready technology at $21.4 million. Market ready technology represents technologies that have reached technological feasibility, and therefore can be capitalized. We are amortizing the market ready technology on a straight-line basis over a period of three to six years. Our analysis also resulted in a $6.3 million charge to acquired in-process research and development. The acquired in-process technology represents the appraised value of technologies in the development stage that had not yet reached technological feasibility and do not have alternative future uses. We expensed this amount as a non-recurring charge upon consummation of the acquisitions. We determined the value assigned to in-process research and development by identifying research projects in areas for which technological feasibility had not been established. For both the Right Track and DesignPRO valuations, we estimated the expected cash flows from the projects once commercially viable. We then discounted the net cash flows back to their present value and applied a percentage of completion. We determined the percentage of completion using milestones representing our management's estimate of effort, value added, and degree of difficulty of the portion of each project completed as of the acquisition date, as compared to the remaining research and development to be completed to bring each project to technical feasibility. If we do not successfully develop our research projects discussed above, our sales and profitability may be adversely affected in future periods and the value of other intangible assets acquired may become impaired. Our management believes that the in-process research and development charge is valued consistently with the SEC staff's current views regarding valuation methodologies. We cannot assure you that the SEC staff will not take issue with any assumptions used in our valuation model and require us to revise the amount allocated to in-process research and development. Note 6: Joint Venture In June 1996, we formed WaferTech, LLC, a joint venture company, with TSMC and several other partners to build and operate a wafer manufacturing plant in Camas, Washington. In return for a $140.4 million cash investment, we received an 18% equity ownership in WaferTech and certain obligations and rights to procure up to 27% of WaferTech's output at market prices. In January 1999, we purchased from Analog Devices, Inc. an additional 5% equity ownership interest in WaferTech for approximately $37.5 million, increasing our ownership interest to 23%. This increased investment in WaferTech provided us with additional obligations and rights to procure up to 35% of WaferTech's future output. In October 1999, the partners in WaferTech contributed $100.0 million in additional equity to support capital expansion plans and working capital requirements of WaferTech. Our share of that contribution was $23.0 million; we maintained our same ownership interest and rights to acquire WaferTech's output. On December 27, 2000, we sold our 23% ownership interest in WaferTech to a subsidiary of TSMC for $350.4 million in cash. The one-time pre-tax gain on the sale was $178.1 million. Although we sold our equity interest in WaferTech in December 2000, we will continue to utilize WaferTech as one of our suppliers of silicon wafers. Through December 27, 2000, we accounted for our investment under the equity method based on our ability to exercise significant influence over WaferTech's operating and financial policies. Our equity in the loss of WaferTech was $1.4 million for 2000, $7.6 million for 1999, $10.4 million for 1998. 31 32 Note 7: Investments and Other Assets At December 31, 2000, our long-term investments and other assets primarily consisted of intangible assets acquired in connection with the acquisitions of DesignPRO, Right Track and Northwest Logic of approximately $21.1 million, net of $2.9 million of accumulated amortization. At December 31, 1999, our long-term investments were primarily related to our investment in WaferTech of $173.7 million. On December 27, 2000, we sold our 23% ownership interest in WaferTech. See Note 6. In 1995, we entered into several agreements with TSMC. We agreed to make a $57.1 million deposit to TSMC for future wafer capacity allocations that extended into 2000. Under the terms of the agreement, TSMC agreed to provide us with wafers manufactured using TSMC processes and according to our specifications, and we agreed to purchase and TSMC agreed to supply a specific capacity of wafers per year through 2000. Billings for actual wafers purchased from TSMC reduced the prepaid balance. The deposits were fully utilized in 2000. Note 8: Commitments We lease certain of our sales facilities under non-cancelable lease agreements expiring at various times through 2009. The leases require us 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) - ---------------------------------------------------------- 2001 $ 4,895 2002 4,490 2003 4,054 2004 2,848 2005 2,159 Thereafter 293 -------------- $ 18,739 ==============
We have the option to extend or renew most of our leases. Rental expense under all operating leases amounted to $3.5 million in 2000, $2.8 million in 1999 and $2.5 million in 1998. Note 9: Convertible Subordinated Notes In June 1995, we 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 our common stock at a price of $6.40 per share. On May 15, 1998, we called for the redemption of the notes effective June 16, 1998. As a result, substantially all of the notes were converted into 35,954,596 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 10: Stockholders' Equity In May 2000, our stockholders voted to approve an amendment to our Certificate of Incorporation to increase the number of authorized shares from 400 million to 700 million. COMMON STOCK REPURCHASES | During fiscal 1998, we repurchased a total of 7,240,000 shares of common stock for an aggregate cost of $60.3 million. During fiscal 1999, we repurchased a total of 4,330,000 shares of common stock for an aggregate cost of $87.1 million. During fiscal 2000, we repurchased a total of 17,130,000 shares of common stock for an aggregate cost of $555.5 million. As of December 31, 2000, 48,000,000 shares were authorized for repurchase. Since the inception of the repurchase program in 1996 through December 31, 2000, we have repurchased a total of 29,900,000 shares. All shares were retired upon acquisition. PUT WARRANTS | In December 1999 and June 2000, we sold put warrants to independent third parties. These put warrants entitled the holders the right to sell 2,500,000 shares of our common stock to us at specified prices on stated maturity dates. The cash proceeds from the sale of the put warrants of $7.0 million in 2000 and $2.4 million in 1999 have been included as an addition to capital in excess of par value. As of December 31, 2000, warrants for 1,500,000 shares expired unexercised while warrants for 1,000,000 shares were exercised in November 32 33 2000. We repurchased these 1,000,000 shares for an aggregate cost of $33.7 million. These shares were included in the 29,900,000 total repurchased shares, which count against the 48,000,000 shares authorized for repurchase under our common stock repurchase program. DEFERRED STOCK-BASED COMPENSATION | During 2000, we recorded aggregate deferred stock-based compensation of $41.3 million representing the value of restricted stock issued in conjunction with the acquisitions of DesignPRO and Right Track. In addition, we recorded deferred stock-based compensation of $17.6 million in conjunction with stock options and restricted stock granted to certain new employees. The restricted stock issued was subject to our repurchase rights under certain circumstances. These rights lapse over a two to four year period. At December 31, 2000, 1,260,243 shares were subject to our repurchase rights. Deferred stock-based compensation represents the difference between the grant price and the quoted market price of our stock at the date of grant. We are amortizing deferred stock-based compensation over the vesting period of two to four years. Amortization of deferred stock-based compensation was $9.8 million during 2000. Note 11: Stock-Based Compensation Plans At December 31, 2000, we had three stock-based compensation plans, which are described below. We apply APB No. 25 in accounting for our plans. STOCK OPTION PLANS | As of December 31, 2000, the 1996 Stock Option Plan had 44.0 million shares reserved for issuance and 1.8 million shares were available for future grants. The 1998 Director Stock Option Plan had 680,000 shares reserved for issuance and 445,000 shares were available for future grants. Any shares reserved for issuance under the 1987 Stock Option Plan and the 1988 Director Stock Option Plan relating to ungranted stock options were cancelled upon the adoption of the new option plans. As of December 31, 2000, under the 1987 Stock Option Plan, 9.0 million previously granted shares remained unexercised, while under the 1988 Director Stock Option Plan, 1.2 million previously granted shares remained unexercised. The 1998 Director Stock Option Plan provides for the periodic issuance of stock options to members of our Board of Directors who are not employees. Under all stock option plans, the 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. A summary of our stock option activity and related weighted average exercise prices for the years ended December 31 are as follows:
2000 1999 1998 ----------------- ---------------- ---------------- (In thousands, except price per share amounts) Shares Price Shares Price Shares Price - ----------------------------------------------------------------------------- ----------------- ---------------- Options outstanding - beginning of year 46,778 $ 9.06 50,948 $ 5.45 49,732 $ 4.79 Stock options: Granted 13,406 35.92 9,124 20.96 8,828 10.03 Exercised (7,386) 4.13 (10,276) 2.23 (4,220) 2.10 Forfeited (2,117) 17.74 (3,018) 7.39 (3,392) 6.39 ----------------- ----------------- ---------------- Options outstanding - end of year 50,681 $ 16.52 46,778 $ 9.06 50,948 $ 5.45 ================= ================= ================
2000 1999 1998 ----------------- ---------------- ---------------- (In thousands, except price per share amounts) Shares Price Shares Price Shares Price - ----------------------------------------------------------------------------- ----------------- ---------------- Options vested and exercisable at end of year 15,918 $ 5.86 15,426 $ 3.80 17,888 $ 2.50 Weighted-average fair value per share of options granted during the year $ 19.06 $10.12 $ 4.21 Weighted-average fair value per share of purchase rights granted during the year $ 14.65 $ 4.04 $ 2.53
33 34
Options Outstanding Options Exercisable ----------------------------------------------------------------- ----------------------------------------- Number Outstanding at Weighted Average Number Exercisable at Range of 12/31/00 Remaining Contractual Weighted Average 12/31/00 Weighted Average Exercise Prices (In thousands) Life (years) Exercise Price (In thousands) Exercise Price ------------------ --------------------- --------------------- ---------------- --------------------- ---------------- $ 0.01 - $ 4.80 9,029 4.03 $ 2.70 6,894 $ 2.25 $ 4.91 - $ 7.66 9,878 6.07 6.83 5,244 6.17 $ 7.70 - $ 13.02 10,701 6.80 9.96 2,663 8.87 $ 13.03 - $ 23.94 9,580 8.82 21.01 971 18.08 $ 24.03 - $ 46.22 9,336 9.57 34.51 146 28.62 $ 46.31 - $ 63.44 2,157 9.55 53.50 -- -- --------------------- --------------------- ---------------- -------------------- ---------------- 50,681 7.17 $ 16.52 15,918 $ 5.86 ===================== ===================== ================ ==================== ================
Effective January 30, 1998, we offered employees, except all officers and director-level employees, the right to reprice their stock options granted from January 1, 1995 through January 19, 1998. The repriced options have an exercise price of $8.57, the fair value of our common stock on the effective date, and the vesting schedule of such options was extended by three months. In connection with this action, approximately 5.2 million options were repriced that previously had a weighted average exercise price of $12.13. EMPLOYEE STOCK PURCHASE PLAN | As of December 31, 2000, the 1987 Employee Stock Purchase Plan had 13.7 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% of their annual base earnings withheld to purchase our common stock with a maximum of $25,000 per year. The purchase price of the stock is 85% of the lower of the closing price at the beginning or at the end of each six-month offering period. We do not recognize compensation cost related to employee purchase rights under the Plan. Sales under the Employee Stock Purchase Plan were 423,988 shares of common stock at an average price of $22.05 per share in 2000, 634,478 shares at $10.81 per share in 1999, and 886,252 shares at $7.13 per share in 1998. There were 1.3 million shares available for future purchases under the Employee Stock Purchase Plan as of December 31, 2000. We received tax benefits of $113.9 million in 2000, $64.1 million in 1999 and $9.0 million in 1998 on the exercise of non-qualified stock options and on the disposition of stock acquired by exercise of incentive stock options or through the Employee Stock Purchase Plan. PRO FORMA NET INCOME AND NET INCOME PER SHARE | 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 that significantly differ from our 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 fair value of our stock option grants and employees' purchase rights under the Employee Stock Purchase Plan, the Black-Scholes method was used with the following weighted-average assumptions and dividend yields of 0% for all years presented:
Stock Options Employees' Purchase Rights ----------------------- -------------------------- Years ended December 31, 2000 1999 1998 2000 1999 1998 - -------------------------------------------------------------------- -------------------------- Expected life from vesting date (years) 0.96 0.83 0.73 0.50 0.50 0.50 Expected stock price volatility 57.3% 53.2% 48.0% 84.6% 45.9% 56.0% Risk-free interest rate 6.2% 5.7% 5.2% 5.9% 4.5% 5.3%
Had we 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, our net income and net income per share would have been reduced to the pro forma amounts below for the years ended December 31, 2000, 1999 and 1998:
(In thousands, except per share amounts) 2000 1999 1998 - ------------------------------------------------------------------------------------------- Pro forma net income $ 440,513 $ 199,850 $ 139,986 Pro forma net income per share: Basic $ 1.11 $ 0.50 $ 0.37 Diluted 1.07 0.49 0.36
34 35 Note 12: Income Taxes U.S. and foreign components of income before income taxes were:
Years Ended December 31, -------------------------------------------- (In thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------- United States $619,032 $280,254 $207,273 Foreign 126,382 62,823 36,910 -------------------------------------------- Income before income taxes $745,414 $343,077 $244,183 ============================================
Unremitted earnings of our foreign subsidiaries that are considered permanently invested outside the United States and on which no deferred taxes have been provided, aggregate to approximately $138.5 million at December 31, 2000. The provision for income taxes consists of:
Years Ended December 31, ------------------------------------------------- (In thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------- Current tax expense: United States $ 282,547 $ 113,510 $ 62,978 State 29,454 15,365 15,488 Foreign 20,075 6,793 7,458 ------------------------------------------------- Total current tax expense 332,076 135,668 85,924 ------------------------------------------------- Deferred taxes: United States (64,892) (18,064) (1,833) State (10,481) (4,552) (1,549) Foreign (9,596) (1,553) (3,186) ------------------------------------------------- Total deferred taxes (84,969) (24,169) (6,568) ------------------------------------------------- Total provision for income taxes $ 247,107 $ 111,499 $ 79,356 =================================================
Deferred tax assets (liabilities) were as follows:
(In thousands) 2000 1999 - ----------------------------------------------------------------------------- Assets: Accrued expenses and reserves $ 179,766 $ 80,591 Acquisition costs 6,084 6,779 Other 1,235 14,676 ----------------------------- Gross deferred tax assets 187,085 102,046 Depreciation (5,032) (13,300) Deferred tax asset valuation allowance (3,303) (3,999) ----------------------------- Net deferred tax assets $ 178,750 $ 84,747 =============================
The change in deferred taxes includes $9.0 million of deferred taxes related to the investment in WaferTech. The valuation allowances of $3.3 million at December 31, 2000, and $4.0 million at December 31, 1999 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. 35 36 Our income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits associated with exercise of non-qualified stock options and disposition of stock acquired by exercise of incentive stock options or through the Employee Stock Purchase Plan. We receive an income tax benefit calculated as the tax effect of the difference between the fair market value of the stock issued at the time of exercise and the option price. These benefits were credited directly to stockholders' equity and amounted to $113.9 million in 2000, $64.1 million in 1999 and $9.0 million in 1998. The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes are as follows:
Years Ended December 31, ------------------------------------------------- (In thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------- Tax provision at U.S. statutory rates $ 260,895 $ 120,077 $ 85,464 State taxes net of federal benefit 20,872 8,920 8,061 Foreign income taxed at lower rates (24,157) (9,040) (6,830) Interest income on municipal obligations (6,878) (5,950) (5,014) Other net (3,625) (2,508) (2,325) ------------------------------------------------- Total provision for income taxes $ 247,107 $ 111,499 $ 79,356 =================================================
Note 13: Litigation We are a party to lawsuits and may in the future become a party to lawsuits involving various types of claims, including, but not limited to, unfair competition and intellectual property matters. Legal proceedings tend to be unpredictable and costly and may be affected by events outside of our control. We cannot assure you that litigation will not have an adverse effect on our financial position or results of operations. Our major litigation matters as of December 31, 2000 are described below. In June 1993, Xilinx, Inc. sued us for monetary damages and injunctive relief based on our alleged infringement of certain patents held by Xilinx. In June 1993, we sued Xilinx for monetary damages and injunctive relief based on Xilinx's alleged infringement of certain patents held by us. In April 1995, we 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 our patents. In May 1995, Xilinx counter-claimed against us in Delaware, asserting defenses and seeking monetary damages and injunctive relief based on our alleged infringement of certain patents held by Xilinx. Subsequently, the Delaware case was 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 our suit, the court granted that one of our patents is invalid, granted that one patent is not infringed, and granted another patent is not literally infringed but denied non-infringement under the doctrine of equivalence. In October and November 2000, Xilinx's suit went to trial and Xilinx withdrew its claim against our MAX 5000, MAX 7000 and MAX 9000 family products. Upon completion of trial, the jury rendered a verdict that our FLEX 8000 family products infringe the two Xilinx patents and that the patents are valid. We have filed post trial motions to overturn the verdicts or to seek a new trial. In a press release dated November 17, 2000, Xilinx announced it will seek an injunction against us to stop all shipments of our "FLEX product" and our "derivative programmable logic devices" that Xilinx claims infringe the two Xilinx patents. The court ordered continued mediation following the jury verdict. Due to the nature of the litigation with Xilinx and because the Xilinx lawsuit has not yet reached the damages trial stage, our management cannot estimate the total expense, the possible loss, if any, or the range of loss that we may ultimately incur in connection with the verdict. Our management cannot ensure that Xilinx will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of our products, including but not limited to our FLEX 8000 family products, or succeed in invalidating our other patents. Although we cannot make any assurances as to the results of these cases, we believe that the jury verdict is in error and intend to pursue our post trial motions with the court to reverse the verdict and will file an appeal if our motions are denied. We continue to believe that we have meritorious defenses to the claims asserted in the Xilinx suit and intend to continue to defend ourselves vigorously in this matter. In May 2000, we sued Xilinx, seeking monetary damages and injunctive relief based on Xilinx's alleged infringement of certain patents held by us. In July 2000, Xilinx filed a counterclaim against us alleging infringement of certain patents held by Xilinx. The court has issued an order setting the claim construction hearing for our claims in April 2001. Due to the nature of the litigation with Xilinx and because the lawsuit is still in the pre-trial stage, our management cannot estimate the total expenses, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the counterclaim allegations. Although we cannot make any assurances as to the results of this case, we believe that we have meritorious defenses to Xilinx's counterclaim and intend to pursue our claims and defend ourselves vigorously in this matter. 36 37 In November 2000, Xilinx filed a complaint against us with the International Trade Commission, or ITC, to bar us from importing or selling products into the United States that Xilinx asserts infringe three Xilinx patents not previously asserted. Xilinx also requested a permanent cease and desist order and other penalties, as the ITC may deem appropriate. The ITC has commenced an investigation based on Xilinx's complaint. Due to the nature of the litigation with Xilinx and because the lawsuit is still in the pre-trial stage, our management cannot estimate the total expenses, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the claim allegations. Although we cannot make any assurances as to the results of this case, we believe that we have meritorious defenses to Xilinx's claims and intend to defend ourselves vigorously in this matter. In August 1994, Advanced Micro Devices, Inc., or AMD, sued us seeking monetary damages and injunctive relief based on our alleged infringement of certain patents held by AMD. In September 1994, we answered the complaint asserting that we are licensed to use the patents which AMD claims are infringed and filed a counterclaim against AMD alleging infringement of certain patents held by us. In October 1997, upon completion of trials bifurcated from the infringement claims, the District Court ruled that we are licensed under all patents asserted by AMD in the suit. In December 1997, AMD filed a Notice of Appeal of the District Court's rulings. In April 1999, the Federal Circuit Court ruled in AMD's favor on its appeal, finding that we are not licensed to AMD's patents, and remanded the case back to the District Court for further proceedings. In 1999, Lattice Semiconductor Corporation entered into an agreement with AMD that includes assuming both the claims against us and the claims against AMD and has replaced AMD in the suit with Vantis, a wholly owned subsidiary of Lattice. Due to the nature of the litigation, our 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. We cannot ensure that Lattice will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of the Classic, MAX 7000, FLEX 8000, MAX 9000 and FLEX 10K product families, or succeed in invalidating any of our patents remaining in the suit. Although we cannot make any assurances as to the results of this case, we intend to pursue our claims and defend ourselves vigorously in this matter. In May 2000, we sued Lattice seeking monetary damages and injunctive relief based on Lattice's alleged infringement of certain patents held by us. In July 2000, Lattice filed a counterclaim against us alleging infringement of certain patents held by Lattice. Due to the nature of the litigation with Lattice and because the lawsuit is still in the pre-trial stage, our management cannot estimate the total expenses, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the counterclaim allegations. Although we cannot make any assurances as to the results of this case, we intend to pursue our claims and defend ourselves vigorously in this matter. In November 1999, we sued Clear Logic Inc. alleging that Clear Logic is unlawfully appropriating our registered mask work technology in violation of the federal mask work statute and that Clear Logic has unlawfully interfered with our relationships and contracts with our customers. The lawsuit seeks compensatory and punitive damages and an injunction to stop Clear Logic from unlawfully using our mask work technology and from interfering with our customers. Clear Logic has answered the complaint by denying that it is infringing our mask work technology and denying that it has unlawfully interfered with our relationships and contracts with our customers. Clear Logic has also filed a counterclaim against us for unfair competition under California law alleging that we have made false statements to our customers regarding Clear Logic. Due to the nature of the litigation with Clear Logic and because the lawsuit is still in the pre-trial stage, our management cannot estimate the total expenses, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the counterclaim allegations. Although we cannot make any assurances as to the results of this case, we intend to pursue our claims and defend ourselves vigorously in this matter. 37 38 Note 14: Segment and Geographic Information We operate 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. Our sales by major geographic area (based on destination) were as follows:
Years Ended December 31, -------------------------------------------------- (In thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------- North America: United States $ 660,590 $ 438,807 $ 336,295 Other 126,168 30,561 22,627 -------------------------------------------------- Total North America 786,758 469,368 358,922 Europe 300,229 160,027 149,391 Japan 206,958 158,513 118,342 Asia Pacific 82,870 48,715 27,687 -------------------------------------------------- Total $1,376,815 $ 836,623 $ 654,342 ==================================================
The majority of our long-lived assets were located in the United States. Long-lived assets included net property and equipment and long-term investments and other assets. Long-lived assets that were outside the United States constituted 26% of the total at December 31, 2000, and less than 10% of the total at December 31, 1999 and 1998. No single country outside of the United States constituted more than 10% of total long-lived assets for years ended December 31, 2000, 1999 and 1998. No single end customer provided more than 10% of our sales for years ended December 31, 2000, 1999 and 1998. Note 15: Employee Benefits Plans We have a plan to provide retirement and incidental benefits for our eligible employees, known as the Altera Corporation Savings and Retirement Plan, or the Plan. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax deferred salary deductions for eligible employees. Participants in the Plan may make salary deferrals of up to 20% of the eligible annual salary, limited by the maximum dollar amount allowed by the Internal Revenue Code. For every dollar deferred under the Plan, we make a matching contribution equal to 100% up to the first 5% of the salary deferred with a maximum of $1,500 per participant per year. Effective January 1, 2001, we increased the maximum limit of matching contribution from $1,500 to $2,000 per participant per year. Participants become fully vested as to the matching contribution after five years. Our contributions to the Plan were $1.3 million in both 2000 and 1999 and $1.1 million in 1998. 38 39 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP San Jose, California January 17, 2001 39 40 Supplementary Financial Data Quarterly Financial Information (UNAUDITED)
(In thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter - ---------------------------------------------------------------------------------------------------------------- 2000 Sales $272,781 $340,686 $395,395 $367,953 Gross profit 178,191 226,001 262,701 242,928 Net income 75,154 98,262 117,989 205,502 Basic net income per share 0.19 0.25 0.30 0.52 Diluted net income per share 0.18 0.23 0.28 0.50 - ---------------------------------------------------------------------------------------------------------------- 1999 Sales $186,399 $197,783 $215,121 $237,320 Gross profit 117,245 125,515 138,414 154,127 Net income 46,975 51,078 55,572 70,369 Basic net income per share 0.12 0.13 0.14 0.18 Diluted net income per share 0.11 0.12 0.13 0.17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 40 41 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information concerning our executive officers and directors required by this Item is incorporated by reference to the section in Item 1 of this Report entitled "Directors and Executive Officers." The section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The sections entitled "Executive Compensation," "Director Compensation" and "Employment Contracts and Change of Control Arrangements" in our Proxy Statement are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The section entitled "Security Ownership of Certain Beneficial Owners and Management" in our Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The sections entitled "Director Compensation" and "Certain Business Relationships" in our Proxy Statement are incorporated herein by reference. 41 42 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this Report: 1. Financial Statements The information required by this item is included in Item 8 of Part II of this Report. 2. Financial Statement Schedules. All schedules have been omitted as they are either not required, not applicable, or the required information is included in the financial statements or notes thereto. 3. Exhibits.
EXHIBIT NUMBER EXHIBIT - -------------- ------- 2.1(**) Assignment and Assumption Agreement dated as of November 15, 2000 between Registrant and TSMC Development, Inc.(14) 3.1 Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State on June 9, 2000.(12) 3.2 By-laws of the Registrant as adopted May 5, 1997 (which became the By-laws of the Registrant on June 19, 1997).(6) 4.1 Specimen copy of certificate for shares of common stock of the Registrant.(7) 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.(4) 10.4(b)+ 1987 Employee Stock Purchase Plan, and form of Subscription Agreement, as restated effective May 10, 2000.(12) 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) 10.26 Form of Indemnification Agreement entered into with each of the Registrant's officers and directors.(7) 10.33(b)+ 1988 Director Stock Option Plan and form of Outside Director Nonstatutory Stock Option Agreement restated effective May 7, 1997.(11) 10.37 LSI Products Supply Agreement with Sharp Corporation, dated October 1, 1993.(2) 10.37(a) Letter Agreement, dated August 20, 1996, by and between Registrant and Sharp Corporation, amending the LSI Product Supply Agreement, dated October 1, 1993.(11) 10.37(b) Letter Agreement, dated May 22, 1997, by and between Registrant and Sharp Corporation, amending the LSI Product Supply Agreement, dated October 1, 1993.(11) 10.37(c) Letter Agreement, dated May 22, 1998, by and between Registrant and Sharp Corporation, amending the LSI Product Supply Agreement, dated October 1, 1993.(11) #10.38+ Altera Corporation Nonqualified Deferred Compensation Plan and Trust Agreement dated February 1, 1994, and forms of Deferred Compensation Agreement. 10.39(*) Wafer Supply Agreement dated June 26, 1995 between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(3) 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.(5) 10.42(a) Amendment of Wafer Supply Agreement dated June 1, 1997 by and between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(11) 10.45(a)+ 1996 Stock Option Plan, as amended October 5, 1999 and restated as of May 10, 2000.(12) #10.45(b)+ Form of Stock Option Agreement under 1996 Stock Option Plan. 10.50 Agreement and Plan of Merger dated June 18, 1997.(6) 10.51(a)+ 1998 Director Stock Option Plan.(8) 10.51(b)+ Form of Stock Option Agreement under 1998 Director Stock Option Plan.(8)
42 43 10.53 Product Distribution Agreement with Arrow Electronics Incorporated, effective January 26, 1999.(9) 10.55+ Form of Restricted Stock Purchase Agreement.(10) 10.56(a)+ 2000 Non-Qualified Stock Option Plan No. 1.(13) 10.56(b)+ Form of Stock Option Agreement for Former Employees of Northwest Logic, Inc.(13) 10.56(c)+ Form of Stock Option Agreement for Former Founding Shareholders of Northwest Logic, Inc.(13) 10.57(a)+ Restricted Stock Purchase Agreement between the Registrant and John Daane.(15) #10.57(b)+ Severance Agreement, dated as of November 30, 2000, by and between John Daane and Registrant. #10.57(c)+ Change in Control Severance Agreement, dated as of November 30, 2000, by and between John Daane and Registrant. #11.1 Computation of Earnings per Share (included on page 29). #13.1 Annual Report to Stockholders for the fiscal year ended December 31, 2000 (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 45).
(1) Incorporated by reference to identically numbered exhibit 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 exhibit of the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993. (3) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-Q for the quarter ended June 30, 1995. (4) Incorporated by reference to identically numbered exhibit of the Registrant's Registration Statement on Form S-8 (File No. 33-61085), as amended, which became effective July 17, 1995. (5) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1995. (6) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-Q for the quarter ended June 30, 1997. (7) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1997. (8) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1998. (9) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-Q for the quarter ended March 31, 1999. (10) Incorporated by reference to identically numbered exhibit of the Registrant's Registration Statement on Form S-8 (File No. 333-31304), filed on February 29, 2000. (11) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1999. (12) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-Q for the quarter ended June 30, 2000. (13) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-Q for the quarter ended September 30, 2000. (14) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 8-K, filed on December 15, 2000. 43 44 (15) Incorporated by reference to exhibit 4.2 of the Registrant's Registration Statement on Form S-8 (File No. 333-54384), filed on January 26, 2001. # Filed herewith. * Confidential treatment has previously been granted for portions of this exhibit pursuant to an order of the Commission. ** Confidential treatment has previously been requested for portions of this exhibit. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report on Form 10-K pursuant to Item 14(c) thereof. (b) Reports on Form 8-K. The following reports on Form 8-K were filed during the fourth quarter of fiscal 2000. 1. Current Report on Form 8-K dated November 17, 2000 and filed on December 11, 2000 announcing a jury verdict in the Xilinx litigation. 2. Current Report on Form 8-K dated December 14, 2000 and filed on December 15, 2000 announcing the sale of our equity interest in WaferTech, LLC. 44 45 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 6, 2001 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 Chairman of the Board of Directors March 6, 2001 - ----------------- Rodney Smith /s/ JOHN P. DAANE President, Chief Executive Officer and Director March 6, 2001 - ------------------ (Principal Executive Officer) John P. Daane /s/ NATHAN SARKISIAN Senior Vice President and Chief Financial Officer March 6, 2001 - --------------------- (Principal Financial and Accounting Officer) Nathan Sarkisian /s/ CHARLES M. CLOUGH Director March 6, 2001 - ---------------------- Charles M. Clough /s/ MICHAEL A. ELLISON Director March 6, 2001 - ---------------------- Michael A. Ellison /s/ PAUL NEWHAGEN Director March 6, 2001 - ------------------ Paul Newhagen /s/ ROBERT W. REED Director and Vice Chairman of the Board of Directors March 6, 2001 - ------------------- Robert W. Reed
45 46 /s/ DEBORAH D. RIEMAN Director March 6, 2001 - ---------------------- Deborah D. Rieman /s/ WILLIAM E. TERRY Director March 6, 2001 - --------------------- William E. Terry
46 47 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT - -------------- ------- 2.1** Assignment and Assumption Agreement dated as of November 15, 2000 between Registrant and TSMC Development, Inc.(14) 3.1 Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State on June 9, 2000.(12) 3.2 By-laws of the Registrant as adopted May 5, 1997 (which became the By-laws of the Registrant on June 19, 1997).(6) 4.1 Specimen copy of certificate for shares of common stock of the Registrant.(7) 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.(4) 10.4(b)+ 1987 Employee Stock Purchase Plan, and form of Subscription Agreement, as restated effective May 10, 2000.(12) 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) 10.26 Form of Indemnification Agreement entered into with each of the Registrant's officers and directors.(7) 10.33(b)+ 1988 Director Stock Option Plan and form of Outside Director Nonstatutory Stock Option Agreement restated effective May 7, 1997.(11) 10.37 LSI Products Supply Agreement with Sharp Corporation, dated October 1, 1993.(2) 10.37(a) Letter Agreement, dated August 20, 1996, by and between Registrant and Sharp Corporation, amending the LSI Product Supply Agreement, dated October 1, 1993.(11) 10.37(b) Letter Agreement, dated May 22, 1997, by and between Registrant and Sharp Corporation, amending the LSI Product Supply Agreement, dated October 1, 1993.(11) 10.37(c) Letter Agreement, dated May 22, 1998, by and between Registrant and Sharp Corporation, amending the LSI Product Supply Agreement, dated October 1, 1993.(11) #10.38+ Altera Corporation Nonqualified Deferred Compensation Plan and Trust Agreement dated February 1 1994, and forms of Deferred Compensation Agreement. 10.39* Wafer Supply Agreement dated June 26, 1995 between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(3) 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.(5) 10.42(a) Amendment of Wafer Supply Agreement dated June 1, 1997 by and between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(11) 10.45(a)+ 1996 Stock Option Plan, as amended October 5, 1999 and restated as of May 10, 2000.(12) #10.45(b)+ Form of Stock Option Agreement under 1996 Stock Option Plan. 10.50 Agreement and Plan of Merger dated June 18, 1997.(6) 10.51(a)+ 1998 Director Stock Option Plan.(8) 10.51(b)+ Form of Stock Option Agreement under 1998 Director Stock Option Plan.(8)
48 10.53 Product Distribution Agreement with Arrow Electronics Incorporated, effective January 26, 1999.(9) 10.55+ Form of Restricted Stock Purchase Agreement.(10) 10.56(a)+ 2000 Non-Qualified Stock Option Plan No. 1.(13) 10.56(b)+ Form of Stock Option Agreement for Former Employees of Northwest Logic, Inc.(13) 10.56(c)+ Form of Stock Option Agreement for Former Founding Shareholders of Northwest Logic, Inc.(13) 10.57(a)+ Restricted Stock Purchase Agreement between the Registrant and John Daane.(15) #10.57(b)+ Severance Agreement, dated as of November 30, 2000, by and between John Daane and Registrant. #10.57(c)+ Change in Control Severance Agreement, dated as of November 30, 2000, by and between John Daane and Registrant. #11.1 Computation of Earnings per Share (included on page 29). #13.1 Annual Report to Stockholders for the fiscal year ended December 31, 2000 (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 45).
(1) Incorporated by reference to identically numbered exhibit 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 exhibit of the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1993. (3) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-Q for the quarter ended June 30, 1995. (4) Incorporated by reference to identically numbered exhibit of the Registrant's Registration Statement on Form S-8 (File No. 33-61085), as amended, which became effective July 17, 1995. (5) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1995. (6) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-Q for the quarter ended June 30, 1997. (7) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1997. (8) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1998. (9) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-Q for the quarter ended March 31, 1999. (10) Incorporated by reference to identically numbered exhibit of the Registrant's Registration Statement on Form S-8 (File No. 333-31304), filed on February 29, 2000. (11) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1999. (12) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-Q for the quarter ended June 30, 2000. (13) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 10-Q for the quarter ended September 30, 2000. (14) Incorporated by reference to identically numbered exhibit of the Registrant's Report on Form 8-K, filed on December 15, 2000. 49 (15) Incorporated by reference to exhibit 4.2 of the Registrant's Registration Statement on Form S-8 (File No. 333-54384), filed on January 26, 2001. # Filed herewith. * Confidential treatment has previously been granted for portions of this exhibit pursuant to an order of the Commission. ** Confidential treatment has previously been requested for portions of this exhibit. + 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. EX-10.38 2 f70153ex10-38.txt EXHIBIT 10.38 1 EXHIBIT 10.38 ALTERA CORPORATION NONQUALIFIED DEFERRED COMPENSATION PLAN PLAN AND TRUST AGREEMENT (AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1998) 2 TABLE OF CONTENTS
Page ---- ARTICLE I -- PLAN ADMINISTRATION.................................................................2 ARTICLE II -- ELIGIBILITY, PARTICIPATION AND BENEFICIARY DESIGNATION.............................2 ARTICLE III -- PLAN CONTRIBUTIONS AND ALLOCATIONS................................................3 ARTICLE IV -- VESTING............................................................................4 ARTICLE V -- TRUST FUND..........................................................................5 ARTICLE VI -- GENERAL DUTIES OF THE COMMITTEE AND THE TRUSTEE....................................6 ARTICLE VII -- ALLOCATION OF TRUST INCOME OR LOSS................................................6 ARTICLE VIII -- PARTICIPANTS' ACCOUNTS...........................................................7 ARTICLE IX -- PAYMENTS TO A PLAN BENEFICIARY.....................................................8 ARTICLE X -- HARDSHIP WITHDRAWALS...............................................................10 ARTICLE XI -- TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO PLAN BENEFICIARIES WHEN COMPANY INSOLVENT.........................................................................11 ARTICLE XII -- INVESTMENT AND ADMINISTRATION OF TRUST FUND......................................12 ARTICLE XIII -- ACCOUNTING BY TRUSTEE...........................................................14 ARTICLE XIV -- RESPONSIBILITY OF TRUSTEE........................................................14 ARTICLE XV -- TAXES, EXPENSES AND COMPENSATION OF TRUSTEE.......................................15 ARTICLE XVI -- PROTECTION OF TRUSTEE............................................................16 ARTICLE XVII -- INDEMNIFICATION OF TRUSTEE......................................................17 ARTICLE XVIII -- RESIGNATION AND REMOVAL OF TRUSTEE AND LEGAL COUNSEL........................................................................17 ARTICLE XIX -- DURATION AND TERMINATION OF TRUST AND AMENDMENT..................................18 ARTICLE XX -- MISCELLANEOUS.....................................................................18
-i- 3 ALTERA CORPORATION NONQUALIFIED DEFERRED COMPENSATION PLAN AND TRUST (AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1998) THIS PLAN AND TRUST AGREEMENT, effective as of February 1, 1994, is hereby amended and restated in its entirety effective as of January 1, 1998 by and between Altera Corporation (the "Company"), acting on behalf of itself and any designated subsidiaries, and Charles Schwab and Company as trustee (the "Trustee"). Throughout, Company shall include wherever relevant any entity that is directly or indirectly controlled by the Company or any entity in which the Company has a significant equity or investment interest, as determined by the Company. RECITALS: 1. The Company maintains the Nonqualified Deferral Compensation Plan (the "Plan") for the benefit of a select group of management or highly compensated employees designated by the Company as well as members of the Company's Board of Directors (the "Board"). 2. Under the Plan, the Company is obligated to pay vested accrued benefits to Plan Participants and their beneficiary or beneficiaries ("Plan Beneficiaries"), from the Company's general assets. 3. The Company has established an irrevocable trust (the "Trust") to which it contributes to meet its obligations under the Plan, and such contributions are held by the Trustee and invested, reinvested and distributed, all in accordance with the provisions of this Plan. 4. The Company intends that amounts allocated to the Trust and the earnings thereon shall be used by the Trustee to satisfy the liabilities of the Company under the Plan with respect to each Participant for whom an Account has been established and such utilization shall be in accordance with the procedures set forth herein. 5. The Company intends that the assets of the Trust shall at all times be subject to the claims of the general creditors of the Company as provided in Article XI. 6. The Company intends that the existence of the Trust shall not alter the characterization of the Plan as "unfunded" for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and shall not be construed to provide income to the Participants under the Plan prior to actual payment of the vested accrued benefits thereunder. 4 NOW THEREFORE, the Company does hereby establish the Plan and Trust as follows and does also hereby agree that the Plan and Trust shall be structured, held and disposed of as follows: ARTICLE I PLAN ADMINISTRATION A. The Plan shall be administered by the Retirement Plans Committee of the Company (the "Committee"). Subject to the provisions in the Plan and to the specific duties delegated by the Board of Directors to such Committee, the Committee shall be responsible for the general administration and interpretation of the Plan and for carrying out its provisions. The Committee shall have such powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following powers and duties: (1) discretionary authority to construe and interpret the terms of the Plan, and to determine eligibility and the amount, manner and time of payment of any benefits hereunder; (2) to prescribe procedures to be followed by Participants for purposes of Plan participation and distribution of benefits; and (3) to take such other action as may be necessary and appropriate for the proper administration of the Plan. B. The Committee may adopt such rules, regulations and bylaws and may make such decisions as it deems necessary or desirable for the proper administration of the Plan. Any rule or decision that is not inconsistent with the provisions of the Plan shall be conclusive and binding upon all persons affected by it, and there shall be no appeal from any ruling by the Committee that is within its authority, except as otherwise provided herein. ARTICLE II ELIGIBILITY, PARTICIPATION AND BENEFICIARY DESIGNATION A. Eligible Participants. The following categories of individuals who provide services to the Company ("Eligible Participants") shall be eligible to participate in the Plan: (i) employees who are designated as eligible to participate on the attached Exhibit A to this Plan; (ii) any other employee or category of employee that is designated by the Committee as eligible to participate in the Plan, and (iii) members of the Company's Board of Directors. The Committee reserves the right to modify the definition of Eligible Participants at any time. Any Eligible Participant who has commenced participation in the Plan shall be referred to in this Plan as a "Participant." -2- 5 B. Participation. Each Participant may elect to commence participation in the Plan by completing an Altera Corporation Nonqualified Deferred Compensation Plan Deferred Compensation Agreement ("Deferred Compensation Agreement") within 30 days following the date on which the Committee gives such individual written notice that the individual is an Eligible Participant. Any Eligible Participant who does not execute a Deferred Compensation Agreement within the time periods described herein may nevertheless participate in the Plan commencing with Compensation paid in the next succeeding calendar year by filing an executed Deferred Compensation Agreement with the Committee before the beginning of such calendar year. C. Beneficiary Designation. Each Participant, prior to entering the Plan, shall designate a beneficiary or beneficiaries to receive the remainder of any interest of the Participant under the Plan. A Participant may change his or her beneficiary designation at any time on written notice to the Committee. Each beneficiary designation shall be in a form prescribed by the Committee and will be effective only when filed with the Committee during the Participant's lifetime. Each beneficiary designation filed with the Committee will cancel all previously filed beneficiary designations. In the absence of a valid designation, or if no designated beneficiary survives the Participant, the Participant's interest shall be distributed to the Participant's estate. ARTICLE III PLAN CONTRIBUTIONS AND ALLOCATIONS A. Participant Deferrals. Each Participant participating in the Plan shall execute a Deferred Compensation Agreement authorizing the Company to withhold a specific dollar amount or a percentage of the Participant's Compensation which would otherwise be paid to the Participant with respect to services rendered. Compensation shall be defined for purposes of the foregoing as the cash compensation payable to the Participant in connection with the Participant's services to the Company, including all amounts which a Participant elects to have the Company contribute on his behalf as a deferral contribution ("Compensation"). The deferral percentage is applied to Compensation after all other applicable payroll deductions have been applied. The Committee may, in its discretion, establish in the Deferred Compensation Agreement minimum and maximum levels of bonus and non-bonus compensation that may be deferred pursuant to the Plan. Compensation deferrals made by a Participant under this Plan shall be held as an asset of the Company. B. Election Changes. A Participant may, in such form as the Committee may prescribe, discontinue deferral of future compensation at any time; however, no other modifications to the Deferred Compensation Agreement may be made prior to the commencement of the calendar year following written notification to the Company of any desired modifications. The Committee has the power to establish uniform and nondiscriminatory rules and from time to time to modify or change such rules governing the manner and method by which Compensation deferral contributions shall be made, as well as the manner and method by which Compensation deferral contribution may be changed or discontinued temporarily or permanently. All Compensation deferral contributions shall -3- 6 be authorized by the Participant in writing, made by payroll deduction and deducted from the Participant's Compensation without reduction for any taxes or withholding (except to the extent required by law or the regulations). Notwithstanding the foregoing, each Participant shall remain liable for any and all employment taxes owing with respect to such Participant's Compensation deferral contributions. C. Cessation of Eligible Status. In the event a Participant ceases to be an Eligible Participant while also a participant in the Plan, such Participant may continue to make Compensation deferral contributions under the Plan through the end of the payroll period in which the Participant ceases to be an Eligible Participant. Thereafter, such Participant shall not make any further Compensation deferral contributions to the Plan unless or until he or she again meets the eligibility requirements of Article II above. D. Company Matching Contributions. As of the last day of each calendar year or such earlier time or times as the Committee may determine, the Company may make a matching contribution to the Trust in such amount as the Board shall specify. E. Company Discretionary Contributions. The Company may, in its sole discretion, make discretionary contributions to the Accounts of one or more Participants at such times and in such amounts as the Board shall determine. F. Allocations. The Compensation deferral contributions and any Company contributions made under the Plan on behalf of a Participant shall be credited to the Participant's Account. The Committee shall establish and maintain separate subaccounts as it determines to be necessary and appropriate for the proper administration of the Plan. Each Participant Account consists of the aggregate interest of the Participant under the Plan (and in the Trust Fund), as reflected in the records maintained by the Company for such purposes. ARTICLE IV VESTING A. Compensation Deferral Contributions. The value of a Participant's Account attributable to the Participant's Compensation deferral contributions shall always be fully vested and nonforfeitable. B. Company Contributions. The value of a Participant's Account attributable to any Company contributions pursuant to Article III.D and E shall vest in its entirety five (5) years after the date of the Company contribution to which such value relates, provided the Participant has remained in the continuous service of the Company throughout such five-year period. If the Participant's employment with the Company (or service on the Board, as applicable) terminates for any reason prior to the expiration of such five-year period, unless determined otherwise by the Board, no portion -4- 7 of the Participant's Account attributable to Company contributions occurring within the preceding five-year period shall be considered vested for purposes of this Plan. Upon termination of a Participant's employment with the Company for any reason, any portion of the Participant's Account that is not then vested (including allocable earnings, as determined by the Committee), shall be forfeited. ARTICLE V TRUST FUND A. Trust. The Company hereby establishes the Trust with the Trustee, consisting of such sums of money and other property acceptable to the Trustee as from time to time shall be paid or delivered to the Trustee. All such money and other property, all investments and reinvestments made therewith or proceeds thereof and all earnings and profits thereon, less all payments and charges as authorized herein, shall constitute the "Trust Fund" or "Trust." The Trust Fund shall at all times be subject to the claims of general creditors of the Company as provided in Article XI. B. Grantor Trust. The Trust hereby established shall be irrevocable, but for the issuance by the Internal Revenue Service of unfavorable tax rulings on the status of the Trust as a grantor trust. Subject to Article XI, Trust assets shall be held for the exclusive purpose of providing vested accrued benefits to the Trust Beneficiaries and defraying expenses of the Trust in accordance with the provisions of this Plan. No part of the income or corpus of the Trust Fund shall be recoverable by or for the Company prior to the termination of the Trust and the satisfaction of all liabilities under the Plans. C. Assignment. No right or interest to receive accrued benefits from the Trust may be assigned, sold, anticipated, alienated or otherwise transferred by the Plan Beneficiaries. D. Trustee. The Trustee accepts the Trust established under this Plan on the terms and subject to the provisions set forth herein, and it agrees to discharge and perform fully and faithfully all of the duties and obligations imposed upon it under this Plan. E. Trust Assets. The principal of the Trust and any earnings thereon shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes herein set forth. Neither the Plan Beneficiaries nor the Plan shall have any preferred claim on, or any beneficial ownership interest in, any assets of the Trust prior to the time such assets are paid to a Plan Beneficiary as vested accrued benefits as provided in Article IX, and all rights created under the Plan and the Trust under this Plan shall be mere unsecured, contractual rights of the Participants against the Company. -5- 8 ARTICLE VI GENERAL DUTIES OF THE COMMITTEE AND THE TRUSTEE A. Committee Duties. The Committee will provide the Trustee with a copy of any future amendment to this Plan promptly upon its adoption. The Committee may from time to time hire outside consultants, accountants, actuaries, legal counsel or record keepers to perform such tasks as the Committee may from time to time determine. B. Trustee Duties. The Trustee shall manage, invest and reinvest the Trust Fund as provided in Article XII of this Plan. The Trustee shall collect the income on the Trust Fund, and make distributions therefrom, all as hereinafter provided. C. Company Contributions. While the Plan remains in effect, and prior to a Change in Control, as defined below, the Company shall make contributions to the Trust Fund at least once each quarter. The amount of any quarterly contributions shall be at the discretion the Company. At the close of each calendar year, the Company shall make an additional contribution to the Trust Fund to the extent that previous contributions to the Trust Fund for the current calendar year are not equal to the total of the Compensation deferrals made by each Participant plus Company matching contributions and discretionary contributions, if any, accrued, as of the close of the current calendar year. The Trustee shall not be liable for any failure by the Company to provide contributions sufficient to pay all accrued benefits under the Plan in full in accordance with the terms of this Plan. D. Department of Labor Determination. In the event that any Participants are found to be ineligible, that is, not members of a select group of management or highly compensated employees, according to a determination made by the Department of Labor, the Committee will take whatever steps it deems necessary, in its sole discretion to equitably protect the interests of the affected Participants. ARTICLE VII ALLOCATION OF TRUST INCOME OR LOSS A. Determination of Net Income. As of each Valuation Date (as defined in Article VII.D below), the Committee shall determine the net income or loss of the Trust Fund based on a statement from the Trustee of the receipts and disbursements of the Trust Fund since the immediately preceding Valuation Date and of the fair market value of the Fund as of the Valuation Date. If one or more separate investment funds have been established as provided in Article XII, each fund shall be valued separately on each Valuation Date and the net income or loss of each fund shall be allocated to each Account invested in such investment fund. In addition, self-directed accounts as defined under Article XII.B shall be valued according to Section C of this Article. B. Valuation. As of each Valuation Date and prior to any allocation of contributions and forfeitures to be made as of such date, the net income or loss of the Trust Fund since the immediately preceding Valuation Date, including net appreciation or depreciation and any expenses paid by the -6- 9 Trust, shall be allocated to each Account in the ratio that the value, as of the immediately preceding Valuation Date of each such Account invested in the Trust Fund bears to the value, as of the immediately preceding Valuation Date, of all Accounts invested in the Trust Fund. If one or more separate investment funds have been established, the net income or loss of each fund shall be allocated to each Account invested in such investment fund in proportion to the value of each Account invested in such funds as of the immediately preceding Valuation Date. The Committee shall adopt suitable procedures to establish a proportionate crediting of Trust income or loss to those portions of Accounts in the case of contributions or hardship withdrawals that have occurred in the interim period since the immediately preceding Valuation Date. C. Valuation of Segregated Accounts. The portion of any Participants's Account invested on a segregated basis as provided in Article XII shall be valued separately on each Valuation Date and the net income or loss allocated to such Account shall be based on the assets, including income, gain, loss and/or other change in value of the assets constituting such portion of the Account. D. Valuation Dates. The Trust Fund, any separate investment funds and any segregated account shall be valued as of the last day of each calendar year and as of any other date the Company directs the Trustee to value the Trust Fund, as provided in Article VII.E. E. Special Valuation Dates at Committee Discretion. The Committee may direct the Trustee to determine the fair market value of the Trust Fund and may make a determination of Trust income or loss as of any date other than the last day of a calendar year. ARTICLE VIII PARTICIPANTS' ACCOUNTS A. Separate Accounts. The Committee shall open and maintain a separate Account for each Participant. Each Participant's Account shall reflect the amounts allocated thereto and distributed therefrom and such other information as affects the value of such Account pursuant to this Plan. The Committee may maintain records of Accounts to the nearest whole dollar. B. Statement of Accounts. As soon as practicable after the end of each calendar year the Committee shall furnish to each Participant a statement of his or her Account, determined as of the end of such calendar year. Upon the discovery of any error or miscalculation in an Account, the Committee shall correct it, to the extent correction is practically feasible; provided, however, that any such statement of Account shall be considered to reflect accurately the status of the Participant's Account for all purposes under the Plan unless, subject to any longer period required by ERISA, the Participant reports a discrepancy to the Committee within six (6) months after receipt of the statement. The Committee shall have no obligation to make adjustments to an Participant's Account for any discrepancy reported to the Committee more than six (6) months after receipt of the -7- 10 statement, or for a discrepancy caused by the Participant's error. Statements to Participants are for reporting purposes only, and no allocation, valuation or statement shall vest any right or title in any part of the Trust Fund, nor require any segregation of Trust assets, except as is specifically provided in this Plan. C. Accounts Which Are Not Segregated. When a Participant's services to the Company cease and distribution of benefits is not deferred, the amount of the benefit shall be based on the value of the vested portion of the Participant's Account as of the Valuation Date immediately preceding his or her termination date plus any contribution subsequently credited to such Account and less any distributions subsequently made from the Account. D. Segregated Accounts. Payment to a Participant shall be based on the value of the vested portion of the Participant's segregated Account at the date of distribution. The value of his or her segregated Account shall be the current fair market value, including any income or loss, of the property constituting such segregated Account. ARTICLE IX PAYMENTS TO A PLAN BENEFICIARY A. General. Payments of vested accrued benefits to Plan Beneficiaries from the Trust Fund shall be made in accordance with the distribution event specified by the Participant in the Deferred Compensation Agreement between the Company and the Participant (the "Distribution Event"); provided, however, the Trustee shall make such payments, as directed by the Committee, to the extent the Company is not at such time Insolvent as defined in Article XI. Except as otherwise expressly provided in the Participant's Deferred Compensation Agreement, no distribution shall be made or commenced prior to the Participant's Distribution Event or a "Change of Control," whichever occurs earlier. A Participant may, at least one year prior to the Participant's specified Distribution Event, revoke such Distribution Event in favor of an alternative Distribution Event; provided that a Participant may revoke a Distribution Event once only, and provided further, that any such revocation shall not be given effect if, during the one year period after the date of such revocation, the Participant voluntarily terminates his or her services to the Company. For purposes of this Plan, a "Change in Control" shall be deemed to have occurred if any person (including a "Group" as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) acquires shares of the Company either (i) having a majority of the total number of votes that may be cast for the election of directors of the Company or (ii) possessing, directly or indirectly, the power to control the direction of management or policies of the Company; provided, however, that no Change of Control shall be deemed to occur in the event of a merger, consolidation or reorganization of the Company where the shareholders of the Company are substantially the same as before such merger, consolidation or reorganization. The Trustee shall have no responsibility to determine whether a Change in Control has occurred and shall be advised of such event by the Company. -8- 11 B. Cash Distributions. Where the distribution of all or any portion of a Participant's Account is to be deferred in the form of cash, the Account shall continue to be held and invested in the Trust subject to revaluation as provided in Article VII. C. In Kind Distributions. In kind distributions shall be (i) made only in the Committee's discretion, (ii) made only in a form of investment that was held on behalf of the Participant as a segregated investment pursuant to Article XII.B in a separate investment fund pursuant to Article XII.D immediately preceding the date of distribution, (iii) limited to the amount of such investment so held, and (iv) based on the fair market value of the distributable property, as determined by the Trustee at the time of distribution. D. Method of Distribution. Payment to any Plan Beneficiary shall be made pursuant to the Deferred Compensation Agreement executed by the Participant, in whole or in part. A Participant may specify, at least ninety (90) days prior to the Participant's Distribution Event, whether such distribution shall be made: (1) In a lump sum, in cash and/or, in the Committee's discretion, in kind, or (2) In annual installments over a period not to exceed ten (10) years equal to 1/n of the Participant's vested accrued benefit where n is the number of installments remaining to be paid, subject to such reasonable procedures and guidelines as the Committee may establish, or (3) In annual installments over a period not to exceed ten (10) years, based on percentages specified by the Participant, subject to an annual minimum percentage of five percent (5%) and such other limitations as the Committee may establish. E. Certain Distributions. In case of any distribution to a minor or to a legally incompetent person, the Committee may (1) direct the Trustee to make the distribution to his legal representative, to a designated relative, or directly to such person for his benefit, or (2) instruct the Trustee to use the distribution directly for his support, maintenance, or education. The Trustee shall not be required to oversee the application, by any third party, of any distributions made pursuant to this Article IX.E. F. IRS Determination. Notwithstanding any other provisions of this Plan, if any amounts held in the Trust are found in a "determination" (within the meaning of Section 1313(a) of the Internal Revenue Code of 1986, as amended (the "Code")), to have been includible in the gross income of any Trust Beneficiary prior to payment of such amounts from the Trust, the Trustee shall, as soon as practicable pay such amounts to the Plan Beneficiary, as directed by the Company. For purposes of this Section, the Trustee shall be entitled to written notice from the Committee that a determination described in the preceding sentence has occurred and to receive a copy of such notice. The Trustee shall have no responsibility until so advised by the Committee. -9- 12 ARTICLE X HARDSHIP WITHDRAWALS A. General Rule. At the request of a Participant, the Committee shall authorize a withdrawal at any time of the accrued benefit attributable to the Participant's Compensation deferrals and gains or losses thereon under the Participant's Account, provided that authorization for such withdrawal and the amount thereof shall be given only on account of an unforeseeable emergency. The term "unforeseeable emergency" shall mean severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Internal Revenue Code section 152(a)) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case, but in any case, payment may not be made to the extent that such hardship is or may be relieved -- (1) Through reimbursement or compensation by insurance or otherwise, (2) By liquidation of the Participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship, or (3) By cessation of deferrals under the Plan. The Committee shall establish reasonable procedures and guidelines uniformly applied, to determine whether an unforeseeable emergency exists; provided, however, that no withdrawal request shall be granted if to do so could result in the inclusion of Trust Fund amounts in the gross income of Plan Beneficiaries prior to payment of such amounts from the Trust Fund because approval of such request would be inconsistent with any applicable statute, regulation, notice, ruling or other pronouncement of the Internal Revenue Service interpreting this or similar provisions. ARTICLE XI TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO PLAN BENEFICIARIES WHEN COMPANY INSOLVENT A. Company Insolvency. The Company shall be considered "Insolvent" and an "Insolvency" shall be deemed to exist for purposes of this Plan under any of the following circumstances: (1) The Company is unable to pay its debts as they mature, defined as having a weighted average overdue payables balance in excess of 270 days. -10- 13 (2) A receiver or trustee is appointed to take possession of all or substantially all of the assets of the Company. (3) There is a general assignment by the Company for the benefit of creditors. (4) An action or proceeding is commenced by or against the Company under any insolvency or bankruptcy act, or any other statute or regulation having as its purpose the protection of creditors, and the action or proceeding is not discharged within 60 days after the date of commencement. B. Plan Suspension. Notwithstanding any provision in this Plan to the contrary, if at any time while the Trust is still in existence the Company becomes Insolvent, the Trustee shall upon written notice thereof suspend the payment of all amounts from the Trust Fund and shall thereafter (i) not permit any further elective Compensation deferral contributions by the Participants and (ii) discontinue all contributions by the Company to the Trust on behalf of the Participants. The Trustee shall hold the Trust Fund in suspense for the benefit of the Company's creditors until it receives a court order directing the disposition of the Trust Fund; provided, however, that the Trustee may deduct or continue to deduct its fees and expenses, including fees of any consultants, actuaries, accountants, legal counsel or record keepers retained by the Company or Trustee to provide services to the Trust. C. Notice of Insolvency. By its approval and execution of this Plan, the Company represents and agrees that its Board, the Committee, and its Chief Executive Officer, as from time to time acting, shall have the fiduciary duty and responsibility on behalf of the Company's creditors to give to the Trustee prompt written notice of the Company's Insolvency and the Trustee shall be entitled to rely thereon to the exclusion of all directions or claims to pay vested accrued benefits thereafter made. Absent such notice, the Trustee shall have no responsibility for determining whether or not the Company has become Insolvent. D. If after being Insolvent, the Company later becomes solvent without the entry of a court order concerning the disposition of the Trust Fund, or if any bankruptcy or insolvency proceedings referred to in Article XI.A are dismissed, the Company shall by written notice so inform the Trustee and the Trustee shall thereupon resume all its duties and responsibilities under this Plan without regard to this Article XI until and unless the Company again becomes Insolvent as such term is defined herein. E. If the Trustee discontinues payments from the Trust pursuant to this Article XI and subsequently resumes payments, or removes the suspended status of the Trust, interest will be added to the Accounts of all Executives, including those Accounts from which a payment was held in suspense, for the period of discontinuance at not less than the average rate on 90-Day Treasury Bills auctioned during the period of discontinuance, to be determined and calculated by the Company. The Company will not make any other contributions to the Trust that otherwise would have been made during the period of discontinuance. -11- 14 ARTICLE XII INVESTMENT AND ADMINISTRATION OF TRUST FUND A. Investments. The Trustee shall have the power: (1) To invest and reinvest the Trust Funds; provided, however, the Trustee may delegate this investment authority, in whole or in part, and subject to such terms and conditions and as the Trustee shall require, to the Committee or to an Investment Manager who meets the requirements under the Altera Corporation Employee Retirement and Savings Plan; (2) To collect and receive any and all money and other property due to the Trust Fund and to give full discharge therefore; (3) To settle, compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust; to commence or defend suits or legal proceedings to protect any interest of the Trust; and to represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal; (4) Generally to do all acts, whether or not expressly authorized, which the Trustee may deem necessary or desirable for the protection of the Trust Fund. Persons dealing with the Trustee shall be under no obligation to see to the proper application of any money paid or property delivered to the Trustee or to inquire into the Trustee's authority as to any transaction. B. Segregated Investments; Participant Direction Permitted. The Committee may, in its discretion, provide Participants with a list of permitted investments available for hypothetical investment and the Participant may designate, in a manner specified by the Committee, one or more investments that his or her Account will be deemed to be invested in for purposes of determining the amount of earnings to be credited to that Account. The Company may, but need not, acquire investments corresponding to those designated by the Participants hereunder, and it is not under any obligation to maintain any investment it may make. Any such investments, if made, shall be in the name of the Company (or the Trustee), and shall be an asset of the Company in which no Participant shall have any interest. For valuation and record keeping purposes, Accounts shall be segregated and shall be valued separately by the Trustee under the provisions of Article VII.C. Valuations of such Accounts shall be made at such times as the Committee may require, but no less frequently than annually. Such Accounts may be charged with their proportionate share of any general expenses charged to the Trust or with the full share of any expense incurred directly or indirectly in connection with such Accounts. -12- 15 C. Participant Direction Subject to Committee and Trustee Approval. Neither the Committee nor the Trustee shall be under any obligation to approve or disapprove any specific investment medium. Neither the Company nor the Trustee has any liability for any losses or damage that may occur or result from (i) the approval of or failure to approve of any specific investment medium; (ii) the imposition of any administrative rules relating to the timing of investment elections of any sort; or (iii) any administrative delay in carrying out or failure to carry out investment elections within a specified time. The Committee or the Trustee may disapprove or refuse to carry out any investment request which in its opinion would subject the Company or the Trustee to burdensome administrative responsibilities or which the Committee determines to be inappropriate from a legal, financial or social perspective. The Trustee, in approving any investment medium or in making investments under this Plan, shall not be restricted by statutes governing the legal investment of trust funds. D. Separate Investment Funds - Committee May Establish Separate Funds. The Committee may, in its sole discretion, direct the Trustee to create one or more separate investment funds, having such different specific investment objectives as the Committee shall from time to time determine. The Committee shall determine and may from time to time redetermine the number of investment funds and the specific objectives of said funds and the investments or kinds of investment which shall be authorized therefor. E. Committee To Establish Rules. The Committee may at any time make such uniform and nondiscriminatory rules as it determines necessary regarding the administration of the directed investment option. The Committee may also develop and maintain rules governing the rights of Participants to change their investment directions and the frequency with which such changes can be made. ARTICLE XIII ACCOUNTING BY TRUSTEE The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be done, including such specific records as shall be agreed upon in writing between the Committee and the Trustee. All such accounts, books and records shall be open to inspection and audit at all reasonable times by the Committee, the Committee's representatives or agents. Within one hundred and twenty (120) days following the close of each calendar quarter and within one hundred and twenty (120) days after the removal or resignation of the Trustee, the Trustee shall deliver to the Committee a written account of its administration of the Trust during such quarter or during the period from the close of the last preceding quarter to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other actions effected by it, including a description of all securities and investments purchased and sold, with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other -13- 16 property held in the Trust at the end of such quarter or as of the date of such removal or resignation, as the case may be. The written approval of any accounting by the Committee shall be final as to all matters and transactions stated or shown therein and binding upon the Committee and all persons who then shall be or then after shall become interested in this Trust. Failure of the Committee to notify the trustee within 180 days after receipt of any accounting of its disapproval of such accounting shall be the equivalent of written approval. ARTICLE XIV RESPONSIBILITY OF TRUSTEE The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use; provided, however, that the Trustee shall incur no liability to anyone for any action taken pursuant to a direction, request or approval given by the Committee or any Participant which is contemplated by and complies with the terms of this Trust Agreement, and to that extent the Trustee shall be relieved of the prudent person rule for investments. The Trustee may hire agents, accountants, actuaries record keepers and financial consultants. Expenses of such persons shall be deemed to be expenses of management and administration of the Trust within the meaning of Article XV.D, below. The Trustee shall have, without exclusion, all powers conferred on Trustee by applicable law unless expressly provided otherwise herein. ARTICLE XV TAXES, EXPENSES AND COMPENSATION OF TRUSTEE A. Company Assets. It is the intention of the Company to have the corpus and income of the Trust established hereunder treated as assets and income of the Company to be used to satisfy the Company's legal liability under the Plan in respect of all of the Participants, and the Company agrees that all income, deductions and credits of the Trust Fund belong to the Company as owner for income tax purposes and will be included on the Company's income tax returns. B. Taxes. The Company shall from time to time pay taxes (references in this Plan to the payment of taxes shall include interest and applicable penalties) of any and all kinds whatsoever which at any time are lawfully levied or upon or become payable in respect of the Trust Fund, the income or any property forming a part thereof, or any security transaction pertaining thereto. To the extent that any taxes levied or assessed upon the Trust Fund are not paid by the Company or contested by the Company pursuant to the last sentence of this Article, the Trustee shall pay such taxes out of the Trust Fund, and the Company shall, upon demand by the Trustee, deposit into the Trust Fund an amount equal to the amount paid from the Trust Fund to satisfy such tax liability. If requested by the Company, the Trustee shall at the Company's expense, contest the validity of such -14- 17 taxes in any manner deemed appropriate by the Company or its counsel, but only if it has received an indemnity bond or other security satisfactory to it to pay any expenses of such contest. Alternatively, the Company may itself contest the validity of any such taxes, but any such contest shall not affect the Company's obligation to reimburse the Trust Fund for taxes paid from the Trust Fund. C. Withholding. In making payments from the Trust, the Trustee shall be liable for federal income tax withholding, and shall withhold the appropriate amount of tax, if any, as provided by applicable law and regulation, from any payment made to a Plan Beneficiary, unless the Company does not provide the Trustee with the necessary information as set forth in regulations, in which case the Company shall assume all relevant liability. D. Compensation; Expenses. The Trustee may be paid compensation by the Company in accordance with any written agreement for this purpose between them; provided, however, that a Trustee who is an officer, director or employee of the Company shall serve without compensation. The Trustee shall be reimbursed by the Company for its reasonable expenses of management and administration of the Trust, including reasonable compensation of any agent engaged by the Trustee to assist it in such management and administration. The Trustee shall be able to charge the Trust Fund for such compensation and for any reasonable expenses including counsel, appraisal or accounting fees, and the same may be deducted from the Trust Fund unless paid by the Company within sixty (60) days after the Company receives written billing by the Trustee; provided that this paragraph shall not apply while a dispute over the amount of such charges exists. ARTICLE XVI PROTECTION OF TRUSTEE A. Certification. The Committee shall certify to the Trustee the name or names of any person or persons authorized to act for the Company. Until the Committee notifies the Trustee, in a similarly signed notice, that any such person is no longer authorized to act for the Company, the Trustee may continue to rely upon the authority of such person. The Trustee may rely upon any certificate, notice or direction of the Committee which the Trustee reasonably believes to have been signed by a duly authorized officer or agent of the Company. Notices to the Trustee shall be sent in writing to the Trustee, Charles Schwab & Company, ________. No communication shall be binding upon the Trust Fund or the Trustee until it is received by the Trustee and unless it is in writing and signed by an authorized person. Notices to the Company shall be sent in writing attention to the Company's principal office to the Chief Financial Officer, c/o Altera Corporation, 101 Innovation Drive, San Jose, CA 95134, or to such other address as the Company may specify. No notice shall be binding upon the Company until it is received by the Company. B. Legal Counsel. The Trustee may consult with any legal counsel ("Legal Counsel"), except as provided in Article XVIII.C, for the purpose of obtaining advice on topics including but -15- 18 not limited to the construction of this Plan, its duties hereunder, or any act which it proposes to take or omit, and shall not be liable for any action taken or omitted in good faith pursuant to such advice. Expenses of Legal Counsel shall be deemed to be expenses of management and administration of the Trust within the meaning of Article XV.D hereof. C. Trustee Duties. The Trustee shall discharge its duties under this Plan in a manner consistent with the objectives of this Plan. The Trustee shall not be liable for any loss sustained by the Trust Fund by reason of the purchase, retention, sale or exchange of any investment in good faith and in accordance with the provisions of this Plan. The Trustee shall have no responsibility or liability for any failure of the Company to make contributions to the Trust Fund or to pay vested accrued benefits when due. The Trustee's duties and obligations shall be limited to those expressly imposed upon it under the provisions of this Plan relating to the Trust, and the Trustee shall not have responsibility under the provisions of this Plan relating to the Plan, notwithstanding any reference to the Plan. ARTICLE XVII INDEMNIFICATION OF TRUSTEE To the fullest extent permitted by law, the Company agrees to indemnify, to defend, and to hold harmless the Trustee against any liability whatsoever for any action taken or omitted by such Trustee in good faith in connection with this Plan or duties hereunder and for any expenses or losses for which the Trustee may become liable as a result of any such actions or non-actions unless resultant from gross negligence or willful misconduct. ARTICLE XVIII RESIGNATION AND REMOVAL OF TRUSTEE AND LEGAL COUNSEL A. Resignation. The Trustee may resign upon thirty (30) days' prior written notice to the Company, except that any such resignation shall not be effective until a successor trustee has been appointed, and such successor has accepted the appointment in writing, but in any event no later that 90 days after such resignation. The Company shall condition its acceptance of such successor on the obtaining from such successor of a written statement that the successor has read the Trust Agreement and understands its obligations thereunder. B. Removal. The Company may remove the Trustee upon thirty (30) days' prior written notice to the Trustee. Any such removal shall not be effective until the close of such notice period and delivery by the Company to the Trustee of (i) an instrument in writing appointing a successor trustee, (ii) an acceptance of such appointment in writing executed by such successor, and (iii) a -16- 19 written statement by such proposed successor that the successor has read the Trust Agreement and understands its obligations thereunder. C. Successor Trustee. Upon the resignation or removal of the Trustee and appointment of a successor, the Trustee shall transfer and deliver the Trust Fund to such successor. Following the effective date of the appointment of the successor, the Trustee's responsibility hereunder shall be limited to managing the assets in its possession, transferring such assets to the successor and settling its final account. Neither the Trustee nor the successor shall be liable for the acts of the other. All of the provisions set forth herein with respect to the Trustee shall relate to each successor with the same force and effect as if such successor had been originally named as the Trustee hereunder. ARTICLE XIX DURATION AND TERMINATION OF TRUST AND AMENDMENT A. Irrevocable. The Trust is hereby declared to be irrevocable and shall continue until all vested accrued benefits have been paid. B. Termination of Trust. If this Trust terminates under the provisions of Article XIX.A, the Trustee shall liquidate the Trust Fund and, after its final accounting has been settled, shall distribute to the Company the net balance of any assets of the Trust Fund remaining after all vested accrued benefits and administration expenses have been paid. Upon making such distribution, the Trustee shall be relieved from all further liability. C. Plan Amendment. This Plan may be amended, or the Plan terminated or suspended, by an instrument in writing executed on behalf of the Company by the Committee, or a duly appointed representative of the Board of Directors and delivered to the Trustee, provided, however, that (i) no amendment will be made to this Plan which will cause this Plan, the Trust or the assets of the Trust Fund to be governed by or subject to Part 2, 3 or 4 of Title I of ERISA, (ii) no such amendment shall adversely affect any Plan Beneficiary's accrued benefit, (iii) no such amendment shall increase the duties or responsibilities of the Trustee unless the Trustee consents thereto in writing, (iv) no such amendment which would cause the Trust to be other than a "grantor trust," or have contributions to the Trust by the Company, or income and gains of the Trust Fund, constitute a taxable event to the Trust or to the Executives, and (v) no such amendment shall cause the vested accrued benefit paid to Plan Beneficiaries from the Trust Fund to become nondeductible to the Company in the year of payment. -17- 20 ARTICLE XX MISCELLANEOUS A. California Law. This Plan and the Trust hereby created shall be construed and regulated by the laws of the State of California. B. Headings. The headings of sections in this Plan are used herein for convenience of reference only and in case of any conflict the text of this Plan shall control. C. Successorship. This Plan shall be binding upon and inure to the benefit of any successor to the Company or its business as the result of merger, consolidation, reorganization, transfer of assets or otherwise, and any subsequent successor thereto; and any such successor shall be deemed to be the "Company" under this Plan. In the event of any such merger, consolidation, reorganization, transfer of assets or other similar transaction, the successor to the Company or its business or any subsequent successor thereto shall promptly notify the Trustee in writing of its successorship and furnish the Trustee with the information specified in Article XVI.A of this Plan. In no event shall any such transaction described herein suspend or delay the rights of Trust Beneficiaries to receive their vested accrued benefits hereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. CHARLES SCHWAB & COMPANY ALTERA CORPORATION TRUSTEE By: /s/ Nathan M. Sarkisian /s/ illegible --------------------------------- --------------------------------- (Title) CFO Date: 9/9/97 Date: 9/25/97 ------------------------------- ---------------------------- -18- 21 ALTERA CORPORATION NONQUALIFIED DEFERRED COMPENSATION PLAN DEFERRED COMPENSATION AGREEMENT 1. I ACKNOWLEDGE THAT THE TERMS AND CONDITIONS OF THE ALTERA CORPORATION NONQUALIFIED DEFERRED COMPENSATION PLAN ("PLAN") HAVE BEEN EXPLAINED TO ME, INCLUDING THE TAX CONSEQUENCES OF MY DECISION TO PARTICIPATE IN THE PLAN. 2. I AGREE TO DEFER ALL OR A PORTION OF MY CURRENT INCOME, AND TO HAVE THAT INCOME PAID TO ME AT A LATER DATE PURSUANT TO THE TERMS AND CONDITIONS OF THE PLAN, WHICH IS INCORPORATED BY REFERENCE, IN ITS ENTIRETY, IN THIS AGREEMENT. NOTE: ACTUAL BENEFITS PAYABLE UNDER THE PLAN MAY BE GREATER OR LESS THAN AMOUNTS DEFERRED DEPENDING ON THE EARNINGS OR LOSSES THAT ARE CREDITED TO THE PARTICIPANT'S ACCOUNT IN ACCORDANCE WITH THE PLAN. 3. I ACKNOWLEDGE THAT UNDER THE TERMS OF THE PLAN, NO PAYMENTS CAN BE MADE IN THE EVENT ALTERA CORPORATION IS INSOLVENT (AS DEFINED IN THE PLAN). 4. I UNDERSTAND THAT THIS AGREEMENT IS NOT AN EMPLOYMENT AGREEMENT, DOES NOT GUARANTEE THAT I WILL RECEIVE ANY PREDETERMINED AMOUNT OF COMPENSATION, AND DOES NOT GUARANTEE THAT I WILL RECEIVE ANY BONUS. 5. I UNDERSTAND THAT ANY INCOME I DEFER WILL BE HELD AS AN ASSET OF ALTERA CORPORATION AND WILL REMAIN SUBJECT TO THE CLAIMS OF THE GENERAL CREDITORS OF ALTERA CORPORATION. 6. I UNDERSTAND THAT THE RETIREMENT PLANS COMMITTEE HAS THE SOLE DISCRETIONARY AUTHORITY TO ADMINISTER THE INVESTMENT OF FUNDS DEFERRED UNDER THE PLAN AND TO REVIEW FROM TIME TO TIME SUCH INVESTMENTS CONSISTENT WITH PROPER PLAN ADMINISTRATION. 7. I UNDERSTAND THAT ALL APPLICABLE TAXES AND ANY ELECTIVE DEFERRALS (e.g., ESPP, 401(k), MEDICAL INSURANCE PREMIUMS, ETC.) WILL BE DEDUCTED FROM MY PAYCHECK (SALARY AND ANY BONUS) PRIOR TO DEFERRALS BEING MADE TO THE PLAN. THEREFORE, I UNDERSTAND THAT THE PERCENTAGE OF GROSS SALARY AND BONUS I ELECT TO DEFER MAY NOT EXCEED THE AMOUNT THAT IS NECESSARY TO MAKE ALL SUCH DEDUCTIONS. 22 A. ELECTION TO DEFER COMPENSATION 1. Please choose one of the following with respect to salary: _____ I elect to defer ______ % (not to exceed 65%) of gross salary; or _____ I elect to defer 100% of my salary after all applicable payroll deductions have been made; I understand that I may not participate in the 401(k) Plan. 2. Please choose one of the following with respect to any future bonus: _____ I elect to defer ______ % (not to exceed 80%) of any future bonus; or _____ I elect to defer 100% of any future bonus after all applicable payroll deductions have been made; I understand that I may not participate in the 401(k) Plan. 3. Please choose one of the following with respect to any incentive payments: _____ I elect to defer ______ % (not to exceed 65%) of any incentive payments; or _____ I elect to defer 100% of any incentive payments after all applicable payroll deductions have been made; I understand that I may not participate in the 401(k) Plan. I understand that I may only contribute up to 65% of my gross salary and any incentive payments and up to 80% of any future bonus if I also participate in the 401(k) Plan. If I elect to defer 100% of my salary, any future bonus, or any incentive payment (after all applicable payroll deductions have been made), I understand that I may not participate in the 401(k) Plan. If I later decide to participate in the 401(k) Plan, I understand that my deferrals to the Plan will be reduced to 0% for the remainder of the year. I understand that I may discontinue deferral of future Compensation at any time during the year, but that I may make no other change in the Agreement until the beginning of the calendar year after I have notified Altera Corporation in writing of the change I desire. I also understand that if I discontinue deferral of future Compensation during the year, I cannot restart deferral until the beginning of the succeeding calendar year. 23 I understand that under the terms of the Plan I may, under certain circumstances, elect to make changes to the (a) Distribution Event (one-time only), (b) method of payment, (c) distribution at death and (d) designation of beneficiary, but at this time I am not electing to make any such changes. Agreed: - -------------------------------- (Signature) ALTERA CORPORATION - -------------------------------- (Print Name) By: --------------------------------- - -------------------------------- (Social Security Number) 24 ALTERA CORPORATION NONQUALIFIED DEFERRED COMPENSATION PLAN DEFERRED COMPENSATION AGREEMENT 1. I ACKNOWLEDGE THAT THE TERMS AND CONDITIONS OF THE ALTERA CORPORATION NONQUALIFIED DEFERRED COMPENSATION PLAN ("PLAN") HAVE BEEN EXPLAINED TO ME, INCLUDING THE TAX CONSEQUENCES OF MY DECISION TO PARTICIPATE IN THE PLAN. 2. I AGREE TO DEFER ALL OR A PORTION OF MY CURRENT INCOME, AND TO HAVE THAT INCOME PAID TO ME AT A LATER DATE PURSUANT TO THE TERMS AND CONDITIONS OF THE PLAN, WHICH IS INCORPORATED BY REFERENCE, IN ITS ENTIRETY, IN THIS AGREEMENT. NOTE: ACTUAL BENEFITS PAYABLE UNDER THE PLAN MAY BE GREATER OR LESS THAN AMOUNTS DEFERRED DEPENDING ON THE EARNINGS OR LOSSES THAT ARE CREDITED TO THE PARTICIPANT'S ACCOUNT IN ACCORDANCE WITH THE PLAN. 3. I ACKNOWLEDGE THAT UNDER THE TERMS OF THE PLAN, NO PAYMENTS CAN BE MADE IN THE EVENT ALTERA CORPORATION IS INSOLVENT (AS DEFINED IN THE PLAN). 4. I UNDERSTAND THAT THIS AGREEMENT IS NOT AN EMPLOYMENT AGREEMENT, DOES NOT GUARANTEE THAT I WILL RECEIVE ANY PREDETERMINED AMOUNT OF COMPENSATION, AND DOES NOT GUARANTEE THAT I WILL RECEIVE ANY BONUS. 5. I UNDERSTAND THAT ANY INCOME I DEFER WILL BE HELD AS AN ASSET OF ALTERA CORPORATION AND WILL REMAIN SUBJECT TO THE CLAIMS OF THE GENERAL CREDITORS OF ALTERA CORPORATION. 6. I UNDERSTAND THAT THE RETIREMENT PLANS COMMITTEE HAS THE SOLE DISCRETIONARY AUTHORITY TO ADMINISTER THE INVESTMENT OF FUNDS DEFERRED UNDER THE PLAN AND TO REVIEW FROM TIME TO TIME SUCH INVESTMENTS CONSISTENT WITH PROPER PLAN ADMINISTRATION. 7. I UNDERSTAND THAT ALL APPLICABLE TAXES AND ANY ELECTIVE DEFERRALS (E.G., ESPP, 401(k), MEDICAL INSURANCE PREMIUMS, ETC.) WILL BE DEDUCTED FROM MY PAYCHECK (SALARY AND ANY BONUS) PRIOR TO DEFERRALS BEING MADE TO THE PLAN. THEREFORE, I UNDERSTAND THAT THE PERCENTAGE OF GROSS SALARY AND BONUS I ELECT TO DEFER MAY NOT EXCEED THE AMOUNT THAT IS NECESSARY TO MAKE ALL SUCH DEDUCTIONS. 25 A. ELECTION TO DEFER COMPENSATION 1. Please choose one of the following with respect to salary: _____ I elect to defer ______ % (not to exceed 65%) of gross salary; or _____ I elect to defer 100% of my salary after all applicable payroll deductions have been made; I understand that I may not participate in the 401(k) Plan. 2. Please choose one of the following with respect to any future bonus: _____ I elect to defer ______ % (not to exceed 80%) of any future bonus; or _____ I elect to defer 100% of any future bonus after all applicable payroll deductions have been made; I understand that I may not participate in the 401(k) Plan. 3. Please choose one of the following with respect to any incentive payments: _____ I elect to defer ______ % (not to exceed 65%) of any incentive payments; or _____ I elect to defer 100% of any incentive payments after all applicable payroll deductions have been made; I understand that I may not participate in the 401(k) Plan. I understand that I may only contribute up to 65% of my gross salary and any incentive payments and up to 80% of any future bonus if I also participate in the 401(k) Plan. If I elect to defer 100% of my salary, any future bonus, or any incentive payment (after all applicable payroll deductions have been made), I understand that I may not participate in the 401(k) Plan. If I later decide to participate in the 401(k) Plan, I understand that my deferrals to the Plan will be reduced to 0% for the remainder of the year. I understand that I may discontinue deferral of future Compensation at any time during the year, but that I may make no other change in the Agreement until the beginning of the calendar year after I have notified Altera Corporation in writing of the change I desire. I also understand that if I discontinue deferral of future Compensation during the year, I cannot restart deferral until the beginning of the succeeding calendar year. B. DISTRIBUTION - ONLY TO BE COMPLETED BY FIRST YEAR PARTICIPANTS I understand that all vested amounts held for my benefit under the Plan shall begin to be distributed upon the occurrence of a "Distribution Event" (described below), subject to earlier distribution upon a change of control or unforeseen emergency as described in the Plan. 26 Distribution of vested amounts held for my benefit under the Plan should commence pursuant to the following choice (select one): _____ Specific date or age (not to exceed 70), without regard to termination of employment; OR _____ Earlier of (i) __________ specific date or age (not to exceed 70), or (ii) termination of employment; OR _____ Termination of employment. I understand that actual payout of assets starts within 105 days after the end of the calendar year in which my specified Distribution Event occurs. I understand further that I may not make further deferrals to the Plan while I am receiving a distribution of benefits from the Plan. I understand that the Distribution Event specified above may be changed only ONCE during the course of my Plan participation and in addition, (i) may only be changed at least one year prior to the originally specified Distribution Event, and (ii) if I choose a later date or age, such age or date must be at least three years later than the original date or age; provided, however, that no such change shall be given effect if I voluntarily terminate my services to the Company during the one-year period after such change. C. METHOD OF PAYMENT (ONE METHOD MUST BE CHECKED IN ORDER FOR THIS TO BE A VALID AGREEMENT) I elect that the payment of all vested amounts due me under this Agreement and the Plan shall be made in the following manner: _____ One single lump sum payment. _____ Annual installments equal to 1/n of the assets on deposit in the trust credited to my account, where n is the number of installments remaining to be paid. I hereby elect _____ annual payments (not to exceed 10 years), upon my elected Distribution Event. _____ Annual installments equal to a specified % of the vested assets credited to my account under the Trust. I hereby elect _____ annual payments (not to exceed 10 years). Please indicate the installment % by year in the space provided below. NOTE: Installment percentages must be in 5% increments and are subject to a 5% minimum percentage:
Year % ---- ----- 1 ______ 2 ______
27 3 ______ 4 ______ 5 ______ 6 ______ 7 ______ 8 ______ 9 ______ 10 ______
I understand that my elected method of distribution can be changed up to 90 days prior to the Distribution Event specified above; provided, however, that no such change shall be given effect if I voluntarily terminate my services to the Company during the 90-day period after such change. I understand further that my elected method of distribution may be modified by Altera Corporation at any time prior to my termination of employment, provided that any such modification that impairs my rights under this Agreement and the Plan shall be subject to my consent. 28 D. SPECIAL ELECTION FOR DISTRIBUTION AT DEATH By checking the box below, I can elect a lump sum payment of the remainder of my interest under the Plan in the event I should die before all amounts payable to me under the Plan have been paid, notwithstanding my elections under B and C above. [ ] I hereby elect a lump sum distribution at death. [ ] Annual installments equal to 1/n of the assets on deposit in the trust credited to my account, where n is the number of installments remaining to be paid. I hereby elect _____ annual payments (not to exceed 10 years) at death. NOTE: If no box is checked, distribution at death will occur in accordance with your elections under B and C above. [ ] Annual installments equal to a specified % of the vested assets credited to my account under the Trust. I hereby elect _____ annual payments (not to exceed 10 years) at death. Please indicate the installment % by year in the space provided below. NOTE: Installment percentages must be in 5% increments and are subject to a 5% minimum percentage.
Year % ---- ------ 1 ______ 2 ______ 3 ______ 4 ______ 5 ______ 6 ______ 7 ______ 8 ______ 9 ______ 10 ______
29 E. DESIGNATED BENEFICIARY I designate the following beneficiary to receive the remainder of my interest under the Plan in the event that I should die before all amounts payable to me under the Plan have been paid. I understand that I may change this Designated Beneficiary at any time on written notice to Altera. _____ Please follow the Beneficiary Election on file for the Altera Corporation Employee Retirement and Savings Plan. OR _____ Name(s) and Relationship:_______________________________________________ ________________________________________________________________________ ________________________________________________________________________ The foregoing Election is voluntarily made by me after reviewing the terms of the Plan and with knowledge that this Election is irrevocable until changed in accordance with the terms of the Plan. Agreed: - --------------------------------- (Signature) ALTERA CORPORATION - --------------------------------- (Print Name) By --------------------------------- - --------------------------------- (Social Security Number) - --------------------------------- ------------------------------------ (Date) (Date) EX-10.45(B) 3 f70153ex10-45b.txt EXHIBIT 10.45(B) 1 Exhibit 10.45(b) 1996 STOCK OPTION PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same meanings in this Option. I. 1. NOTICE OF STOCK OPTION GRANT NAME: ________________________________ ADDRESS: _____________________________ You have been granted an option to purchase Common Stock of the Company, subject the terms and conditions of the Plan and this Option Agreement, as Grant Number ___________ Date of Grant ___________ Vesting Commencement ___________ Exercise Price per Share ___________ Total Number of Shares ___________ Total Exercise ___________ Type of Option Nonstatutory Stock Option Expiration Date ___________ 2. VESTING SCHEDULE. Shares in each period will become fully vested on the date shown (see Vesting Rights Section I.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 1996 Stock Option Plan, and conditioned upon due and valid execution of this Option Agreement by the Optionee. OPTIONEE: ALTERA CORPORATION By: - ----------------------------- --------------------------------- Title: Vice President 2 3. Vesting Rights. This Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall vest each month thereafter. 4. Termination Period. (a) General Rule. Except as provided below, this Option may be exercised for thirty (30) days after termination of Optionee's employment or consulting relationship with the Company. In the event of the Optionee's change in status from Employee to Consultant or Consultant to Employee, this Option Agreement shall remain in effect. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. (b) Death; Disability. Upon the termination of the Optionee's employment or consulting relationship with the Company by reason of his or her death or Disability, this Option may be exercised for six (6) months after such termination, provided that in no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. 1. Grant of Option. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee") an option (the "Option") to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 14(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. In the event of Optionee's death, Disability or other termination of Optionee's employment or consulting relationship, the exercisability of the Option is governed by the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the 2 3 provisions of the Plan. The Exercise Notice shall be delivered in person, by mail, via electronic mail or facsimile or by other authorized method to the Secretary of the Company or other person designated by the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange or quotation service upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. 3. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; or (b) check; or (c) broker assisted cashless exercise; or (d) surrender of other Shares which (i) 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 (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares; or (e) other method authorized by the Company. 4. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. 6. U.S. Tax Consequences. For Optionees subject to U.S. income tax, some of the federal and California tax consequences relating to this Option, as of the date of this Option, are set forth below. All other Optionees should consult a tax advisor for tax consequences relating to this Option in their respective jurisdiction. . THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. 3 4 (a) Exercising the Option. (i) Nonstatutory Stock Option. The Optionee may incur regular federal income tax and California income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (ii) Incentive Stock Option. If this Option qualifies as an ISO, the Optionee will have no regular federal income tax or California income tax liability upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee undergoes a change of status from Employee to Consultant, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the ninety-first (91st) day following such change of status. (b) Disposition of Shares. (i) NSO. If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. (ii) ISO. If the Optionee holds ISO Shares for at least one year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. (c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. 4 5 7. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by California law except for that body of law pertaining to conflict of laws. 8. NO GUARANTEE OF EMPLOYMENT. OPTIONEE UNDERSTANDS AND AGREES THAT HIS OR HER EMPLOYMENT WITH THE COMPANY OR ITS SUBSIDIARIES IS FOR AN UNSPECIFIED DURATION AND CONSTITUTES "AT-WILL" EMPLOYMENT. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY OR ITS SUBSIDIARY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S AND/OR SUBSIDIARY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE. 9. Entire Agreement. This agreement sets forth the entire agreement and understanding between the Company and Optionee relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in a signed writing. By your signature and the signature of the Company's representative on page one of this Option Agreement, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated on the Notice of Stock Option Grant. 5 EX-10.57(B) 4 f70153ex10-57b.txt EXHIBIT 10.57(B) 1 EXHIBIT 10.57(b) ALTERA CORPORATION SEVERANCE AGREEMENT This Severance Agreement (the "Agreement") is made and entered into effective as of November 30, 2000 (the "Effective Date") by and between John Daane (hereinafter referred to as "Executive") and Altera Corporation (the "Company"). WHEREAS, Executive desires to accept employment with the Company as its Chief Executive Officer ("CEO"); WHEREAS, the Company desires to employ Executive as its CEO; and WHEREAS, the Company and Executive agree that Executive shall be eligible for severance under the circumstances set forth in Section 2 of this Agreement; Accordingly, the parties agree as follows: 1. Term of Agreement. This Agreement shall commence on the first day of Executive's employment with the Company, and terminate on the date which is five (5) years following such date, unless the term of this Agreement is extended at the sole discretion of the Company's Board of Directors. Nothing in this Agreement shall be construed as creating an obligation to extend the term of the Agreement. 2. Executive's Eligibility for Severance. Executive shall be entitled to the "Severance Package" as defined in Section 3 of this Agreement if (but only if) the Company terminates Executive's employment for reasons other than (A) Executive's death, (B) for Cause, or (C) if Executive is eligible to receive the "Change In Control Severance Package" due to a "Change in Control" as defined and provided for in the Altera Corporation Change In Control Severance Agreement between the parties, dated November 30, 2000. Executive is not entitled to the Severance Package if Executive terminates his employment for any reason. In addition, as a condition of Executive receiving the Severance Package, Executive and the Company agree to sign a release agreement in the form attached hereto as Exhibit "A" within thirty days of the effective date of Executive's termination and prior to Executive receiving the Severance Package. 3. Severance Package. In the event Executive is entitled to the Severance Package pursuant to Section 2, above, it shall be payable within thirty days of Executive's termination. The Severance Package shall consist of (i) payment equivalent to two year's of Executive's then-current base salary, and (ii) one year of accelerated stock vesting, which applies to all Executive's restricted stock and option grants. The Severance Package shall be paid in lieu of any other severance to Executive. 4. Certain Definitions. As used herein, the following terms shall have the following respective meanings: 1 2 (a) Disability. If, in the sole opinion of the Company, Executive shall be prevented from properly performing his duties hereunder by reason of any physical or mental incapacity for a period of more than ninety (90) days in the aggregate in any twelve-month period, then, to the extent permitted by law, Company may terminate Executive's employment. Nothing in this Section shall affect Executive's rights under any disability plan in which he is a participant. If Executive elects to receive disability benefits due to a Disability, such election shall not prohibit Executive from receiving the Severance Package pursuant to Section 3 above. (b) Cause. The following shall constitute "Cause" for termination: (i) Executive's deliberate dishonesty with respect to the Company or any subsidiary or affiliate thereof; or (ii) Executive's conviction of a crime involving moral turpitude; or (iii) Criminal acts pertaining to the Company or any of its affiliates or shareholders; material and fraudulent falsification; embezzlement or unauthorized conversion of property; or willful disclosure of trade secrets or other information likely to be used to the detriment of the Company. 5. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of this Agreement prior to the effectiveness of any succession shall entitle Executive to severance from the Company in the same amount and on the same terms as Executive would be entitled if Executive were eligible pursuant to Section 2 herein for the Severance Package. As used in this Agreement, "Company" shall mean the Company as defined above and any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amount would still be payable to Executive hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or if there is no such designee, to Executive's estate. 6. Notice. All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered (a) by hand or (b) by a nationally recognized overnight courier service or (c) by United States 2 3 first class registered or certified mail, return receipt requested, to the principal address of the other party, as set forth below. The date of notice shall be deemed to be the earlier of actual receipt of notice by any permitted means, or five business days following dispatch by overnight delivery service or the United States Mail. Executive shall be obligated to notify the Company in writing of any change in his address. Notice of change of address shall be effective only when done in accordance with this section. Company's Notice Address: C. Wendell Bergere, Esq. Vice President, General Counsel and Secretary Altera Corporation 101 Innovation Drive San Jose, California 95134 Executive's Notice Address: John Daane 156 Highland Avenue Los Gatos, California 95030 7. At-Will Employment Status. Nothing in this Agreement creates any contractual rights in favor of Executive with respect to the terms of his employment. Additionally, as set forth in detail in the Company's Employee Handbook, Executive's employment with the Company is "at-will." This means that Executive is free to resign at any time and the Company is free to terminate Executive's employment at any time for any reason, with or without advanced notice. Executive's "at-will" status cannot be altered except in a writing which has been approved by the Board of Directors of the Company. 8. Miscellaneous (a) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. (b) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (c) No waiver by Executive at any time of any breach of, or compliance with, any provision of this Agreement to be performed by the Company shall be deemed a waiver of that or any other provisions at any subsequent time. (d) This Agreement may be amended only by a written agreement executed by each of the parties hereto. No amendment of or waiver of, or modification of any obligation under this Agreement will be enforceable unless set forth in a writing signed by the party against which enforcement is sought. Any amendment effected in 3 4 accordance with this Section will be binding upon all parties hereto and each of their respective successors and assigns. (e) This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. (f) Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. (g) The Company shall do, make, execute and deliver all such additional and further acts, things, assurances and instruments as Executive may reasonably request in order to assure Executive his rights hereunder and to carry into effect the provisions and intent of this Agreement. The Company shall upon Executive's request, convert any options which are incentive stock options into nonqualified options and shall amend any outstanding option agreements in a manner consistent with this Agreement. 9. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and during the term of the Agreement supercedes the provisions of all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto with respect to the subject matter hereof. 10. Acknowledgement. Executive acknowledges that he has had the opportunity to consult legal counsel concerning this Agreement, that Executive has read and understands the Agreement, that Executive is fully aware of its legal effect, and that Executive has entered into it freely based on his own judgment and not on any representations or promises other than those contained in this Agreement. ALTERA CORPORATION, EXECUTIVE a Delaware corporation Date: 11/29/00 Date: 11/30/00 ----------------------------- ------------------------------- By: /s/ RODNEY SMITH /s/ JOHN DAANE ----------------------------- ------------------------------- Name: Rodney Smith Name of Executive ---------------------------- Title: CEO --------------------------- 4 EX-10.57(C) 5 f70153ex10-57c.txt EXHIBIT 10.57(C) 1 EXHIBIT 10.57(c) ALTERA CORPORATION CHANGE IN CONTROL SEVERANCE AGREEMENT This Change in Control Severance Agreement (the "Agreement") is made and entered into effective as of November 30, 2000 (the "Effective Date") by and between John Daane (hereinafter referred to as "you," "your" or "Executive") and Altera Corporation (the "Company"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel, and in this connection, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Company may exist and that such possibility, and the uncertainty and questions that it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's senior management, including yourself, to their assigned duties without distraction in the face of the possibility of a change in control of the Company; and WHEREAS, in order to induce you to accept the position as Chief Executive Officer ("CEO") of the Company, the Company agrees that you shall receive the severance benefits set forth in Section 3 of this Agreement in the event your employment with the Company is terminated under the circumstances described in Section 2(b), below, subsequent to a "Change in Control" of the Company; Accordingly, the parties agree as follows: 1. Term of Agreement. This Agreement shall commence on the first day of your employment with the Company, and shall terminate on the date which is five (5) years following such date, unless within such term a Change in Control has occurred, in which case this Agreement shall terminate upon the date that all obligations of the parties hereto under this Agreement have been satisfied. 2. Change in Employment Status. (a) Any termination of your employment following a Change in Control by the Company or by you shall be communicated by written notice of termination to the other party hereto in accordance with Section 7, which notice shall specify the effective date of such termination and specify the provisions of this Agreement, if any, upon which such termination is based. (b) You shall be entitled to the benefits provided in Section 3 if (but only if) within 24 months following a Change in Control one or more of the following events (the "Trigger Events") occur: (i) your employment is terminated with an effective date within such 24 month period by the Company for reasons other than (A) your death; (B) for Cause, (ii) you are reassigned by the Company to a position other than CEO and you terminate your employment with an effective date within 90 days of such reassignment; or (iii) the Company moves its 1 2 headquarters more than 60 miles from the location of its present headquarters and you terminate your employment with an effective date within 90 days of such move. 3. Severance Upon the Occurrence of a Trigger Event. In the event of the occurrence of a Trigger Event, you shall receive from the Company within thirty (30) days of the date of termination the "Change in Control Severance Package," as herein defined. The Change in Control Severance Package shall consist of (i) payment equivalent to twenty-four months of your then-current base salary, (ii) a bonus equivalent to two times your target bonus, if any, for the fiscal year in which the Change in Control occurs, and (iii) accelerated vesting of all options and restricted shares which have been granted or issued at least six months prior to the Change in Control. The Change in Control Severance Package (or Limited Payment Amount, as defined in Section 4) provided for herein shall be paid in lieu of any other severance to you. 4. Limits on Amounts Payable. (a) Notwithstanding anything contained in this Agreement to the contrary, to the extent that any payment or benefit (within the meaning of Section 280G(b)(2) of the Code to you or for your benefit, paid or payable or distributed or distributable pursuant to Section 3 of this Agreement ("Payment" or "Payments"), would be subject to the excise tax imposed under Code Section 4999, or any interest or penalties are incurred by you with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), the Payments shall be reduced (but not below zero) if and to the extent that a reduction in the Payments would result in you retaining a larger amount, on an after-tax basis (taking into account federal, state and local income taxes and the Excise Tax), than if you received all of the Payments (any such reduced amount is hereinafter referred to as the "Limited Payment Amount"). Unless you shall have given prior written notice specifying a different order to the Company to effectuate the Limited Payment Amount, the Company shall reduce or eliminate the Payments by (i) first reducing or eliminating those Payments which are not payable in cash, and then (ii) by reducing or eliminating cash Payments. Any notice given by you pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing your rights and entitlements to any benefits set forth in Section 3. (b) An initial determination as to whether the Payments shall be reduced to the Limited Payment Amount and the amount of such Limited Payment Amount shall be made, at the Company's expense, by the accounting firm that is the Company's independent accounting firm as of the date of the Change in Control (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation, to the Company and you within five (5) days of your termination date, if applicable, or such other time as requested by the Company or by you (provided you reasonably believe that any of the Payments may be subject to the Excise Tax). If the Accounting Firm determines that no Excise Tax is payable by you with respect to a Payment or Payments, it shall furnish you with an opinion reasonably acceptable to you that no Excise Tax will be imposed with respect to any such Payment or Payments. Within ten (10) days of the delivery of the Determination to you, you shall have the right to dispute the Determination (the "Dispute"). If there is no Dispute, the Determination shall be binding, final and conclusive upon the Company and you. 5. Certain Definitions. As used herein, the following terms shall have the following respective meanings: 2 3 (a) Change in Control. A "Change in Control" shall occur or be deemed to have occurred only if any of the following events occur: (i) any "person" as such term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other than (A) the Company, (B) any "group" including you, (C) any employee benefit plan of the Company, or (D) any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing in the aggregate more than 50% of either (A) the total combined voting power of the Company's then outstanding stock or (B) the total fair market value of the Company's then outstanding stock. (ii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the stock of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into stock of the surviving entity) 50% or more of the total combined voting power and the total combined fair market value of the stock of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iii) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale, lease, exchange or disposition by the Company of all or substantially all of the Company's assets. (b) Disability. If, in the sole opinion of the Company, Executive shall be prevented from properly performing his duties hereunder by reason of any physical or mental incapacity for a period of more than ninety (90) days in the aggregate in any twelve-month period, then, to the extent permitted by law, Company may terminate Executive's employment. Nothing in this Section shall affect Executive's rights under any disability plan in which he is a participant. If the Company terminates Executive's employment pursuant to this provision within 24 months following a Change in Control, Executive shall receive the Change in Control Severance Package provided in this Agreement. If Executive elects to receive disability benefits due to a Disability, such election shall not prohibit Executive from receiving severance benefits. (c) Cause. The following shall constitute "Cause" for termination: (i) Your deliberate dishonesty with respect to the Company or any subsidiary or affiliate thereof; or (ii) Your conviction of a crime involving moral turpitude; or (iii) Criminal acts pertaining to the Company or any of its affiliates or shareholders; material and fraudulent falsification; embezzlement or unauthorized conversion of property; violation of conflict of interest or vendor relations policies; or willful disclosure of trade secrets or other information likely to be used to the detriment of the Company. 6. 3 4 Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of this Agreement prior to the effectiveness of any succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you had been terminated without Cause. As used in this Agreement, "Company" shall mean the Company as defined above and any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or if there is no such designee, to your estate. 7. Notice. All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered (a) by hand or (b) by a nationally recognized overnight courier service or (c) by United States first class registered or certified mail, return receipt requested, to the principal address of the other party, as set forth below. The date of notice shall be deemed to be the earlier of actual receipt of notice by any permitted means, or five business days following dispatch by overnight delivery service or the United States Mail. You shall be obligated to notify the Company in writing of any change in your address. Notice of change of address shall be effective only when done in accordance with this section. Company's Notice Address: C. Wendell Bergere, Esq. Vice President, General Counsel and Secretary Altera Corporation 101 Innovation Drive San Jose, California 95134 Executive's Notice Address: John Daane 156 Highland Avenue Los Gatos, California 95030 8. At-Will Employment Status. Nothing in this Agreement creates any contractual rights in favor of you with respect to the terms of your employment. Additionally, as set forth in detail in the Company's Employee Handbook, your employment with the Company is "at-will." This means that you are free to resign at any time and the Company is free to terminate your employment at any time for any reason. Your "at-will" status cannot be altered except in a writing which has been approved by the Board of Directors of the Company. 4 5 9. Miscellaneous (a) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. (b) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (c) No waiver by you at any time of any breach of, or compliance with, any provision of this Agreement to be performed by the Company shall be deemed a waiver of that or any other provisions at any subsequent time. (d) This Agreement may be amended only by a written agreement executed by each of the parties hereto. No amendment of or waiver of, or modification of any obligation under this Agreement will be enforceable unless set forth in a writing signed by the party against which enforcement is sought. Any amendment effected in accordance with this Section will be binding upon all parties hereto and each of their respective successors and assigns. (e) This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. (f) Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. (g) The Company shall do, make, execute and deliver all such additional and further acts, things, assurances and instruments as you may reasonably request in order to assure you your rights hereunder and to carry into effect the provisions and intent of this Agreement. The Company shall upon your request, convert any options which are incentive stock options into nonqualified options and shall amend any outstanding option agreements in a manner consistent with this Agreement. 10. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and during the term of the Agreement supercedes the provisions of all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto with respect to the subject matter hereof. 5 6 11. Acknowledgement. Executive acknowledges that he has had the opportunity to consult legal counsel concerning this Agreement, that Executive has read and understands the Agreement, that Executive is fully aware of its legal effect, and that Executive has entered into it freely based on his own judgment and not on any representations or promises other than those contained in this Agreement. ALTERA CORPORATION, EXECUTIVE a Delaware corporation Date: 11/29/00 Date: 11/30/00 ----------------------------- ------------------------------- By: /s/ RODNEY SMITH /s/ JOHN DAANE ----------------------------- ------------------------------- Name: Rodney Smith Name of Executive ---------------------------- Title: CEO --------------------------- 6 EX-13.1 6 f70153ex13-1.txt EXHIBIT 13.1 1 EXHIBIT 13.1 CORPORATE PROFILE Altera Corporation, The Programmable Solutions Company(R), is a world leader in one of the fastest growing segments of the semiconductor industry: high-density programmable logic devices (PLDs). Altera PLDs are standard integrated circuits that offer significant advantages over custom logic chips such as application-specific integrated circuits (ASICs). Today's high-density PLDs, used in concert with Altera's desktop software design tools and optimized intellectual property building blocks, allow electronic systems manufacturers to execute on a single chip the same functionality that previously consumed an entire printed circuit board. This methodology, called "system on a programmable chip" (SOPC), helps electronic systems manufacturers shorten time-to-market and reduce development costs. Altera serves over 13,000 customers in three primary market segments: communications, electronic data processing, and industrial applications. The Company sells its chips worldwide and derives nearly half of its revenues from markets outside the United States. Altera common stock is traded on The Nasdaq Stock Market(R) under the symbol ALTR. Altera's web site is located at http://www.altera.com. 2 SELECTED CONSOLIDATED FINANCIAL DATA
FIVE-YEAR SUMMARY Years ended December 31, (In thousands, except per share amounts) 2000 1999 1998 1997 1996 - ----------------------------------------- ---------- ---------- ---------- -------- -------- STATEMENTS OF OPERATIONS DATA: Sales $1,376,815 $ 836,623 $ 654,342 $631,114 $497,306 Cost of sales 466,994 301,322 249,474 236,958 191,958 ---------- ---------- ---------- -------- -------- Gross margin 909,821 535,301 404,868 394,156 305,348 Research and development expenses 172,373 86,065 59,864 54,417 49,513 Selling, general, and administrative expenses 209,979 143,214 113,161 112,784 87,742 Acquired in-process research and development expense 6,305 -- -- -- -- ---------- ---------- ---------- -------- -------- Income from operations 521,164 306,022 231,843 226,955 168,093 Gain on sale of WaferTech, LLC 178,105 -- -- -- -- Interest and other income (expense), net 46,145 37,055 12,340 2,616 1,044 ---------- ---------- ---------- -------- -------- Income before income taxes, equity investment and cumulative effect of change in accounting principle 745,414 343,077 244,183 229,571 169,137 ---------- ---------- ---------- -------- -------- Income before equity investment and cumulative effect of change in accounting principle 498,307 231,578 164,827 151,517 109,135 Equity in loss of WaferTech, LLC 1,400 7,584 10,440 -- -- ---------- ---------- ---------- -------- -------- Income before cumulative effect of change in accounting principle 496,907 223,994 154,387 151,517 109,135 Cumulative effect of change in accounting principle -- -- -- 18,064 -- ---------- ---------- ---------- -------- -------- Net income $ 496,907 $ 223,994 $ 154,387 $133,453 $109,135 ---------- ---------- ---------- -------- -------- Income per share before cumulative effect of change in accounting principle: Basic $ 1.25 $ 0.57 $ 0.41 $ 0.43 $ 0.31 Diluted 1.19 0.54 0.39 0.39 0.29 Net income per share: Basic $ 1.25 $ 0.57 $ 0.41 $ 0.38 $ 0.31 Diluted 1.19 0.54 0.39 0.34 0.29 Shares used in computing income per share: Basic 396,849 396,158 373,972 354,100 349,624 Diluted 416,629 414,928 406,356 410,464 403,252 BALANCE SHEET DATA: Working capital $1,013,155 $ 785,359 $ 587,923 $430,371 $295,020 Total assets 2,004,134 1,439,599 1,093,331 952,518 778,212 Long-term debt -- -- -- 230,000 230,000 Stockholders' equity 1,247,930 1,118,073 881,721 536,687 370,245 Book value per share 3.21 2.81 2.26 1.50 1.06
3 About Your Investment STOCK OWNERSHIP PROFILE The Company estimates that at December 31, 2000, there were more than 100,000 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:
1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- 29.6 21.4 39.0 45.9 27.7
Computed using earnings that exclude the cumulative effect of change in accounting principle in 1997, and the one-time effects relating to the WaferTech transaction in 2000. TRADING VOLUME The average trading volume in the company's stock increased 6.8% in 2000 over 1999, as measured by Nasdaq(R). Trading volume in 2000 averaged 9.4 million shares per day, compared to 8.8 million shares per day in 1999 and 10.2 million shares in 1998, retroactively adjusted for 2-for-1 splits of the Company's common stock in the fourth quarter of 1996, the second quarter of 1999, and the third quarter of 2000. ESTIMATED STOCK OWNERSHIP PERCENTAGE Institutional Investors 80% Individuals 15% Officers, Directors & Employees 5%
4 CORPORATE DIRECTORY BOARD OF DIRECTORS Rodney Smith Chairman of the Board Altera Corporation John Daane President and Chief Executive Officer Altera Corporation Charles M. Clough Former Chairman, President, and Chief Executive Officer Wyle Electronics Michael A. Ellison Former Chief Executive Officer Steller, Inc. Paul Newhagen Former Vice President, Administration Altera Corporation Robert W. Reed Former Senior Vice President Intel Corporation William E. Terry Former Director and Executive Vice President Hewlett-Packard Company Deborah Rieman, Ph.D. Former President and Chief Executive Officer CheckPoint Software Technologies, Inc. CORPORATE OFFICERS John Daane President and Chief Executive Officer C. Wendell Bergere Vice President, General Counsel, and Secretary Denis Berlan Executive Vice President and Chief Operating Officer Erik R. Cleage Senior Vice President, Marketing John R. Fitzhenry Vice President, Human Resources Jordan Plofsky Senior Vice President, Embedded Processor Products Lance M. Lissner Senior Vice President, Business Development Nathan Sarkisian Senior Vice President and Chief Financial Officer Michael Jacobs Senior Vice President, Worldwide Sales APPOINTED OFFICERS Bahram Ahanin Vice President, Design Automation Alain Bismuth Vice President, New Market Development Robert Blake Vice President, Product Planning Melonie C. Brophy Vice President, Finance and Treasurer Misha R. Burich Senior Vice President, Software Development James W. Callas Vice President, Finance and Corporate Controller Timothy W. Colleran Vice President, Product Marketing Donald F. Faria Vice President, Customer Marketing and Applications Francois Gregoire Vice President, Technology Frank L. Hannig Vice President and Chief Information Officer William Y. Hata Vice President, Product Engineering Ben A. Lee Vice President, Asia Pacific Craig Lytle Vice President, Intellectual Property Business Unit Robert C. Mahoney Vice President, Strategic Accounts Bruce Mielke Vice President, Test Development Thomas B. Murchie Vice President, Operations Chris T. K. Oh Vice President, Asia Pacific Operations Timothy J. Propeck Vice President, North America Sales Timothy J. Southgate Vice President, Software Engineering Clifton S. Tong Vice President, Corporate Marketing Nigel Toon Vice President and Managing Director, Europe John E. Turner Senior Vice President, Design Engineering Scott Wylie Vice President, Investor Relations CORPORATE HEADQUARTERS 101 Innovation Drive San Jose, California 95134 (408) 544-7000 INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP San Jose, California STOCK LISTING For the past two years, the quarterly high and low closing sales prices for the common stock, retroactively adjusted for 2-for-1 splits in 1999 and 2000, were:
2000 1999 -------------------- ------------------- Quarter High Low High Low - ------- -------- -------- ------- ------- First 48 1/2 24 17 1/4 12 5/32 Second 57 5/16 36 9/32 20 5/32 16 1/32 Third 64 13/16 43 31/32 27 5/8 17 9/16 Fourth 51 1/16 23 15/16 33 7/8 20 7/8
REGISTRAR/TRANSFER AGENT Fleet National Bank c/o EquiServe P.O. Box 43010 Providence, Rhode Island 02940 (781) 575-3120 http://www.EquiServe.com WEB SITE For current information on Altera Corporation, visit our web site at http://www.altera.com. ADDITIONAL INFORMATION Please direct all requests to: Investor Relations 101 Innovation Drive San Jose, California 95134 (408) 544-7707 Business releases may be requested from our Fax-on-Demand service at (800) 789-2587 in the United States and Canada, and at (408) 894-0466 from other international locations. EX-21.1 7 f70153ex21-1.txt EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT The following list identifies only Registrant's significant subsidiaries as defined in Rule 1-02(w) of Regulation S-X.
JURISDICTION YEAR NAME OF INCORPORATION ORGANIZED ------------------------------------------------------------------ Altera International, Inc. Cayman Islands 1997 Altera International Limited Hong Kong 1997
47 EX-23.1 8 f70153ex23-1.txt EXHIBIT 23.1 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, No. 333-62917, No. 333-81787, No. 333-31304, No. 333-37216, No. 333-41688, No. 333-47722 and No. 333-54384) and Form S-3 (No. 333-44746) of Altera Corporation of our report dated January 17, 2001 relating to the financial statements, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP San Jose, California March 6, 2001 48 -----END PRIVACY-ENHANCED MESSAGE-----