1
EXHIBIT 13.1
ABOUT YOUR INVESTMENT
STOCK OWNERSHIP PROFILE. The Company estimates that at December 31, 1996
there were more than 20,000 holders of Altera stock.
STOCK PRICE. Altera's initial public offering took place on March
31, 1988. The Company's price-to-earnings ratio at each year-end
for the last five years was as follows:
1992 1993 1994 1995 1996
------------------------------------------
23.0 32.4 26.0* 26.0 30.5
* Excludes R&D in-process write-off associated with the acquisition of
Intel's programmable logic business.
TRADING VOLUME. The average trading volume in the Company's stock increased
30% in 1996 over 1995, as measured by Nasdaq. Trading volume in 1996
averaged 4.4 million shares per day, compared to 3.4 million per day in
1995, and 3.0 million in 1994, retroactively adjusted for 2-for-1
splits of the Company's common stock in the second quarter of 1995 and the
fourth quarter of 1996.
2
CORPORATE DIRECTORY
BOARD OF DIRECTORS
Rodney Smith
Chairman, Chief Executive Officer & President
Altera Corporation
Michael A. Ellison
Chief Executive Officer
Steller, Inc.
Paul Newhagen
Vice President, Administration
Altera Corporation
Robert W. Reed
Former Senior Vice President
Intel Corporation
William E. Terry
Former Director & Executive Vice President
Hewlett-Packard Company
Deborah Triant, Ph.D.
President and Chief Executive Officer
CheckPoint Software Technologies, Inc.
CORPORATE OFFICERS
Rodney Smith
President & Chief Executive Officer
C. Wendell Bergere
Vice President, General Counsel & Secretary
Denis Berlan
Vice President, Operations/Product Engineering
Erik Cleage
Vice President, Marketing
John R. Fitzhenry
Vice President, Human Resources
Clive McCarthy
Vice President, Development Engineering
Paul Newhagen
Vice President, Administration
Thomas J. Nicoletti
Vice President, Investor Relations and Business
Development
Nathan Sarkisian
Vice President, Finance & Chief Financial Officer
Peter Smyth
Vice President, Sales
CORPORATE HEADQUARTERS
2610 Orchard Parkway
San Jose, California 95134-2020
(408) 544-7000
CORPORATE COUNSEL
Wilson, Sonsini, Goodrich & Rosati
Palo Alto, California
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
San Jose, California
FORM 10-K
A copy of the Company's Form 10-K, filed with the
Securities and Exchange Commission (without exhibits),
is available from:
Shareholder Relations
Altera Corporation
2610 Orchard Parkway
San Jose, California 95134-2020
(408) 544-7707
STOCK LISTING
Altera's common stock has been traded on the over-the-
counter market since the Company's initial public
offering (IPO) on March 31, 1988, and is quoted on The
Nasdaq Stock Market under the symbol "ALTR." The
Company has never paid cash dividends on its common
stock and has no present plans to do so.
3
For the past two years, the quarterly high and low closing
sales prices for the common stock were:
1996 1995
------------------- ------------------
Quarter High Low High Low
- ----------------------------------------------------
First 38 1/2 22 9/16 14 27/32 10 1/8
Second 31 3/16 18 13/16 22 1/2 13 31/32
Third 27 5/8 14 34 7/8 21 13/16
Fourth 38 7/8 24 7/8 32 19/32 23 1/16
REGISTRAR/TRANSFER AGENT
Investor Relations
Boston EquiServe L.P.
P.O. Box 8040
Boston, MA 02266-8040
(617) 575-3100
Altera, MAX, FLEX, and MAX+PLUS are registered trademarks, and
MAX+PLUS II, FLEX 10K, FLEX 8000, MAX 9000, MAX 7000, MAX 7000S,
MAX 5000, Classic, FLASHlogic, and individual device designations
are trademarks of Altera Corporation. Altera Corporation
acknowledges the trademarks of other organizations for their respective
products or services mentioned in this document.
4
SELECTED CONSOLIDATED FINANCIAL DATA
FIVE-YEAR SUMMARY
Year Ended December 31
(In thousands, ------------------------------------------------------------------------
except per share amounts) 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
STATEMENTS OF OPERATIONS
DATA:
Sales $497,306 $401,598 $198,796 $140,279 $101,470
Cost of sales 191,958 158,808 77,672 58,470 43,994
-------- -------- -------- -------- --------
Gross profit 305,348 242,790 121,124 81,809 57,476
Research and development 49,513 33,849 45,994 16,847 15,826
Selling, general, and
administrative 87,742 74,658 45,771 35,202 25,147
-------- -------- -------- -------- --------
Income from operations $168,093 $134,283 $ 29,359 $ 29,760 $ 16,503
======== ======== ======== ======== ========
Income before income taxes $169,137 $137,891 $ 31,496 $ 31,392 $ 18,024
======== ======== ======== ======== ========
Net income $109,135 $ 86,871 $ 14,608 $ 21,195 $ 11,539
======== ======== ======== ======== ========
Primary net income per share $ 1.19 $ 0.95 $ 0.17 $ 0.25 $ 0.14
Fully diluted net income per $ 1.15 $ 0.95 $ 0.17 $ 0.25 $ 0.14
share
Shares used in computing
net income per share:
Primary 91,824 91,154 86,492 83,984 82,572
Fully diluted 101,437 96,088 86,492 83,984 82,572
December 31
----------------------------------------------------------------------
(In thousands,
except per share amounts) 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital $295,020 $346,242 $121,479 $ 94,895 $ 66,508
Total assets 778,212 715,554 213,882 155,757 114,693
Long-term debt 230,000 288,600 -- -- --
Shareholders' equity 370,245 255,189 158,019 121,699 95,606
Book value per share 4.23 2.93 1.84 1.49 1.19
QUARTERLY DATA (UNAUDITED)
Year Ended December 31, 1996
--------------------------------------------------------
(In thousands, First Second Third Fourth
except per share amounts) Quarter Quarter Quarter Quarter
1996 DATA: -------- -------- -------- --------
Sales $137,098 $116,295 $116,728 $127,185
Gross profit 84,044 71,446 71,634 78,224
Net income 31,440 24,265 24,118 29,312
Primary net income per share 0.34 0.27 0.26 0.32
Fully diluted net income per share 0.33 0.26 0.26 0.31
1995 DATA:
Sales $75,038 $92,165 $109,079 $125,316
Gross profit 44,987 54,676 66,262 76,865
Net income 15,097 19,632 23,729 28,413
Net income per share 0.17 0.21 0.26 0.31
11
5
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITIONS & RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES. 1996 sales were $497.3 million, a 24% increase from 1995 sales of
$401.6 million, and a 150% increase from 1994 sales of $198.8 million. The
increase in sales from 1995 reflects increased unit volumes of the
Company's MAX 7000 component family, and to a lesser extent the MAX 9000
product family. Sales of the mature Classic, MAX 5000 and FLASHlogic
product lines were down from 1995, although unit volumes increased. The
increase in sales from 1994 to 1995 was driven by increased unit volumes of
the Company's MAX 7000 component family, and to a lesser extent by the FLEX
8000, Classic and FLASHlogic product lines. Percentage sales growth in 1996
and 1995 was generally consistent across all geographic regions.
Sales of development systems and software used by customers to design and
program Altera components were approximately 6% of sales in 1996, compared
to 6% and 9% of sales in 1995 and 1994, respectively. Licensed
installations grew approximately 26% during the year and now cumulatively
total approximately 29,000.
Sales of the MAX 7000 family increased 46% from 1995 and comprised
approximately 49% of total Company sales for the year. The MAX 7000 family
offers users some of the fastest mid-density parts available in the
marketplace today. All members of the family are electrically erasable.
Average selling prices for the family did not change significantly
throughout the year.
Sales of the FLEX 8000 family accounts for 16% of Company sales. This
family includes some of the largest programmable logic devices offered by
any vendor. All members of the family may be reprogrammed without being
removed from the end-user's system (in-circuit reconfigurability). During
1996, average selling prices for the family declined approximately 20%.
In the second quarter of 1995, the Company began shipping the MAX 9000
product family. This family has a feature-rich, high-density architecture.
All members of the family can be programmed after being soldered onto the
circuit board for manufacturing ease. Also in 1995, the Company introduced
the FLEX 10K family. This family offers logic capacities that were once
associated exclusively with gate arrays, combined with the time-to-market
advantages of programmable logic devices. Various combinations of memory
configurations and complex logic functions can be implemented in FLEX 10K
devices. Unit sales of these products continued to increase throughout
1996. The 1996 revenue growth rate of the FLEX 10K was the highest for
any product family every introduced by the
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6
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITIONS & RESULTS OF OPERATIONS
Company. For the year ended December 31, 1996, combined sales of the MAX
9000 and the FLEX 10K families amounted to 6% of total sales.
Altera's major markets are in communications, computing, and industrial
applications. Altera's 1996 international sales were 47% of total sales,
compared to 47% in 1995 and 48% in 1994.
Major items in the statements of operations, expressed as a percentage of
sales, were as follows:
Year Ended December 31
--------------------------
1996 1995 1994
---- ---- ----
Cost of sales 39% 40% 39%
Gross margin 61% 60% 61%
Research and development 10% 8% 23%
Selling, general, and administrative 17% 19% 23%
Operating income 34% 33% 15%
Interest expense 3% 2% -%
Interest and other income, net 3% 3% 1%
Provision for income taxes 12% 13% 9%
Net income 22% 22% 7%
--- --- ---
GROSS MARGIN. As a percentage of sales, gross margin increased from 60.5%
in 1995 to 61.4% in 1996; in 1995, gross margin declined slightly from
60.9% in 1994 to 60.5%. The margin percentage increased in 1996 compared to
1995, due to lower manufacturing costs resulting from improved yields,
process advancements, and lower wafer costs, despite reductions in selling
prices. The decline in 1995 compared to 1994 was mainly due to lower prices
to end customers and higher costs for purchased silicon wafers driven by
the appreciation of the yen versus the dollar. The increased silicon costs
in 1995 were partially offset by a reduction in other manufacturing costs
as a result of scale efficiencies on higher production volumes and
improvements in production yields.
RESEARCH & DEVELOPMENT. In the last two years, the Company has introduced
the MAX 9000, FLEX 10K and MAX 7000S families of products, two major new
software releases, and several new package technologies. Additionally, the
Company has redesigned a number of its products to accommodate their
manufacture using new wafer fabrication processes, including a new
eight-inch wafer process using triple-layer metal technology.
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7
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITIONS & RESULTS OF OPERATIONS
The increase in research and development expenditures as a percentage of
sales from 8% in 1995 to 10% in 1996 is primarily associated with the
transition of several of the Company's newer products to more advanced
process geometries, as well as prototype and pre-production expenditures
related to the MAX 7000S, MAX 9000 and FLEX 10K product families.
The research and development expenditures for 1994 included a $23.7 million
non-recurring charge related to "research and development in-process" in
conjunction with the purchase of the Intel programmable logic business.
Excluding this charge, research and development expenditures increased by
52% from 1994 to 1995. The increase was driven by larger expenditures for
the design of new products, including more design engineering labor,
prototype wafers, and masks. Also contributing to the increase in 1995 were
the higher labor expenses for the development of software to support new
products and design environments, and pre-production costs related to the
introductions of the MAX 9000 and FLEX 10K families.
SELLING, GENERAL & ADMINISTRATIVE. Selling, general, and administrative
expenses for 1996 increased 18% from 1995 but slightly decreased as a
percentage of sales. From 1994 to 1995, selling, general, and
administrative expenses increased 63%, but decreased as a percentage of
sales from 23% to 19%.
Selling, general, and administrative expenses include commission and
incentive expenses, advertising and promotional expenditures, legal, and
salary expenses related to field sales, marketing, and administrative
personnel. The increases over the last three years are mainly driven by
higher marketing and field sales headcount, new offices both domestically
and internationally, increases in advertising and promotional expenditures,
and higher commissions due to increased sales. As a percentage of sales,
selling, general, and administrative expenses were lower in 1995 than 1994
due to the growth in sales outpacing the increase in expenses in 1995.
Altera has approximately twenty field sales offices and markets its
products through distributors, representatives, and its own direct sales
force. Approximately 85% of the Company's worldwide sales are made through
distributors. The Company will continue to increase sales resources in
markets and regions where it anticipates such actions will increase sales
or improve customer service.
OPERATING INCOME. Operating income in 1996 was $168.1 million, compared to
$134.3 million in 1995. The 25% increase in operating income from 1995 to
1996 is commensurate with the increase in sales. The 1994 operating income
of $29.4 million includes a $23.7 million charge for research and
development in-process. Excluding this charge, operating income for 1994
was $53.1 million or 27% of
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8
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITIONS & RESULTS OF OPERATIONS
sales compared to 33% of sales in 1995. On this basis, the operating income
as a percentage of sales increased from 1994 to 1995, as strong sales
growth outpaced increases in operating expenses.
INTEREST EXPENSE. Interest expense increased from $7.4 million in 1995 to
$12.3 million in 1996. The expense relates to the convertible notes issued
in June 1995 and includes interest expense and amortization of $7.4
million of debt issuance costs, partially offset in 1996 by capitalized
interest of approximately $1.7 million related to the construction of the
new headquarters.
INTEREST AND OTHER INCOME, NET. Interest and other income increased from
$11.0 million in 1995 to $13.3 million in 1996 as a result of increased
cash balances available for investment throughout the year. In 1995,
increased cash balances, as a result of the issuance of the convertible
notes in 1995, combined with higher interest rates, increased interest
income to $11.0 million, compared to $2.9 million in 1994.
TAXES. Altera's tax rate was 35% in 1996, compared to 37% in 1995 and 54%
in 1994. The decrease of the rate in 1996 is primarily due to an increased
amount of earned interest income from tax exempt investments and research
and development credits. The higher rate in 1994 resulted from the tax
treatment of the research and development in-process charge. Excluding the
effect of the research and development in-process charge, the effective
rate was 37% in 1994, which is consistent with the 1995 rate.
FUTURE RESULTS. Future operating results will depend on the Company's
ability to develop, manufacture, and sell complicated semiconductor
components and complex software that offer customers greater value than
solutions offered by competing vendors. The Company's efforts in this
regard may not be successful. Also, a number of factors outside of the
Company's control, including general economic conditions and cycles in
world markets, exchange rate fluctuations, or a lack of growth in the
Company's end markets could adversely impact future results. The Company is
highly dependent upon subcontractors to manufacture silicon wafers and
perform assembly and testing services. Disruptions or adverse supply
conditions arising from market conditions, political strife, labor
disruptions, natural or man-made disasters, normal process fluctuations,
variances in manufacturing yields, and other factors could have adverse
consequences on the Company's future results. Additionally, litigation
relating to competitive patents and intellectual property, competitive
breakthroughs, and aggressive competitive pricing could also adversely
affect future operating results.
15
9
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITIONS & RESULTS OF OPERATIONS
For instance, in 1994, the Company found it necessary to significantly
reduce the prices for its FLEX 8000 family of products in order to
stimulate customer interest and design activity. At various times in 1996,
the Company reduced the book prices on the MAX 7000, FLEX 8000, MAX 9000
and FLEX 10K product families in order to attract customers and expand
market share. The Company expects price competition and other competitive
pressures to continue. Because of the foregoing and other factors that
might affect the Company's operating results, past financial performance
should not be considered an indicator of future performance, and investors
should not use historical trends to anticipate future results. In addition,
the cyclical nature of the semiconductor industry and other factors have
resulted in a highly volatile price of the Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During 1996, the Company generated $98.2 million in
net cash from operating activities which was primarily attributable to net
income of $109.1 million adjusted by non-cash items including depreciation
and amortization of $20.9 million and an increase in accrued liabilities
of $17.0 million. Offsetting these were increases in deferred taxes of
$8.1 million, accounts receivable of $14.0 million, and inventories of
$20.4 million and a decrease in accounts payable of $8.2 million. These
increases in the use of cash were primarily the result of an increase in
sales volume from 1995 to 1996.
INVESTING ACTIVITIES. Net cash used in investing activities for 1996 was
$55.7 million. The Company's principal investing activities have been
investments in a joint-venture called WaferTech, LLC (WaferTech) of $84.2
million, the construction of a multiple-building corporate headquarters of
$27.0 million and routine capital expenditures of $18.2 million. These
investing activities were partially funded by the sale of $75.7 million of
short-term investments.
Capital expenditures for 1996 amounted to $45.2 million, of which $27.0
million related to the construction of a multiple-building corporate
headquarters. During 1996, the Company started the construction of 500,000
square feet of office and light manufacturing space on a new site which was
purchased in 1995. The construction is expected to be completed in 1997.
The remaining capital expenditures in 1996 consisted of additional test and
automated handling capacity to accommodate increased sales and more
rigorous test requirements of the Company's newer products. Altera's
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10
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITIONS & RESULTS OF OPERATIONS
capital expenditures in the past three years, excluding the land purchase
in 1995 and the headquarters construction in 1996, have been primarily for
semiconductor design and test equipment, as well as data processing
software and equipment.
In June 1996, Altera, Taiwan Semiconductor Manufacturing Corporation
(TSMC), and several other partners formed WaferTech, a joint-venture
company, to build and operate a wafer manufacturing plant in Camas,
Washington. In return for a $140.4 million cash investment, Altera will
receive 18% equity ownership in the joint-venture company and certain
rights to procure output from the fab at market price. The investment is to
be made in three installments of which the first two were made in 1996. The
remaining installment amounts to $56.2 million and is due in November 1997.
In addition, the Company has an obligation to guarantee a pro rata share of
debt incurred by WaferTech, up to a maximum of $45 million.
FINANCING ACTIVITIES. In 1996, the Company used $51.2 million of cash for
financing activities, consisting primarily of payments on the notes payable
to secure wafer capacity of $57.1 million and the repurchase of 300,000
shares of common stock of $4.3 million. Cash used by financing activities
in 1996 was partially offset with the proceeds from common stock issued
under the Company's Stock Option and Employee Stock Purchase Plans. In
1995, the Company also generated funds from the issuance of $230.0 million
of convertible subordinated notes. The convertible subordinated notes are
due in June of 2002 and bear an interest rate of 5.75%, payable
semiannually. The notes are convertible at the option of the holder into
shares of the Company's common stock at a price of $25.59 per share.
Discounts, commissions, and expenses, which are amortized over the
seven-year life of the notes, reduced the proceeds to $224.8 million. The
notes are callable by the Company no sooner than June of 1998.
At December 31, 1996, Altera had $280.9 million of cash, cash equivalents,
and short-term investments available to finance future growth, $56.2
million of short-term obligations and $230.0 million of long-term debt.
Management believes that operational capital expenditures in 1997 will
increase from 1996 commensurate with sales growth. In addition, the
Company expects $50 to $55 million of costs in 1997 related to the
construction of its corporate headquarters. Altera believes the
available sources of funds and the cash expected to be generated from
operations will be adequate to finance current operations, the remaining
obligation to WaferTech, and capital expenditures through at least 1997.
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11
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITIONS & RESULTS OF OPERATIONS
EMPLOYEES
Over the course of 1996, the number of regular employees increased 4% to
918 at year end. Sales per employee were $553,000 in 1996 compared to
$519,000 in 1995, and $335,000 in 1994.
IMPACT OF CURRENCY & INFLATION
The Company purchases the majority of its materials and services in U.S.
dollars, and its foreign sales are also billed in U.S. dollars. However,
certain contracts for silicon wafer purchases are denominated in Japanese
yen, and the volume of such contracts increased significantly in 1994, 1995
and 1996. The appreciation of the U.S. dollar with respect to the yen had a
positive impact on the Company's margin during 1996. The increase of
yen-denominated purchases in 1995 and the declining value of the dollar
with respect to the yen had an adverse impact on the Company's margins
during the first six months of 1995. The Company was able to mitigate much
of that impact with improved yields and efficiencies. In addition, in the
third quarter of 1995, the Company purchased yen forward contracts in an
amount approximately equal to its expected yen requirements for that
quarter. As of December 31, 1995 and throughout 1996, the Company had no
open foreign exchange contracts for the purchase or sale of foreign
currencies. If market conditions change, however, Altera may choose to bill
foreign customers in local currencies. In addition, the impact of other
foreign currency exchange rate fluctuations may be material in the future,
as a result of increased foreign currency fluctuations or increased
material purchases in yen. The effects of inflation upon Altera's financial
results have not been significant to date.
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12
CONSOLIDATED BALANCE SHEETS
ASSETS December 31
------------------------
(In thousands) 1996 1995
- -----------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 70,788 $ 79,409
Short-term investments 210,062 285,810
-------- --------
Total cash, cash equivalents, and
short-term investments 280,850 365,219
Accounts receivable, less allowance for doubtful
accounts of $2,399 and $1,005 68,486 54,518
Inventories 75,798 55,421
Deferred income taxes 45,402 37,339
Other current assets 2,451 5,510
-------- --------
Total current assets 472,987 518,007
Property and equipment, net 89,804 54,846
Investments 206,671 131,331
Other assets 8,750 11,370
-------- --------
$778,212 $715,554
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 13,279 $ 17,049
Accrued liabilities 89,209 72,209
Notes payable and short-term obligations 56,160 61,920
Accrued compensation 14,136 16,347
Income taxes payable 5,183 4,240
-------- --------
Total current liabilities 177,967 171,765
Notes payable -- 58,600
Convertible notes 230,000 230,000
-------- --------
Total liabilities 407,967 460,365
-------- --------
Commitments and contingencies (Notes 5, 6, 7, 8)
Shareholders' equity:
Common stock; no par value; 160,000 shares
authorized; 87,604 and 87,117 shares
issued and outstanding 90,644 83,445
Retained earnings 279,601 171,744
-------- --------
Total shareholders' equity 370,245 255,189
-------- --------
$778,212 $715,554
======== ========
See accompanying notes to consolidated financial statements.
13
CONSOLIDATED STATEMENTS OF OPERATIONS &
SHAREHOLDERS' EQUITY OPERATIONS
OPERATIONS YEAR ENDED DECEMBER 31
-------------------------------------------
(In thousands, except per share amounts) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
Sales $497,306 $401,598 $198,796
Cost of sales 191,958 158,808 77,672
-------- -------- --------
Gross profit 305,348 242,790 121,124
Research and development 49,513 33,849 22,249
Research and development in process -- -- 23,745
Selling, general, and administrative 87,742 74,658 45,771
-------- -------- --------
Income from operations 168,093 134,283 29,359
Interest expense (12,284) (7,401) --
Interest and other income, net 13,328 11,009 2,137
-------- -------- --------
Income before income taxes 169,137 137,891 31,496
Provision for income taxes 60,002 51,020 16,888
-------- -------- --------
Net income $ 109,135 $ 86,871 $ 14,608
========= ========= ========
Primary net income per share $ 1.19 $ 0.95 $ 0.17
Fully diluted net income per share $ 1.15 $ 0.95 $ 0.17
- -------
Shares used in computing net income per share:
Primary 91,824 91,154 86,492
Fully diluted 101,437 96,088 86,492
SHAREHOLDERS' EQUITY
Common Retained
(In thousands) Stock Earnings
- -------------------------------------------------------------------
Balance, December 31, 1993 $ 51,434 $ 70,265
Tax benefit resulting from stock
option transactions 2,265
Issuance of 4,319 shares 19,447
Net income 14,608
--------- ---------
Balance, December 31, 1994 73,146 84,873
Tax benefit resulting from stock
option transactions 5,269
Issuance of 1,165 shares 5,030
Net income 86,871
--------- ---------
Balance, December 31, 1995 83,445 171,744
Tax benefit resulting from stock
option transactions 4,492
Issuance of 787 shares 5,760
Repurchase of 300 shares (3,053) (1,278)
Net income 109,135
--------- ---------
Balance, December 31, 1996 $ 90,644 $ 279,601
========= =========
See accompanying notes to consolidated financial statements.
14
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 109,135 $ 86,871 $ 14,608
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 14,604 9,269 7,001
Amortization 6,280 2,897 2,527
Research and development in process -- -- 23,745
Deferred taxes (8,063) (24,974) (4,568)
Changes in assets and liabilities:
Accounts receivable, net (13,968) (22,856) (9,804)
Inventories (20,377) (16,944) (12,235)
Other assets 3,059 (4,341) (825)
Accounts payable (8,160) 5,736 6,001
Accrued liabilities 17,000 37,553 10,799
Accrued compensation (2,211) 7,716 3,041
Income taxes payable 943 2,894 (2,107)
--------- --------- --------
Cash provided by operating activities 98,242 83,821 38,183
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (45,172) (45,820) (10,509)
Acquisition of Intel programmable logic business -- -- (22,911)
Other long-term investments (86,240) (500) (600)
Net change in short-term investments 75,748 (234,855) 13,850
--------- --------- --------
Cash used for investing activities (55,664) (281,175) (20,170)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Convertible notes -- 224,825 --
Payment of notes payable (57,120) -- --
Tax benefit from employee stock dispositions 4,492 5,269 2,265
Net proceeds from issuance of common stock 5,760 5,030 4,529
Repurchase of common stock (4,331) -- --
--------- --------- --------
Cash provided by (used for) financing activities (51,199) 235,124 6,794
--------- --------- --------
Net increase (decrease) in cash and cash equivalents (8,621) 37,770 24,807
Cash and cash equivalents at beginning of year 79,409 41,639 16,832
--------- --------- --------
Cash and cash equivalents at end of year $ 70,788 $ 79,409 $ 41,639
========= ========= ========
Cash paid during the year for:
Income taxes $ 62,347 $ 64,122 $ 21,106
Interest 13,225 6,392 --
Supplemental disclosure of non-cash
activities:
Cancellation of notes payable related to
wafer capacity 63,400 -- --
Remaining obligation related to
WaferTech 56,160 -- --
See accompanying notes to consolidated financial statements.
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: COMPANY & BUSINESS
Altera Corporation (Altera or the Company) designs, develops,
manufactures, and markets CMOS programmable logic integrated circuits
and associated engineering development software and hardware. The
Company's major markets are communications, computing, and industrial
applications.
The Company's export sales were $231.7, $187.4, and $95.5 million for
1996, 1995, and 1994, respectively. Sales to Europe were $103.8, $84.2,
and $42.6 million and sales to Japan were $94.8, $78.9, and $37.6
million in 1996, 1995, and 1994, respectively. In 1996, the two largest
distributors accounted for 29% and 15% of sales. In 1995, the two
largest distributors accounted for 21% and 15% of sales, whereas in
1994, they each accounted for 15% and 14% of sales, respectively.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. Altera has a fiscal year that ends on the Friday
nearest December 31st. For presentation purposes, the consolidated
financial statements and notes refer to the calendar month end. The
consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of all significant
intercompany balances and transactions. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts; actual results could differ from those estimates.
CASH EQUIVALENTS & SHORT-TERM INVESTMENTS. Cash equivalents consist of
highly liquid investments with original maturities of three months or
less. Short-term investments are held as securities available for sale
and are carried at their market value as of the balance sheet date
which approximated cost. The amortized cost of debt securities are
adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in investment income. Realized
gains or losses are determined on the specific identification method
and are reflected in income. Net unrealized gains or losses are
recorded directly in shareholders' equity except that those unrealized
losses that are deemed to be other than temporary are reflected in
income.
INVENTORIES. Inventories are recorded at the lower of standard cost,
which approximates actual cost on a first-in-first-out basis, or
market. The inventories at December 31, 1996 and 1995, were comprised
of the following components:
December 31
----------------------
(In thousands) 1996 1995
- ---------------------------------------------------------------
Purchased parts and raw materials $ 1,773 $ 2,067
Work in process 56,870 38,617
Finished goods 17,155 14,737
======= =======
Total inventories $75,798 $55,421
======= =======
12
16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DEPRECIATION & AMORTIZATION. Depreciation and amortization are computed
using the straight-line method. Estimated useful lives of two to five
years are used for equipment and office furniture. Amortization of
leasehold improvements is computed using the shorter of the remaining
facility lease term or the estimated useful life of the improvements.
As of December 31, 1996, the costs of the building include $1.7 million
of capitalized interest incurred during the construction and
development period. Property and equipment at December 31, 1996 and
1995, was comprised of the following components:
December 31
--------------------------
(In thousands) 1996 1995
- ---------------------------------------------------------------------------
Land $ 19,925 $ 19,925
Building 32,955 1,605
Equipment 75,453 64,703
Office furniture and equipment 9,508 4,908
Leasehold improvements 3,493 3,512
--------- --------
Property and equipment, at cost 141,334 94,653
Accumulated depreciation and amortization (51,530) (39,807)
========= ========
Property and equipment, net $ 89,804 $ 54,846
========= ========
INTANGIBLES. The Company evaluates the recoverability of its intangible
assets in accordance with Statement of Financial Accounting Standard
No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." FAS 121 requires
recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets.
REVENUE RECOGNITION. The Company recognizes revenue from product sales
upon shipment. Product sales to distributors are made under agreements
allowing a limited right-of-return and price adjustments under certain
circumstances. Estimated returns and allowances are recorded at the
time of shipment. Accrued liabilities include provisions for returns
and allowances of $68.3 million and $54.5 million at December 31, 1996
and 1995, respectively.
FOREIGN EXCHANGE CONTRACTS. The Company purchases the majority of its
materials and services in U.S. dollars and its foreign sales are also
billed in U.S. dollars. However, certain contracts for silicon wafer
purchases are denominated in Japanese yen. At times, the Company enters
into foreign exchange option or forward contracts to hedge against
currency fluctuations which affect these transactions. As of December
31, 1996, the Company had no open foreign exchange contracts for the
purchase or sale of foreign currencies, but may choose to enter into
such contracts in the future should conditions appear favorable. No
assurance can be given that any of these arrangements will protect the
Company from the effects on its operation of currency fluctuations.
23
17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INCOME PER SHARE. Primary income per share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the year. Dilutive common equivalent shares consist
of the assumed net shares issuable upon the exercise of dilutive stock
options using the treasury stock method. The convertible subordinated
notes issued in June 1995 are not common stock equivalents and,
therefore, have been excluded from the computation of primary earnings
per share.
Fully diluted net income per share assumes the conversion of the
convertible subordinated notes into shares of common stock, the
elimination of the related interest requirements, net of income taxes,
and the dilutive effect of the stock options.
STOCK SPLITS. All share data have been retroactively restated to
reflect a 2-for-1 split of the Company's outstanding common stock which
was reflected in the stock price as of January 7, 1997 and was
effective as to the shareholders of record on December 18, 1996. The
share data had also been adjusted in 1995 to reflect a 2-for-1 stock
split which was reflected in the stock price as of June 1, 1995 and was
effective as to the shareholders of record on May 10, 1995.
STOCK-BASED COMPENSATION PLANS. The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Under APB No. 25, compensation
cost is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of grant over the exercise price of the
option granted. Compensation cost for stock options, if any, is
recognized ratably over the vesting period. The Company's policy is to
grant options with an exercise price equal to the quoted market price
of the Company's stock on the grant date. Accordingly, no compensation
has been recognized for its stock option plans. The Company provides
additional pro forma disclosures as required under Statement of
Financial Accounting Standards (FAS) 123, "Accounting for Stock-Based
Compensation". See Note 9.
FAIR VALUE OF FINANCIAL INSTRUMENTS. For certain of the Company's
financial instruments, including cash and cash equivalents, short-term
investments, accounts receivable, notes payable and accounts payable,
the carrying amounts approximate fair value due to their short
maturities. The estimated fair value for the convertible notes (with a
carrying amount of $230 million at December 31, 1996) is approximately
$354 million. The fair value for the convertible notes is primarily
based on quoted market prices.
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially
subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents, short-term investments and
accounts receivable. The Company places its short-term investments in a
variety of financial instruments and, by policy, limits the amount of
credit exposure through diversification and highly rated securities.
The Company sells its products to distributors and original equipment
manufacturers throughout the world. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally,
requires collateral, such as letters of credit, whenever deemed
necessary.
24
18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DEPENDENCE ON WAFER SUPPLIERS. The Company does not directly
manufacture finished silicon wafers. The Company's strategy has been to
maintain relationships with semiconductor manufacturers for the
production of its wafers. The Company has been successful in
maintaining such relationships (Notes 5 and 6). However, there can be
no assurance that the Company will be able to satisfy its future wafer
needs from current or alternative manufacturing sources. This could
result in possible loss of sales or reduced margins.
NOTE 3: MARKETABLE SECURITIES
At December 31, 1996 and 1995, the carrying value of the Company's
portfolio of marketable securities approximated fair value. The
portfolio consists of the following:
December 31
-----------------------
(In thousands) 1996 1995
-------------------------------------------------------------------------------
Money market funds $ 19,951 $ 48,800
Municipal bonds 218,295 104,600
U.S. Government and agency obligations 13,112 175,000
Corporate bonds 9,190 11,400
Other debt securities 8,432 20,100
======== =========
$268,980 $ 359,900
======== =========
At December 31, 1996 and 1995, the net unrealized holding gains and
losses on securities were immaterial. The marketable securities at
December 31, 1996, and 1995 by contractual maturity are shown below.
December 31
-------------------------
(In thousands) 1996 1995
--------------------------------------------------------------------
Due in one year or less $ 96,056 $164,000
Due after one year through two years 172,924 195,900
======== ========
$268,980 $359,900
======== ========
NOTE 4: ACQUISITION
On October 1, 1994, Altera purchased Intel Corporation's Programmable
Logic Device (PLD) product line, including certain directly associated
capital equipment, a credit toward the purchase of inventory, and
certain intellectual property. The PLD product line was purchased for a
price of $37.8 million, consisting of $22.9 million in cash and
2,805,400 shares of the Company's common stock (valued at $14.9
million). The transaction was accounted for as a purchase. The excess
of the purchase price over the fair market value of the net tangible
assets acquired was allocated to research and development in process
($23.7 million), and to acquired technology ($7.0 million) that is
being amortized over four years on a straight-line basis. At December
31, 1996 and 1995, the accumulated amortization related to the acquired
technology amounted to $3.9 million and $2.2 million, respectively.
25
19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Had the acquisition of the PLD product line occurred as of the
beginning of 1994, unaudited sales, net income, and net income per
share presented on a pro forma basis for the year ended December 31,
1994, would have been $224.5 million, $29.7 million, and $0.34,
respectively.
NOTE 5: INVESTMENTS AND OBLIGATIONS
At December 31, 1996, Altera's long-term investments primarily relate
to an investment in WaferTech, LLC (WaferTech) of $140.4 million,
deposits with Taiwan Semiconductor Manufacturing Corporation (TSMC) for
future wafer allocations of $57.1 million (Note 6) and the Company's
investment in Cypress Semiconductor (Texas) Inc. (CSTI), a subsidiary
of Cypress Semiconductor Corporation of $9.1 million.
In June 1996, Altera, TSMC, and several other partners formed
WaferTech, a joint-venture company, to build and operate a wafer
manufacturing plant in Camas, Washington. In return for a $140.4
million cash investment, Altera received an 18% equity ownership in the
joint-venture company and certain rights to procure output from the fab
at market price. The investment is to be made in three installments of
which the first two were made in June and November of 1996 in equal
amounts of $42.1 million. The remaining installment amounts to $56.2
million and is due in November 1997. In addition, the Company has an
obligation to guarantee a pro rata share of debt incurred by WaferTech,
up to a maximum of $45.0 million. The Company accounts for this
investment under the equity method based on the Company's ability to
exercise significant influence on the operating and financial policies
of WaferTech. The Company's share of WaferTech's net income for 1996
was immaterial. Altera owns a 17% equity interest in CSTI and has
the right to purchase a percentage of the wafers produced by CSTI
approximately equal to the Company's percentage ownership of CSTI.
The Company accounts for this investment under the cost method.
NOTE 6: NOTES PAYABLE
In 1995, the Company entered into several agreements with TSMC, whereby
it agreed to make certain deposits to TSMC for future wafer capacity
allocations extending into 2001. The Company made cash deposits
amounting to $2.4 million in 1995 and issued promissory notes for
$120.5 million representing partial prepayments for wafers to be
supplied under these agreements. During the second quarter of 1996, the
Company and TSMC renegotiated these agreements, resulting in the
cancellation of all notes payable and a refund of certain prepayments,
except for a $57.1 million prepayment made in January 1996 for wafer
capacity from 1997 through 2000.
Under the terms of the agreement related to the $57.1 million
prepayment, TSMC agrees to provide the Company with wafers manufactured
with TSMC processes and according to the Company's specifications, and
the Company agrees to purchase and TSMC agrees to supply, a specific
capacity of wafers per year through 2000. Subsequent billings for
actual wafers used from TSMC will reduce the prepaid balance. The
prepayments are generally
26
20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
nonrefundable if the Company does not purchase the full prepaid
capacity unless the Company identifies a third-party purchaser,
acceptable to TSMC, for the capacity.
NOTE 7: COMMITMENTS
The Company leases its headquarters facilities under non-cancelable
lease agreements. The major facility lease expires in July 1997. The
lease requires the Company to pay property taxes, insurance,
maintenance, and repair costs. Future minimum lease payments under all
non-cancelable operating leases as of December 31, 1996, are $1.3
million in 1997, and none thereafter. Rental expense under all
operating leases amounted to $4.0 million, $3.2 million, and $2.6
million in 1996, 1995, and 1994, respectively.
The Company has a standby letter of credit facility in the amount of
1.5 billion yen (approximately $13 million) which has been fully
utilized. The terms of this facility require immediate funding of any
draws against any letters of credit issued under the facility. The
facility requires the Company to comply with certain covenants
regarding net worth and financial ratios.
NOTE 8: CONVERTIBLE NOTES
In June 1995, the Company issued $230 million of convertible
subordinated notes due in June of 2002 and bearing an interest rate of
5.75%, payable semiannually. The notes are convertible into shares of
the Company's common stock at a price of $25.59 per share. Discounts,
commissions, and expenses, which are being amortized over the
seven-year life of the notes, reduced the net proceeds to $224.8
million. Accumulated amortization at December 31, 1996 and 1995
amounted to approximately $1.2 million and $0.4 million respectively.
The notes are callable by the Company no sooner than June of 1998.
NOTE 9: STOCK-BASED COMPENSATION PLANS
At December 31, 1996, the Company had four stock-based compensation
plans, which are described below. The Company applies APB Opinion 25
and related Interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its three fixed stock
option plans and its stock purchase plan.
STOCK OPTION PLANS. There are 16.2 million shares of common stock
reserved for issuance under the 1987 Stock Option Plan, 4.0 million
shares of common stock are reserved for issuance under the 1996 Stock
Option Plan and 940,000 shares of common stock are reserved for
issuance under the Company's 1988 Director Stock Option Plan. The
Director Stock Option Plan provides for the periodic issuance of stock
options to members of the Company's Board of Directors who are not also
employees of the Company. Under all Stock Option Plans, the exercise
price of each option equals the market price of the Company's common
stock on the date of grant and an option's maximum term is 10 years.
Options generally vest over five years at annual increments as
determined by the Board of Directors.
21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The number of shares for which options were exercisable was
approximately 2,960,000, 2,050,000, and 1,864,000 at December 31, 1996,
1995, and 1994, respectively. A summary of the Company's stock option
activity and related weighted average exercise prices within each
category for each of the years ended December 31, 1996, 1995 and 1994
relating to the Company's stock option plans are as follows:
1996 1995 1994
--------------------- --------------------- ---------------------
(Share amounts in thousands) Shares Price Shares Price Shares Price
------ ------ ------ ------ ------ -------
Options outstanding at January 1, 10,059 $ 3.02 9,128 $ 2.57 8,412 $ 2.24
Stock options:
Granted 3,433 26.25 2,346 22.60 2,561 7.40
Exercised (620) 28.54 (839) 2.91 (1,208) 2.27
Forfeited (372) 13.40 (576) 6.54 (637) 4.45
====== ====== ====== ====== ===== ======
Options outstanding at December 31, 12,500 $ 5.07 10,059 $ 3.02 9,128 $ 2.57
====== ====== ====== ====== ===== ======
The fair value of each option grant, as defined by FAS 123, is
estimated on the date of grant using the Black-Scholes option-pricing
model. The Black-Scholes model, as well as other currently accepted
option valuation models, was developed to estimate the fair value of
freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock
option awards. These models also require highly subjective assumptions,
including future stock price volatility and expected time until
exercise, which greatly affect the calculated fair value grant date. To
compute the estimated grant date fair value of the Company's stock
option grants in 1996 and 1995, respectively, the Black-Scholes model
was used with the following weighted-average assumptions: expected
volatility of 36.4% and 34.6%, risk-free interest rates of 5.9% and
6.6%, expected lives from vesting date of 0.41 and 0.45 years, and
dividend yields of 0%.
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
------------------------------------------------------- -------------------------------
Number Weighted-Average Weighted- Number
Range of Outstanding Remaining Average Exercisable Weighted-Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
--------------- ------------ ---------------- -------------- ----------- ----------------
(in thousands) (in thousands)
$1.81-$6.12 4,740 5.45 years $ 3.35 2,406 $ 2.75
$6.13-$9.25 2,015 7.45 $ 7.17 253 $ 7.27
$9.26-20.88 1,745 9.07 $17.37 100 $12.91
$20.89-$31.38 2,798 8.85 $24.30 192 $25.79
$31.39-$38.69 1,202 9.87 $34.92 9 $33.55
EMPLOYEE STOCK PURCHASE PLAN Under the 1987 Employee Stock Purchase
Plan, the Company is authorized to issue up to 2.8 million shares of
common stock to its full-time employees, nearly all of whom are
eligible to
28
22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
participate. Under the terms of the Plan, employees can choose each
year to have up to 10 percent of their annual base earnings withheld to
purchase the Company's common stock. The purchase price of the stock is
85 percent of the lower of the closing price at the beginning or at the
end of each six-month offering period. Approximately 75 to 80 percent
of eligible employees have participated in the Plan in the last two
years.
Sales under the Employee Stock Purchase Plan in 1996, 1995 and 1994
were 167,626, 326,646, and 306,356 shares of common stock at an average
price of $21.49, $7.91 and $5.82 per share, respectively. At December
31, 1996, there were 351,332 shares available for future purchases
under the Employee Stock Purchase Plan.
Compensation cost (included in pro forma net income and net income per
share amounts) is recognized for the fair value of the employees'
purchase rights, which was estimated using the Black-Scholes model with
the following assumptions for 1996 and 1995, respectively: an expected
life of six months for both years; expected volatility of 38.4% and
30.7%; risk-free interest rates of 5.1% and 6.0%; and dividend yields
of 0%. The weighted-average fair value of those purchase rights granted
in 1996 and 1995, as defined by FAS 123, was $5.55, and $4.35,
respectively.
The Company received a $4.5 million, $5.3 million, and $2.3 million tax
benefit in 1996, 1995, and 1994, respectively, on the exercise of
non-qualified stock options and on the disposition of stock acquired
with an incentive stock option or through the Employee Stock Purchase
Plan.
PRO FORMA NET INCOME AND NET INCOME PER SHARE. Had the Company recorded
compensation costs based on the estimated grant date fair value, as
defined by FAS 123, for awards granted under its Stock Option Plans
and Stock Purchase Plan, the Company's net income and income per share
would have been reduced to the pro forma amounts below for the years
ended December 31, 1996 and 1995:
1996 1995
------- -------
Pro forma net income (in thousands) $99,885 $83,815
Pro forma net income per share:
Primary $ 1.10 $ 0.92
Fully diluted $ 1.07 $ 0.92
The pro forma amounts reflect compensation expense related to 1996 and
1995 stock option grants only. In future years, the annual compensation
expense will increase relative to the fair value of stock options
granted in those future years.
NOTE 10: COMMON STOCK REPURCHASE
On July 15, 1996, the Board of Directors authorized the repurchase of
up to 4 million shares of the Company's common stock. During July 1996,
the Company repurchased 300,000 shares of common stock for a total
price of $4.3 million. The repurchased shares were retired upon
acquisition.
23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: LITIGATION
In June 1993, Xilinx, Inc. (Xilinx) brought suit against the Company
seeking monetary damages and injunctive relief based on the Company's
alleged infringement of certain patents held by Xilinx. In June 1993,
the Company brought suit against Xilinx, seeking monetary damages and
injunctive relief based on Xilinx's alleged infringement of certain
patents held by the Company. In April 1995, the Company filed a
separate lawsuit against Xilinx in Delaware, Xilinx's state of
incorporation, seeking monetary damages and injunctive relief based on
Xilinx's alleged infringement of one of the Company's patents. In May
1995, Xilinx counterclaimed against the Company in Delaware, asserting
defenses and seeking monetary damages and injunctive relief based on
the Company's alleged infringement of certain patents held by Xilinx.
The Delaware case was transferred to California in March 1996 on
Xilinx's motion. The parties participated in court-ordered mediation in
1996 which to date has failed to result in settlement. Due to the
nature of the litigation with Xilinx and because the lawsuits are
still in the pre-trial stage, the Company's management
cannot estimate the total expense, the possible loss, if any, or the
range of loss that may ultimately be incurred in connection with the
allegations. Management cannot ensure that Xilinx will not succeed in
obtaining significant monetary damages or an injunction against the
manufacture and sale of the Company's MAX 5000, MAX 7000, FLEX 8000, or
MAX 9000 families of products, or succeed in invalidating any of the
Company's patents. Although no assurances can be given as to the
results of these cases, based on the present status, management does
not believe that any of such results will have a material adverse
effect on the Company's financial condition or results of operations.
In August 1994, Advanced Micro Devices (AMD) brought suit against the
Company seeking monetary damages and injunctive relief based on the
Company's alleged infringement of certain patents held by AMD. In
September 1994, Altera answered the complaint asserting that it is
licensed to use the patents which AMD claims are infringed and filed a
counterclaim against AMD alleging infringement of certain patents held
by the Company. The case was bifurcated to provide that a separate
trial on the issue of the scope of the existing cross-license agreement
between the parties will precede the trial on the infringement claims.
In June 1996, a trial held to resolve Altera's claim that it is
licensed to some or all of the AMD patents at issue in the case
resulted in a jury verdict in Altera's favor. Due to the nature of the
litigation with AMD and because the lawsuits have not been concluded,
the Company's management cannot estimate the total expense, the
possible loss, if any, or the range of loss that may ultimately be
incurred in connection with the allegations. Management cannot ensure
that AMD will not succeed in obtaining significant monetary damages or
an injunction against the manufacture and sale of the Company's
Classic, MAX 5000, MAX 7000, FLEX 8000, MAX 9000, FLEX 10K, and
FLASHlogic product families, or succeed in invalidating any of the
Company's patents. Although no assurances can be given as to the
results of these cases, based on the present status, management does
not believe that any of such results will have a material adverse
effect on the Company's financial condition or results of operations.
30
24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: INCOME TAXES
The components of the provision for income taxes were as follows:
Year Ended December 31
------------------------------------------
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------
Current tax expense:
United States $ 57,680 $ 64,931 $ 17,687
State 9,799 10,663 3,568
Foreign 586 400 200
-------- -------- --------
Total current tax expense 68,065 75,994 21,455
Deferred taxes (8,063) (24,974) (4,567)
======== ======== ========
Total provision for income taxes $ 60,002 $ 51,020 $ 16,888
======== ======== ========
The 1994 tax provision includes taxes related to the acquisition of
Intel's programmable logic business.
Deferred tax assets (liabilities) were as follows:
December 31
-------------------------
(In thousands) 1996 1995
- -----------------------------------------------------------------------
Assets:
Accrued expenses and reserves $ 38,404 $ 30,846
Acquisition costs 7,282 7,291
State taxes 3,675 3,325
Other 1,590 809
-------- --------
Gross deferred tax assets 50,951 42,271
Deferred tax liabilities (909) (186)
Deferred tax asset valuation allowance (4,640) (4,746)
======== ========
Net deferred tax assets $ 45,402 $ 37,339
======== ========
The valuation allowances of $4.6 and $4.7 million at December 31, 1996
and 1995, respectively, are attributable to deferred tax assets from
the acquisition of Intel's programmable logic business. Sufficient
uncertainty exists regarding the realizability of these assets and,
accordingly, valuation allowances are required.
The provision for taxes reconciles to U.S. statutory taxes as follows:
Year Ended December 31
------------------------------------------
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------
Tax provision at U.S. statutory rates $ 59,198 $ 48,262 $ 11,024
State taxes, net of federal benefit 6,172 6,315 2,319
Foreign sales corporation (1,146) (2,033) (995)
Valuation allowance (106) (487) 5,233
Other, net (4,116) (1,037) (693)
======== ======== ========
Total provision for income taxes $ 60,002 $ 51,020 $ 16,888
======== ======== ========
25
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF ALTERA CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity,
and cash flows present fairly, in all material respects, the financial
position of Altera Corporation and its subsidiaries at December 31,
1996 and 1995, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/s/ Price Waterhouse LLP
------------------------
San Jose, California
January 22, 1997