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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.
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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
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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
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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
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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.
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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
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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.
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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
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(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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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
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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.
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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.
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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.
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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
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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.
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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.
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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
======================
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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.
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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
====================================
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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
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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.
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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.
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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.
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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.