-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ECjm+KsGmQ+XsTZ08KHIoYgCriZumi7KXIMCp8zD/zx9oIKYbBETJmMKsMnwb0tT pdQM+y40qHNMV49rma5x0A== 0000907687-00-000024.txt : 20000404 0000907687-00-000024.hdr.sgml : 20000404 ACCESSION NUMBER: 0000907687-00-000024 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000102 FILED AS OF DATE: 20000403 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACTEL CORP CENTRAL INDEX KEY: 0000907687 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770097724 STATE OF INCORPORATION: CA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21970 FILM NUMBER: 592537 BUSINESS ADDRESS: STREET 1: 955 EAST ARQUES AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087391010 MAIL ADDRESS: STREET 1: 955 EAST ARQUES AVE STREET 2: 955 EAST ARQUES AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-K 1 ANNUAL REPORT ON FORM 10-K FOR 1999 FISCAL YEAR UNITED STATES 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 January 2, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-21970 -------------------------------------- ACTEL CORPORATION (Exact name of Registrant as specified in its charter) California 77-0097724 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 955 East Arques Avenue Sunnyvale, California 94086-4533 (Address of principal executive offices) (Zip Code) (408) 739-1010 (Registrant's telephone number, including area code) -------------------------------------- Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (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 Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing price for shares of the Registrant's Common Stock on March 31, 2000, as reported by the National Market System of the National Association of Securities Dealers Automated Quotation System, was approximately $613,642,000. In calculating such aggregate market value, shares of Common Stock owned of record or beneficially by all officers, directors, and persons known to the Registrant to own more than five percent of any class of the Registrant's voting securities were excluded because such persons may be deemed to be affiliates. The Registrant disclaims the existence of control or any admission thereof for any other purpose. Number of shares of Common Stock outstanding as of March 31, 2000: 23,036,802. -------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference in Parts II, III, and IV of this Annual Report on Form 10-K: (i) portions of Registrant's annual report to security holders for the fiscal year ended January 2, 2000 (Parts II and IV), and (ii) portions of Registrant's proxy statement for its annual meeting of shareholders to be held on May 19, 2000 (Part III). All information contained or incorporated by reference in this Annual Report on Form 10-K should be read in conjunction with and in the context of the Risk Factors set forth at the end of Part I. Unless otherwise indicated, the statements contained in this Annual Report on Form 10-K are made as of March 31, 2000, and the Company undertakes no obligation to update such statements, including all forward-looking statements. PART I ITEM 1. BUSINESS Overview Actel designs, develops, and markets field programmable gate arrays ("FPGAs") and associated design and development software and programming hardware. FPGAs are used by designers of communications, computer, consumer and internet-appliance, industrial, military/aerospace, and other electronic systems to differentiate their products and get them to market faster. Actel is the leading supplier of FPGAs based on antifuse technology, and in 1999 introduced FPGAs based on flash technology. Actel's strategy is to be The Programmable ASIC Solutions Company, a complete solution provider for programmable application specific integrated circuit ("ASIC") systems. Actel shipped its first products in 1988 and thousands of its development systems are in the hands of customers, including Alcatel, Allen Bradley/Rockwell, Cabletron, General Electric, Honeywell, Hughes Aircraft, Lockheed Martin, Lucent Technologies, Marconi, Nortel, and Siemens. Actel derived 9% of its net revenues for 1999 from Nortel and expects to derive 10% or more of net revenues for 2000 from Nortel. Actel has foundry relationships with Chartered Semiconductor Manufacturing Pte Ltd ("Chartered Semiconductor") in Singapore; Lockheed Martin Space Electronics & Communications ("Lockheed Martin SEC") in the United States; Matsushita Electronics Company ("MEC") in Japan; UMC Corp. ("UMC") in Taiwan; and Winbond Electronics Corp. ("Winbond") in Taiwan. Actel's product line consists of eleven families of antifuse-based FPGAs; Designer Series Development System, DeskTOP, and CoreHDL software; Silicon Sculptor device programmers; Silicon Explorer debugging and diagnostic tools; and an evaluation board and sockets. To meet the diverse customer requirements in the broad FPGA market, each member of a product family generally is offered in a variety of speed grades, package types, reliability screenings, and ambient temperature tolerances. Designers can use Actel's integrated suite of design tools (DeskTOP) or third-party software for circuit design and then translate the design into a programmed FPGA using Actel's highly automated software (Designer Series Development System) and device programmers (Silicon Sculptor). CoreHDL blocks or "cores" can reduce development time by being "dropped into" designs, and Silicon Explorer can reduce design-verification time by enabling the user to monitor the functionality of a programmed FPGA in "real time." The evaluation board allows designers to assess the suitability of their designs for specific applications, and sockets permit designers to replace an FPGA without damaging the board. Actel also offers system-level design, prototyping, and consulting services through its Protocol Design Services Group. In 1999, Actel introduced the SX-A family of antifuse FPGAs, which currently is manufactured at MEC using 0.25-micron design rules. This means that Actel is manufacturing antifuse FPGAs at the same geometry as the mainstream process technology used for static random access memory ("SRAM") FPGAs, such as those offered by Xilinx, Inc. ("Xilinx") and Altera Corporation ("Altera"). As a result, the cost, performance, and power advantages inherent in the antifuse have again become evident. The SX-A family is currently positioned as the industry's price/performance/power leader, permitting customers to use programmable devices with ASIC-like speed, power consumption, and pricing in volume production. The new family is particularly well suited for products enabling the portability of the internet, or "e-appliances," such as MP3 players, digital cable set-top boxes, digital cameras, digital film, and DSL modems. In addition, radiation-tolerant versions of SX-A devices will help Actel maintain its position as the world's leading supplier of FPGAs to commercial satellites and other military/aerospace applications. Actel refocused its reprogrammable SRAM strategy in 1999. Actel believes that the size and power advantages of its SRAM architecture can now be used to greatest efficacy in the emerging market for embedded programmable products. A strategic product marketing team has been formed to position Actel's SRAM technology at the forefront of this emerging market. Actel also renewed its commitment in the area of intellectual property ("IP") cores in 1999. Actel's IP program is aimed at addressing customers' design and design reuse needs by providing immediate access to pre-verified soft logic cores implemented in Actel silicon. The strategic product marketing team's charter in this area is to aggressively pursue third-party strategic relationships and proprietary IP programs. In 1999, Actel introduced the ProASIC family of non-volatile, single-chip, very low power, "live-at-power-up" family of reprogrammable gate arrays. The product family, which will consist of seven devices have capacities ranging up to 512,000 gates, was developed by GateField Corporation ("GateField"). The ProASIC family is currently manufactured on a mainstream, 0.25-micron embedded flash process at Infineon Technologies (formerly Siemens Semiconductor) in Germany. Flash-based ProASIC products offer benefits over other programmable logic devices ("PLDs") available on the market today, which are either volatile or non-reprogrammable. ProASIC devices are non-volatile and reprogrammable. ProASIC devices also exhibit a high level of portability between PLD and ASIC design flows. ProASIC devices permit ASIC designers to use their standard design flow, with no new design methodologies to learn, and also be seamlessly migrated to standard ASIC designs. The design methodology also enables designers to "drop in" IP cores from proprietary and third-party sources, eliminating much of the architecture-specific re-engineering required by other PLDs. ProASIC products are closely coupled with the ASICmaster automated place-and-route electronic design automation ("EDA") software, which is optimized for hardware description language ("HDL") design and methodology. ASICmaster performs place and route of the design into the selected device and provides back-annotated delay information for simulation. Once the design is verified, ASICmaster downloads the layout into a device programmer for chip programming. Actel is currently engaged in limited software and silicon sampling of ProASIC at selected customers throughout the world. As part of its strategic alliance with GateField entered into in 1998, Actel acquired the exclusive right to market and sell standard ProASIC products in process geometries of 0.35-micron and smaller, as well as the ASICmaster design tool software. In 1999, the Company loaned $8.0 million to GateField in exchange for a promissory note that is convertible (at Actel's election) into 1,230,769 shares of GateField common stock. In addition, Actel increased its ownership of GateField common stock during 1999 from 16,500 shares to 190,529 shares. As a result of these developments, Actel began accounting for its interests in GateField under the equity method of accounting during 1999. In 1999, Actel also completed its acquisition of AutoGate Logic, Inc. ("AGL") in a transaction accounted for as a purchase. AGL developed a wide range of very large scale integration (VLSI) development tools, including FPGA and custom integrated circuit ("IC") place and route and timing analysis software. The purchase price of $7.2 million included the issuance by Actel of 285,943 shares of Common Stock and the assumption of options to purchase 89,057 shares of Common Stock. Goodwill of $4.9 million and completed technology of $2.1 million associated with the AGL acquisition will be amortized using the straight-line method over a period of five years beginning with the first quarter of fiscal year 2000. The $0.2 million value assigned to the assembled workforce is being amortized over an estimated useful life of six months. For 1999, Actel's pre-tax net income was reduced by $1.1 million under the equity method of accounting as a result of Actel's equity interest in GateField and by $1.9 million due to amortization of goodwill and other acquisition-related charges. These amounts are expected to increase in future years. During the second quarter of 1999, Actel completed a restructuring plan that included a reduction in force as well as the elimination of certain projects and non-critical activities. The total pretax restructure and other charges for these activities, including employee severance and outplacement expenses and the write-off of prepaid license and abandoned capital assets, was $2.0 million. These measures were taken to bring overall spending in line with revenue projections for the year and to sharpen Actel's focus on new product development. For the year, Actel's selling, general, and administrative expenses increased by more (on a percentage basis) than net revenues, principally because of an accrual of estimated settlement costs of claims for alleged patent infringement, an increased level of sales and marketing activities in support of new products, and expenses related to the termination of a distributor. Actel was named as one of the "200 Best Small Companies" by Forbes magazine in its issue dated November 1, 1999. In addition, Actel was added to the Standard & Poor's "SmallCap 600 Index" after the close of trading on January 7, 2000. Actel is included in the S&P SmallCap 600 Electronics (Semiconductors) industry group. No significant disruptions were experienced by Actel as a result of either the September 1999 earthquake in Taiwan or the Year 2000 date change. Actel markets its products through a worldwide, multi-tiered sales and distribution network. In 1999, a majority of Actel's sales were made through distributors. Actel's principal distributors are Pioneer-Standard Electronics, Inc. ("Pioneer") and Unique Technologies, Inc. ("Unique") in North America and Arrow Electronics, Inc. and Zeus Electronics (collectively, "Arrow") worldwide. In 1999, Arrow, Pioneer, and Unique accounted for 16%, 12%, and 13%, respectively, of Actel's net revenues. In addition to the three major industrial distributors, the North American sales network includes 20 sales management and/or technical sales offices and 20 manufacturers' representative firms. The European network includes five sales offices and 12 distributors. The Pan-Asia network includes four sales management offices and seven distributors. Three additional distributors serve the remaining international markets in which Actel offers its products. In 1999, sales to customers outside the United States accounted for 29% of Actel's net revenues, compared with 33% for 1998 and 31% for 1997. Actel was incorporated in California in 1985 and has been authorized by shareholders to reincorporate as a Nevada corporation. The Company's principal facilities and executive offices are located at 955 East Arques Avenue, Sunnyvale, California 94086-4533, and its telephone number at that address is (408) 739-1010. The Company's World Wide Web address is http://www.actel.com . As used in this Annual Report on Form 10-K, "Actel" and "the Company" mean Actel Corporation and its consolidated subsidiaries; and "gate" or "gates" means "ASIC-equivalent" gates, unless otherwise indicated. "Actel" and the Actel logo are registered trademarks of the Company, and "ProASIC" and "ASICmaster" are registered trademarks of GateField. This Annual Report on Form 10-K also includes unregistered trademarks of the Company and trademarks of companies other than Actel. Actel Strategy Actel's strategy is to be The Programmable ASIC Solutions Company. For customers requiring discrete logic solutions, the Company's FPGAs offer the benefits of both ASICs and programmable devices: - Like ASICs, the Company's FPGA devices provide non-volatile, "live-at-power-up," low-power, single-chip solutions at very low prices in volume production. Like other programmable devices, the Company's FPGAs reduce design risk, inventory investment, and time to market. - To further shorten the design cycle, logic designers can choose to use either ASIC or FPGA software tools and design methodologies, and the architectures of the Company's FPGAs enable the utilization of predefined IP cores, which can be reused across multiple designs or product versions. - Depending upon their requirements or preferences, customers can choose to use either FPGAs based on antifuse technology, which are one-time programmable and have ASIC-like speed; or FPGAs based on flash technology, which are reprogrammable. In either case, the Company can provide programming services, making the offering a "virtual ASIC" from the customer's point of view. For customers requiring integrated logic (or system-on-a-chip) solutions, the Company's SRAM-based logic core (or standard cell) will enable the integration of reprogrammable logic with predefined functions on a single chip using a standard process. For customers requiring either discrete or integrated solutions, the Company's IP cores and design services can be provided as needed to help customers accelerate design creation and verification, prototyping, and time to market. Products and Services The Company's product line consists of eleven families of antifuse-based FPGAs; Designer Series Development System, DeskTOP, and CoreHDL software; Silicon Explorer debugging and diagnostic tools; Silicon Sculptor device programmers; and an evaluation board and sockets. In 1999, the Company introduced the SX-A family of antifuse FPGAs and the ProASIC family of reprogrammable gate arrays. The Company also offers system-level design, prototyping, and consulting services through its Protocol Design Services Group. Antifuse FPGAs To meet the diverse customer requirements in the broad programmable logic market, each of the Company's antifuse FPGA families (except the RadHard family) is offered in a variety of speed grades, package types, reliability screenings, and ambient temperature tolerances. The five members of the ACT 1 and ACT 2 families, for example, can be ordered in more than 100 speed, packaging, screening, and tolerance variations. ACT 1 The ACT 1 family of FPGAs consists of two products: the 1,200-gate A1010, which was first shipped for revenue in 1988; and the 2,000-gate A1020, which was first shipped for revenue in 1989. This family of devices was introduced at 2.0 micron and is manufactured using 1.0-micron design rules. The Company offers 5.0- and 3.3-volt versions of both ACT 1 products. ACT 2 The ACT 2 family of FPGAs consists of three products: the 4,000-gate A1240 and the 8,000-gate A1280, which were first shipped for revenue in 1991; and the 2,500-gate A1225, which was first shipped for revenue in 1992. This family of devices was introduced at 1.2 micron and is manufactured using 1.0-micron design rules. ACT 3 The ACT 3 family of FPGAs consists of five products: the 2,500-gate A1425 and the 6,000-gate A1460, which were first shipped for revenue in 1993; and the 1,500-gate A1415, the 4,000-gate A1440, and the 10,000-gate A14100, which were first shipped for revenue in 1994. The ACT 3 family was designed for applications requiring high speed and a high number of inputs and outputs ("I/Os"). The five members of the ACT 3 family can be ordered in approximately 150 speed, packaging, screening, and tolerance variations. The Company offers 5.0- and 3.3-volt versions of all five ACT 3 products, as well as versions (A1460BP and A14100BP) that are compliant with the peripheral component interconnect ("PCI") standard. The ACT 3 family was introduced at 0.8 micron and is manufactured using 0.6-micron design rules. XL The 1200XL family of FPGAs, which was first shipped for revenue in 1995, consists of three products: the 2,500-gate A1225XL, the 4,000-gate A1240XL, and the 8,000-gate A1280XL. Taking advantage of 0.6 micron design rules and redesigned I/O modules and clock distribution networks, 1200XL products offer system performance significantly in excess of that offered by pin-compatible ACT 2 devices. The Company offers 5.0- and 3.3-volt versions of all three members of the 1200XL family, which can be ordered in approximately 100 speed, packaging, screening, and tolerance variations. DX The 3200DX family of FPGAs consists of five products: the 6,500-gate A3265DX, which was first shipped for revenue in 1995; the 14,000-gate A32140DX and the 20,000-gate A32200DX, which were first shipped for revenue in 1996; and the 10,000-gate A32100DX and the 30,000-gate A32300DX, which were first shipped for revenue in 1997. The 3200DX family permits designers to integrate the register-intensive datapath functions of FPGAs, the control and decode modules commonly implemented in CPLDs, and the fast dual-port SRAM typically used for high-speed buffering. Supported by the Company's extensive selection of automated design tools, the 3200DX family is optimized for synthesis design methodologies to yield predictable performance for system logic integration. To further assist designers, most members of the family offer JTAG boundary scan logic, which permits testing of the design during manufacture. The Company offers 5.0- and 3.3-volt versions of all five members of the 3200DX family, which is manufactured using 0.6-micron design rules and can be ordered in approximately 150 speed, packaging, screening, and tolerance variations. MX The MX family of FPGAs consists of six products: the 4,000-gate A40MX04 and the 16,000-gate A42MX16, which were first shipped for revenue in 1997; and the 2,000-gate A40MX02, the 9,000-gate A42MX09, the 24,000-gate A42MX24, and the 36,000-gate A42MX36, which were first shipped for revenue in 1998. The MX family includes the best features from the Company's ACT 1, ACT2, 1200XL, and 3200DX families and should, over time, replace those earlier families in new 5.0-volt commercial designs. The largest MX devices include system logic integration functions, such as embedded SRAM and decode logic, that are used by designers to integrate disparate functions in data networking, telecommunication, and industrial control applications. The MX family is manufactured using 0.45-micron design rules, which permits it to work in pure 5.0-volt, pure 3.3-volt, and mixed 5.0- and 3.3-volt systems. The family can be ordered in more than 200 speed, packaging, screening, and tolerance variations. As the Company's first line of low-cost, single-chip ASIC alternatives, the MX family ramped to volume the fastest of any product in Actel's history. In March 1999, only eighteen months after introduction, the Company announced that it had shipped the two-millionth MX device. In April 1999, the Company announced that it had shipped one million units of the MX04 device. This milestone was achieved just thirteen months after the availability of production-qualified devices. In January 2000, the Company announced that it had shipped one million units of the MX family in the fourth calendar quarter of 1999. The unit volume of MX shipments demonstrates the acceptance of antifuse technology in high-volume applications, such as those serving the internet, and is evidence that electronics engineers are opting with increasing frequency for the time-to-market advantage of FPGAs over the longer lead times associated with traditional ASICs. In July 1999, the Company announced the availability of "-3" speed grade MX devices, which resulted from a proprietary process breakthrough by Actel's foundry partner, Chartered. The -3 speed grade improves overall speed by 35% compared with the standard MX speed grade. The MX family is currently positioned as a line of low-cost, single-chip, mixed-voltage ASIC-alternative FPGAs for 5.0-volt applications. SX The SX family of FPGAs consists of four products, all of which were first shipped for revenue in 1998: the 8,000-gate A54SX08, the 16,000-gate A54SX16 and A54SX16P, and the 32,000-gate A54SX32. The SX family is manufactured using 0.35-micron design rules. All SX devices have full pin compatibility within the family and provide mixed 5.0- and 3.3-volt support with 3.3-volt output drive and 5.0-volt tolerant inputs. The SX family can be ordered in more than 200 speed, packaging, screening, and tolerance variations, and approximately 50 more variations are planned. SX was the first family to be built on the Company's triple-layer metal, "sea of modules" architecture. The foundation for the architecture is a "sea" of logic modules laid out as a grid across the entire silicon floor. This sea-of-modules design minimizes chip area by covering almost the entire silicon substrate with logic resources. To further increase design efficiency and device performance, these modules have been organized into "superclusters." Two different levels of local routing resources within superclusters give designers the ability to achieve very fast performance. The interconnect resources are located on the upper two layers of metal. The result is dramatically reduced die size (regardless of capacity), increased device performance, and reduced cost. The SX family's combination of performance and density enables designers to combine multiple high-performance CPLDs into a single FPGA, thereby cutting power consumption, saving board space, and reducing costs. In May 1999, the Company announced the availability of "-3" speed grade SX devices, which are 35% faster than the standard SX speed grade and were then the world's fastest FPGAs. The SX family and the SX-A family, discussed below, are currently positioned as industry price/performance/power leaders, permitting customers to use programmable devices with ASIC-like speed, power consumption, and pricing in volume production. SX-A The SX-A family of FPGAs, which was first shipped for revenue in 1999, currently consists of four products: the 8,000-gate A54SX08A, the 16,000-gate A54SX16A, the 32,000-gate A54SX32A, and the 72,000-gate A54SX72A. The SX-A family currently is manufactured at MEC using 0.25-micron design rules. This means that, for the first time in more five years, the Company is manufacturing antifuse FPGAs at the same geometry as the mainstream process technology used for SRAM FPGAs. As a result, the cost, performance, and power advantages inherent in the antifuse have again become evident. The SX-A family was introduced in September 1999. The family's fine-grained "sea-of-modules" antifuse architecture and small process geometry permit the Company to offer the world's fastest and lowest-power FPGAs at very competitive prices. This combination of low cost and industry-leading performance and power dissipation delivers what the Company calls "performance without penalty": system designers can reach their performance targets in less time, avoiding weeks or months of struggle to meet performance goals, using fast devices that consume less power and cost less than alternative PLDs. In addition, the SX-A family offers I/O capabilities that provide full support for "hot-swapping." Hot-swapping permits boards to be exchanged while systems are running (or "hot"), which is a capability important in networking, telecommunication, and fault-tolerant computing applications. The SX-A family includes other I/O features, such as slew rate control, and supports mixed-voltage (2.5-, 3.3-, and 5.0-volt) systems. SX-A devices are available in variety of plastic flat pack and ball grid array ("BGA") packages. In March 2000, the Company announced that it had successfully developed a 0.22-micron antifuse process technology at UMC. This new technology, which has already yielded working silicon and is currently being qualified for production, should reduce die size by 20% and improve performance by 10% compared with the Company's current 0.25-micron SX-A devices. The new 0.22-micron process was developed in record time, as was also true of the 0.25-micron process. In recent years, most standard logic processes have adopted the use of multi-voltage transistors and polishing methods that were previously unique to antifuse FPGAs. This, together with the narrowing difference in mask sets between standard and antifuse processes, has significantly reduced the time required to bring up new antifuse processes. Early indications are that the Company is also on an accelerated development cycle for its next-generation family of antifuse products. HiRel/Military HiRel and military devices are designed for use in military and extreme temperature environments. The Company's HiRel offering includes all members of the Company's ACT 1, ACT 2, ACT 3, XL, DX, MX, and SX families in plastic as well as ceramic packages. All of the HiRel devices offered in plastic packages are certified for commercial (0 to +70(0)C), industrial (-40 to +85(0)C), or military (-55 to +125(0)C) temperature ranges. All of the HiRel devices offered in ceramic packages are certified for commercial or military temperature ranges or with Class B (MIL-STD-883) qualification. In March 1999, the Company announced that it has been awarded Full Certification to Qualified Manufacturers Listing ("QML") status. This certification confirms that the Company has an approved quality system and control of its processes and procedures according to the standards set forth in the MIL-PRF-38535. QML certification, which is granted by the Defense Supply Center, Columbus, Ohio ("DSCC"), qualifies processes and materials rather than individual products or production lots. In June 1999, the Company announced that it had completed QML certification for its full line of plastic-packaged antifuse FPGAs, giving customers using commercial off-the-shelf ("COTS") components access to a wide range of package type, density, performance, and price points. With QML plastic certification, the entire line of Actel devices can be integrated into design applications that would otherwise require higher-cost ceramic package devices, thereby providing designers with a lower-cost solution. The certification also permits the integration of commercial and military production without compromising quality or reliability. In addition, many suppliers of microelectronic components have implemented QML as their primary worldwide business standard. Appropriate use of this standard helps not only in the implementation of advanced technologies, but also in providing more effective logistical support throughout the life cycle of the product. In January 2000, the Company announced that it had registered as a STACK International supplier. STACK International members consist of a distinguished worldwide group of major electronic equipment manufacturers serving the high-reliability and communications markets. STACK registration signifies formal acceptance by the Company of the requirements in the "STACK Purchase Specification -- General Requirements for Integrated Circuits." Registration is the first step in acquiring full STACK Certification. RT RadTolerant devices are designed to meet all types of digital logic requirements for space applications, including commercial, military, and civilian satellites as well as deep-space probes. These devices are offered in ceramic packages and certified for military temperature ranges with either Class B or Class E (extended flow/space) qualification and include complete total dose radiation test reports on every lot of devices. In addition, all RadTolerant devices have design- and pin-compatible commercial versions for easy and inexpensive prototyping. The RadTolerant family of FPGAs currently consists of seven products: the 2,000-gate RT1020, the 2,500-gate RT1425A, the 6,000-gate RT1460A, the 8,000-gate RT1280A, the 10,000-gate RT14100A, the 16,000-gate RT54SX16, and the 32,000-gate RT54SX32. The RTSX16 and RTSX32 products, which were introduced in 1999, are capable of up to 100 Krads of total dose immunity. RadTolerant FPGAs provide cost-effective alternatives to radiation-hardened devices for applications requiring high reliability. One such application is the growing market for commercial satellites, which are widely used in telecommunications for cellular phones, pagers, and global positioning system products and services. In November 1999, the Company announced a plan to expand its line of RadTolerant FPGAs with a new family based on 0.25-micron antifuse SX-A devices. This new RTSX-S family of parts will be enhanced for space applications by the addition of a hardened register module, which will improve the new family's tolerance to device upsets caused by the bombardment of external radiation and space particulate. Two devices for the new RadTolerant family have been identified. The first part, the RTSX32S device with a density of 32,000 gates, is currently expected to complete qualification in the third quarter of 2000. The second part, the RTSX72S device with a density of 72,000 gates, will be the Company's largest HiRel FPGA. When qualified, these RTSX-S devices are expected to be the fastest and lowest-power FPGAs operating in space, permitting design engineers to increase system performance, reduce power consumption, and lighten payload through system integration. Both the RTSX and RTSX-S families are fabricated in Japan by the Company's long-time foundry partner, MEC. RH The RadHard family of FPGAs consists of two products: the 8,000-gate RH1280, which was first shipped for revenue in 1996; and the 2,000-gate RH1020, which was first shipped for revenue in 1998. RadHard devices are offered in ceramic packages and certified with Class VQ (QML) qualification. Actel's RadHard FPGAs are manufactured by Lockheed Martin SEC at its QML facility in Manassas, Virginia, using a high-reliability, radiation-hardened 0.8-micron process. The Company and Lockheed Martin SEC jointly developed the RadHard family to meet the demands of applications requiring guaranteed levels of performance and radiation survivability, including the growing telecommunications satellite market. Additional applications for RadHard FPGAs include satellites for military use, deep space probes and planetary missions, and ground-based military applications in which radiation survivability is required. Software A key element of the Company's strategy is to support users' EDA tools of choice by facilitating the use of leading synthesis software as a "front end" to Actel's proprietary Designer Series Development System software. Rather than developing this capability alone, the Company has established the Actel Industry Alliance, which the Company uses to maintain relationships with EDA vendors and to develop interfaces between such vendors' EDA tools and Actel's proprietary software. Under the Alliance program, the Company provides members with access to Actel's proprietary software specifications, early access to software revisions, verification services, and participation in joint marketing efforts. The Alliance currently has more than 20 members, including all major EDA vendors supporting high-level design for both VHDL and Verilog. The Company provides comprehensive HDL solutions for the EDA environments of Aldec, Cadence Design Systems, Exemplar Logic, Mentor Graphics, OrCAD, Synopsys, Synplicity, and Viewlogic. Designer Series Development System The Designer Series Development System tool set is a software suite built on an object-oriented database that helps optimize and simplify FPGA circuit design, implementation, and testing. In 1999, Designer Series software was integrated into Actel's DeskTOP suite of design tools to perform place and route tasks. In June 1999, the Company announced the release of its free Designer Series R1 1999 software update, which included a timing-driven place and route ("TDPR") software module designed to increase performance for applications using the SX family. In November 1999, the Company announced the release of its R2 1999 design tool update, which included support for the SX-A product family and a series of performance and ease-of-use enhancements. The Designer Series TDPR software was enhanced to provide support for all of the Company's product families. Users can now specify the required performance of their designs using parameters (such as system frequency, clock-to-out, input setup time, and path delay) and the TDPR software will automatically place and route the design utilizing those parameters. Due to the abundance of routing resources in the Company's antifuse FPGAs, the TDPR software can typically meet the most demanding design requirements and improve the design's performance by 15% or more. In addition, the R2 1999 release included new ACTGen macros that provide barrel shifter, register file, and FIFO capabilities for both SX-A and SX devices. Additional support was provided for a new 66MHz, 64-bit Target+Master PCI soft core in the SX32A device. DeskTOP In February 1999, the Company became the first PLD supplier to offer a free integrated suite of design tools. The Actel DeskTOP is a three-vendor suite of logic design tools from Synplicity, VeriBest (now wholly owned by Mentor Graphics), and Actel, with technical support provided by Actel. The basic DeskTOP version (for users designing Actel FPGAs of up to 50,000 gates) was offered at no charge to qualified designers through January 31, 2000. The basic Actel DeskTOP design tool suite integrates the functionality of VeriBest's Design View, Design Manager, schematic entry, and VHDL simulator; Synplicity's Synplify synthesis software; and Actel's Designer Series place and route tool. In June 1999, the Company announced the expansion of the DeskTOP integrated suite of design tools to include Actel DeskTOP Pro and Actel DeskTOP Open as migration path options from the basic DeskTOP. These products take the software offerings from VeriBest, Synplicity, and Actel to the highest level of functional performance and productivity, according to the needs of each Actel customer. DeskTOP Pro is a reasonably priced, complete tool suite solution for power users designing high gate count, system-level devices. It offers feature-rich design solutions with no maximum size limitation for all supported Actel devices. DeskTOP Open provides an open synthesis environment for customers who have already invested in their own synthesis tools. It also offers the ability to design with no maximum size limitation for all of the Company's current and planned antifuse devices. Like DeskTOP Pro, the DeskTOP Open upgrade provides VeriBest's Compliant VHDL simulator, VeriBest's state diagram editor, and Actel's Designer Advantage. It also provides easy integrated support for Synplicity's Synplify and Synopsys's FPGA Express synthesis software. In July 1999, the Company announced the expansion of its Actel DeskTOP integrated suite of design tools to include Verilog design entry and simulation. With the integration of Verilog into Actel DeskTOP, users can choose between VHDL or Verilog versions for seamless design entry and simulation of Actel antifuse device designs of up to 50,000 gates. In September 1999, the Company announced that it had already filled more than 4,000 individual software registration requests for the three versions of Actel DeskTOP. CoreHDL Intellectual Property As integrated circuits move to ever higher levels of capacity and integration, the use of IP in the form of cores becomes more important. In offering CoreHDL IP, the Company is targeting high-density FPGA designers who are interested in combining customized logic with predefined functions optimized for high performance applications. By using predefined cores, designers save engineering resources for the value-added portions of their designs while shortening the design cycle. In addition, the portable nature of cores enables design reuse across multiple product versions. The Company's CoreHDL IP portfolio consists of seven cores, which are available in either Verilog-HDL or VHDL source code: Core 8b/10b (8 bit/10 bit encoder/decoder interface); CoreARBITER (PCI arbiter); CoreASYNC (PCI asynchronous backend interface); CoreCRC (cyclic redundancy code generator/checker); CorePCI (peripheral component interface); CoreSDRAM (SDRAM controller interface); and CoreUART (serial communication controller). In September 1999, the Company announced its commitment in the area of IP to aggressively pursue third-party strategic relationships and proprietary IP programs. The Company's IP program will be aimed at addressing customers' design and design reuse needs by providing immediate access to pre-verified soft logic cores implemented in Actel silicon. A four-fold program approach is planned. First, the program will include an internal mini-core IP program to develop functions such as next-generation PCI buses, UART, and SDRAM controllers. Second, the Company plans to create a partnership program to support key third-party IP suppliers who will provide system designers with a portfolio of validated IP blocks. Third, there will be further enhancements to ActGEN, a parameterizable function generator with a graphical user interface ("GUI"). Fourth, the Company will offer design services consulting for IP customization and system-level integration through its Protocol Design Services Group. In January 2000, the Company announced the appointment of Dennis Kish to the newly-created position of Vice President of Strategic Marketing. In this role, Mr. Kish is responsible for identifying emerging markets and opportunities (including third-party strategic relationships and proprietary IP programs) that will benefit from the Company's products and technologies. In September 1999, the Company also announced the release of its CorePCI Version 5.11, which added extensive design flexibility benefits for PCI bus design. The CorePCI 5.11 macro conforms to the PCI Local Bus Specification 2.2 and provides 32/64-bit bus widths and 33/66MHz performance using SX devices. In October 1999, the Company announced that it could deliver a 32,000-gate programmable device with Master/Target PCI functionality in a 329-pin BGA package for under $25 in high volume. This put an FPGA PCI solution in the same price/performance bracket as traditionally lower-cost ASICs. In November 1999, the Company announced the release of its CorePCI Version 5.2, which was the first programmable 64-bit, 66MHz PCI core to offer a complete solution, including Target Only, Master Only, and Master/Target (containing Target+DMA and Target+Master) functions. By offering the complete PCI solution, the Company now provides designers with an even more flexible, cost-effective solution for design reuse, as well as a low-cost migration path to ASICs and next-generation process technologies. A unique benefit of the Company's PCI core is the use of a soft register transfer level ("RTL") design flow, which provides complete PCI design portability to ASICs. The RTL implementation also makes it easy to integrate with user-defined logic at a higher level of abstraction. In addition, CorePCI cores do not require fixed placement, further reducing constraints on the design; and include SDRAM, DRAM, and FIFO controllers, permitting designers to create memory interfaces as required. In combination with the Company's SX and SX-A FPGAs, Actel's PCI core provides a low-power, high-performance, cost-effective, and very flexible platform for a broad scope of PCI and embedded PCI needs in communications, consumer, computer, industrial, and military applications. The soft core is available as customizable VHDL and Verilog-HDL code, and a firm solution can be provided as required. The Company also offers nine cores developed by Inicore AG, a Swiss IP provider, which are available only in VHDL source code: iniADPLL (all digital phase locked loop); iniCAN (controller area network bus interface); iniCPU (6809 8-bit microprocessor); iniG704; iniHDLC (high level data link controller); iniSCI (I2C master and slave interfaces); iniUART (universal asynchronous receiver/transmitter interface); iniUTOPIA (ATM interface); and iniVME (slave interface). In general, these cores are targeted to telecommunications and industrial control applications. Programmers The Company's FPGAs can be programmed by Silicon Sculptor, a highly reliable programmer that is easy to setup and use. The Company also supports programmers that are offered by third parties, including BP Microsystems Inc., Data I/O, SMS Sprint, and System General. Programmers execute instructions included in fuse files, which are obtained from the Company's Designer Series software, to program Actel FPGAs. The compact size of the Silicon Sculptor permits designers to program the Company's FPGAs from their desktop PC rather than in a lab. A single adapter module can be used to program all Actel antifuse or all flash devices within a package type, regardless of pinout. In May 1999, the Company announced that, together with BP Microsystems, it had developed single- and six-site versions of the Silicon Sculptor device programmer that are "native mode" compliant with Windows 95/98/NT. Up to 12 Actel devices can be concurrently programmed from a single PC by daisy chaining two six-site Silicon Sculptors together with a simple expansion cable. Silicon Explorer Silicon Explorer is a powerful debugging and verification tool that enables the user to monitor the internal operation of a programmed FPGA as it performs its functions at speed within a real system. By permitting real-time probing, Silicon Explorer can significantly reduce the amount of time necessary to debug and verify an FPGA design. In June 1999, the Company released testimonials from designers at several leading networking companies regarding Silicon Explorer's effectiveness and ease of use. Designers from Ascend Communications, E/O Networks, and Applied Signal Technology experienced productivity gains by using the real-time diagnostic tool for design verification and debugging. In February 2000, the Company announced a new generation of its Silicon Explorer debugging and diagnostic tool, Silicon Explorer II and Silicon Explorer II Lite. Silicon Explorer II further optimizes design performance, flexibility, and ease of use for all of the Company's antifuse FPGA product families. The logic analysis system in Silicon Explorer II was enhanced to support an external power supply; internal probing of 5.0-, 3.3-, and 2.5-volt FPGAs; four levels of triggering; decompression on download; and system acquisition rates up to 100MHz. In addition to being a logic analyzer that captures external bus activity, Silicon Explorer II includes "Probe Pilot." Probe Pilot attaches to the system being tested, providing access to internal FPGA signals. Probe Pilot hardware samples up to eighteen channels of synchronous or asynchronous signals in real time at system rates up to 100MHz. Its "Explore" software permits a user to dynamically set two of its eighteen channels to analyze signals internal to the FPGA. "Action Probe," a function available only with the Company's devices, permits dynamic access to any internal node. The Silicon Explorer II logic analysis system is compliant with Windows 95/98/NT and offers a Windows-like GUI. Silicon Explorer II Lite is a less-expensive version of Silicon Explorer II without the real-time logic analyzer. Evaluation Board In May 1999, the Company announced the availability of a 16,000-gate evaluation board for its SX and MX families of FPGAs. This evaluation board enables designers to conduct real-time evaluation of functionality and performance of both SX and MX family devices. In addition, a connector is provided to allow easy access to Silicon Explorer so that internal functionality and delays can be investigated. Since the user prototype area of the SX/MX evaluation board enables designers to interface their own surrounding circuits with the FPGA, the evaluation board also permits designers to assess the suitability of their own designs for specific applications. Sockets Sockets for the Company's FPGAs are available in prototype quantities from the Company and in production quantities from Actel-qualified socket manufacturers. Sockets permit designers to replace a chip without damaging the board, which reduces some of the risk commonly associated with using an antifuse FPGA in prototype board design. The complete line of sockets accommodates all of the Company's FPGAs in TQFP, PQFP, RQFP, and VQFP packages. In March 1999, the Company announced a range of BGA sockets for use with its FPGAs. The BGA sockets are well suited to the prototyping environment and are compatible with Actel's MX, SX, and flash devices. The use of BGA sockets facilitates migration to full production, reducing both time to market and production costs. The sockets are designed to be reliable and have zero insertion force, meaning that the device is not stressed before, during, or after testing. The principal benefit of these sockets is that they are placed on the printed circuit board ("PCB") in the same pad layout as the device itself will eventually occupy. This avoids changes to the PCB during the transition from prototyping to production. BGA packaging is becoming more popular, due mainly to its ease of use and ability to be reworked. In November 1999, the Company announced the availability of its new SX72A FPGA in fine-pitch ball grid array ("fBGA") packaging. This 1.0mm ball pitch fBGA with 484 pins occupies the same space as a standard 1.27mm ball pitch BGA with 256 pins. The increased number of I/Os permits designers to utilize a smaller package while supporting higher I/O counts. The very low cost and industry-leading performance and power dissipation of the SX72A, in combination with the high pin count and greatly reduced footprint of the fBGA484, permits the SX72A to address the I/O requirements of high-density PLD and ASIC designs. ProASIC In June 1999, the Company introduced the ProASIC family of non-volatile, single-chip, very low power, "live-at-power-up" family of reprogrammable gate arrays. The product family, which will consist of seven devices have capacities ranging up to 512,000 gates, was developed by GateField. The family is currently manufactured on a mainstream, 0.25-micron embedded flash process at Infineon Technologies ("Infineon") in Germany. The Company is currently engaged in limited software and silicon sampling at selected customers throughout the world. As the first reprogrammable gate arrays, ProASIC devices offer the benefits of both gate arrays and FPGAs. Like traditional gate arrays, the ProASIC family provides non-volatile, high-density, single-chip solutions. In addition, ProASIC reprogrammable devices have a fine-grained architecture, which ensures compatibility with ASIC design tools and methodologies, and contain an ample amount of embedded dual-port memory/FIFO blocks. The architecture and design methodology also enable designers to "drop-in" soft IP from proprietary and third-party sources, eliminating much of the architecture-specific re-engineering required by other PLDs. Networking engineers in particular are receptive to the advantages of a non-volatile, single-chip, reprogrammable device that is designed using ASIC tools and methodologies. Like other PLDs, ProASIC devices reduce time to market and minimize design risk and investment, requiring no mask sets or silicon respins. The use of ProASIC devices also simplifies board design and cost by eliminating the need for a boot device (e.g., serial PROM) associated with SRAM FPGAs. In addition, ProASIC devices operate at very low power, using only one-third to one-half of the power consumed by SRAM FPGAs and other PLDs based on look-up tables ("LUTs"). Finally, the ease of converting ASIC IP into ProASIC significantly broadens the availability of reusable cores for FPGA designers. In short, the ProASIC family brings significant benefits to any designer of high-density logic. ASICmaster Software ASICmaster, the ProASIC design suite, was designed from the beginning to support both ASIC and FPGA design flows. As a result, it is the first programmable family that allows ASIC designers to use all of their existing tools and scripts. Thus, there is no significant investment of money to buy or time to learn new design tools. The achievement of timing convergence using standard ASIC tools was one of the key technical challenges resolved by ProASIC. The most significant outcome is that the decision to choose a programmable or masked silicon solution can be deferred to a much later point in the design cycle. In addition, it blurs the distinction between ASIC and FPGA designs by permitting engineers to focus on system logic, rather than specific silicon solutions. The ASICmaster tool set is based on a complex, multimillion-gate capable ASIC tool that includes TDPR. ASICmaster software integrates a global router, static timing analyzer, 2 1/2 D-based RC extractor, AWE (asymptotic waveform extraction) delay calculator, and ECO (engineering change order) editor into an advanced design flow. Users have the option of automated flow or interactive control for placement and routing. Additional capabilities include automated memory generation with the ProASIC MemoryMaster tool, power estimation, and a layout viewer for identifying and optimizing critical paths. ProASIC tools utilize the same VHDL and Verilog HDL descriptions that are targeted for gate arrays and standard cells. This allows the use of leading EDA tools such as Design Compiler, Build Gates, PrimeTime, Design Time, Verilog XL, VCS, Formality, and others. As a result, ProASIC design tools can be used in almost any ASIC design environment. This permits ASIC designers to operate from within their existing design environments, and also frees them from having to modify HDL code with special directives and instantiations, as is required with SRAM devices. Designers utilizing an FPGA design flow value the ease of use and fast run times they have come to expect from FPGA design tools. ProASIC is supported by leading FPGA tools such as LeonardoSpectrum (Exemplar) and FPGA Express (Synopsys), both of which are discussed below, as well as Synplify (Synplicity) and the Model Technology simulation environment. In August 1999, the Company announced the validation of Exemplar Logic's LeonardoSpectrum 99.1 synthesis tool as fully supporting designs for ProASIC devices. Exemplar Logic is a wholly-owned subsidiary of Mentor Graphics. Exemplar's LeonardoSpectrum synthesis tool was proven in both an ASIC and an FPGA design flow. In qualifying LeonardoSpectrum, the Company determined that the tool provides optimized synthesis results in the ProASIC flow and works with all currently announced high-density ProASIC devices. LeonardoSpectrum also integrates seamlessly with ASICmaster. In November 1999, the Company announced that Synopsys had enhanced its support of ProASIC devices. Synopsys offers design flow flexibility for ProASIC devices with FPGA Compiler II and FPGA Express. Designers can choose an ASIC-like design flow through FPGA Compiler II or a more traditional FPGA design flow through FPGA Express. Both tools have integrated architecture-specific optimization for ProASIC devices to achieve high quality of results. In addition to architecture-specific optimization, Synopsys incorporated several new features for ProASIC devices, including the following: logic replication, which enables the user to duplicate high-fanout logic cells in order to reduce routing congestion and increase design performance; timing constraint file output, which permits designers to enter constraints only once by automatically passing on the timing constraints to ASICmaster; timing back-annotation, which accelerates debugging time by providing more accurate data to the integrated static timing analysis tool in FPGA Compiler II and FPGA Express; and partner-designed module generation, which greatly increases quality of results for arithmetic functions by automatically using architecture-specific modules developed by the Company. Reusable Core/IP Integration Reusable cores, or IP, have not yet substantially penetrated the programmable market. The reasons for this include the high level of IP optimization required to be useful in a LUT-based architecture; the lack of security provided by SRAM programmable logic; and the inability to control the number of units programmed with a single IP element, which is a critical control factor for the standard IP business model. ProASIC devices solve each of these issues. The fine-grained architecture ensures that little modification to the core will be required. The minimal effort required to retarget from ASIC to programmable silicon should make ProASIC attractive to third-party IP vendors and users of captive IP. Security features on the devices ensure that, once programmed, the device cannot be read back. Finally, a proprietary licensing feature, combined with factory programming, means that the standard business model for IP can be extended to programmable technologies. In addition to IP that can be purchased from the Company, such as PCI cores, a variety of independent core vendors (such as Sican and Inicore) are working with ProASIC devices. Protocol Design Services Group The Company's Protocol Design Services Group is a leading provider of FPGA, ASIC, software, and electronic system design solutions. With the Company's acquisition of the Protocol Design Services Group from GateField in August 1998, Actel became the first FPGA provider to offer system-level design expertise to its customers, expanding the Company's capability to support a greater portion of customers' overall design and risk management. The Protocol Design Services Group is located in a secure facility in Mt. Arlington, New Jersey, and is certified to handle government, military, and proprietary designs. Protocol has an eleven-year history of providing engineering design solutions to both the commercial and government sectors in North America and Europe. Protocol's focus has been in telecommunications and networking applications, but it also has significant experience in the automotive, computer, military/aerospace, and consumer markets. Using industry-standard tools and methodologies, Protocol provides varying levels of design services, including system-level and system-on-a-chip design, turnkey FPGA and ASIC design and verification, software development, and circuit card design. In January 1999, the Company announced that the Protocol Design Services Group was actively involved with a major customer to supply a new RTL core for a 66MHz PCI design application in an FPGA. The Company believes this PCI implementation was the first programmable application operating within the PCI 66MHz specification. This PCI solution was developed by the Protocol Design Services Group for a PC-based accelerator board that also uses a number of ProASIC products. The accelerator uses the Company's 66 MHz PCI core in a 16,000-gate SX antifuse FPGA, and has a shared local bus interface between the PCI core and the ProASIC devices. The choice of ProASIC products as building blocks of the solution was driven by the requirement that the accelerator board function as a secure platform for IP. ProASIC devices have several security features, including the ability to prevent read-back of design content. In June 1999, the Company announced that its Protocol Design Services Group had completed 50 ProASIC reprogrammable gate array designs using the ASICmaster design suite. The Protocol Design Services Group completed the designs over the preceding three years for uses ranging from ASIC prototyping to production. This included the frequent use of ProASIC devices as a quick path to verified silicon design, enabling system software to be developed while the ASIC is being fabricated. The Protocol Design Services Group leveraged the ProASIC family's unique reprogrammable gate array technology and its ASIC-like design flow and methodology to increase design productivity and significantly improve time to market compared with traditional ASIC design development. In February 2000, the Company announced that the Protocol Design Services Group had opened a design center in the Boston area. The new Protocol Design Center, located in Chelmsford, Mass., offers a broad range of expertise in engineering design and verification services for FPGAs, ASICs, and electronic systems. The Boston area design center is the newest of a several North American regional centers planned by the Protocol Design Services Group. Market and Applications FPGAs can be used in a broad range of applications across nearly all electronic system market segments. Net revenues from the sale of FPGAs accounted for 96% of the Company's net revenues for 1999, and virtually all of such revenues were derived from the sale of antifuse FPGAs. Most customers use the Company's antifuse FPGAs in low to medium volumes in the final production form of their products. Some high-volume electronic system manufacturers use the Company's antifuse FPGAs as a prototyping vehicle and convert production to lower-cost conventional gate arrays or standard cells, while others with time-to-market constraints use Actel's FPGAs in the initial production and then convert to conventional gate arrays or standard cells. As product life cycles continue to shorten, foundry capacity becomes more difficult to secure, and manufacturing efficiencies for antifuse FPGAs increase, some high-volume electronic system manufacturers are electing to retain antifuse FPGAs in volume production because conversion to conventional gate arrays or standard cells may not yield sufficiently attractive savings before the electronic system reaches the end of its life. With the introduction of the MX, SX, and SX-A families, the Company believes that its antifuse FPGAs will be used increasingly in high volume production. Communications The high density, high performance, and low power consumption of antifuse FPGAs make them appropriate for use in communications equipment. Increasingly complex equipment must frequently be designed to fit in the space occupied by previous product generations. In addition, the rapidly changing communications environment rewards short development times and early market entry. Representative customers of the Company in the communications market include: 3Com, ADC Kentrox, Advanced Fibre Communications, Alcatel, Cabletron, Chipcom, Cisco Systems, Ericsson, Hughes Network Systems, Lucent Technologies, Marconi, Motorola, Nokia, and Nortel. The Company derived 9% of its net revenues for 1999 from Nortel and expects to derive 10% or more of net revenues for 2000 from Nortel. Computer Systems and Peripherals The computer systems market is intensely competitive, placing a premium on early market entry for new products. FPGAs reduce the time to market and facilitate early completion of production models so that development of hardware and software can occur in parallel. Representative customers of the Company in the computer market include: Compaq Computer, Hewlett-Packard, Hypercom, and IBM. Consumer and e-Appliances The high performance, low power consumption, and low cost of antifuse FPGAs make them appropriate for use in products enabling the portability of the internet, or "e-appliances," and other high-volume electronic systems targeted for consumers. E-appliance applications include MP3 "music-off-the-internet" players, digital cable set-top boxes, DSL and cable modems, digital cameras, and digital film. Like the computer market, the market for consumer and e-appliance products places a premium on early market entry for new products and is characterized by short product life cycles. Representative customers of the Company in the consumer/e-appliance market include: Diamond Multimedia, General Instruments, NEC, NuCam, and PairGain. In February 1999, the Company announced that TacT Audio had launched the first direct-drive digital amplifier targeted for the top-end of the high-fidelity market. The TACT Millennium achieves its high-quality sound performance using two MX FPGAs (an MX09 and an MX16), which replaced two 24-bit DSPs and two CPLDs running at over 90MHz. The FPGAs have on-chip program storage that is not easily compromised and use far less power than the original components. The next generation will be even further improved by replacing the two MX parts with a single SX family device, which will include volume control to create a basic system-level building block for future generations of the amplifier. The SX device will also enable future generations of the amplifier to run at much higher speeds. In August 1999, the Company announced that Pathways Development Group, Inc. will use the MX02 FPGA in its new Team Xtreme video game interfaces for people with disabilities. Team Xtreme is a family of products allowing people with disabilities to play Nintendo video game systems without slowdown hardware or special software. A disabled person using Team Xtreme can make use of up to five switches controlled by his or her hands, feet, head, or breath. These switches are combined with a standard game controller played by a teammate and the two teammates are made to look like one person to the game system. Players using Team Xtreme work on hand-eye coordination and motor movement skills, mental and physical endurance, and socialization skills while having fun. The design flexibility of the MX02 device permitted Team Xtreme's designers to develop a single circuit board that works for all three Nintento game interfaces (standard NES, Super NES, and Nintendo 64), providing considerable cost savings. Industrial Control Equipment Industrial control and instrumentation applications often require complex electronic functions tailored to specific needs. FPGAs offer programmability and high density, making them attractive to this segment of the electronic equipment market. Representative customers of the Company in the industrial market include: Agilent, Allen Bradley/Rockwell, Eastman Kodak, General Electric-Medical, Hewlett-Packard, Marquette, Siemens, and Varian. Military and Aerospace Rigorous quality and reliability standards, stringent volume requirements, and the need for design security are characteristics of the military and aerospace market. The Company's antifuse FPGAs have high quality and reliability and are virtually impossible to reverse engineer, making them appropriate for many military and aerospace applications. The Company's antifuse FPGAs are especially well suited for space applications, due to the high radiation tolerance of the antifuse, and for many aircraft and missile flight applications, due to the high density and high performance of antifuse FPGAs. For these reasons, the Company is the world's leading supplier of military, radiation-tolerant, and radiation-hardened FPGAs. The Company's antifuse FPGAs were first designed into a space mission in 1992. Since then, thousands of the Company's programmable logic circuits have performed aboard manned space vehicles, earth observation satellites, and deep-space probes. The Company's FPGAs often perform mission-critical functions on important scientific missions in space. They have, for example, been aboard numerous Mars missions, and were included in the controlling electronics for the Mars Pathfinder Rover. In addition, there are Actel devices performing functions on the repaired and revitalized Hubbell Space Telescope. The Company's FPGAs are also being readied for the next space infrared telescope facility (SIRTF), which is scheduled to launch in 2001. As a final example, the Stardust probe, which was launched in 1999 and is scheduled to make several large loops around the sun and rendezvous with the tail of the comet Wild 2 in January of 2004, carries about 100 Actel FPGAs. The Company participates in programs administered by NASA's Goddard, Johnson, and Marshall Space Flight Centers (including the Space Shuttle) as well as programs at California Institute of Technology's Jet Propulsion Laboratory ("JPL"). However, the Company's success has not been limited to the United States. Today, the Company's FPGAs can be found in spacecraft launched by virtually every civilian space agency around the world, including the European Space Agency (ESA) and the Japanese National Space Development Agency (NASDA), as well as on board the International Space Station (ISS). Representative customers of the Company in the military and aerospace market include: Boeing, Harris, Honeywell, Hughes Aircraft, JPL, Lockheed Martin, Loral, Marconi, National Aeronautics Space Administration ("NASA"), Northrup, Olin Corporation, Raytheon, SCI Systems, and TRW. Sales and Distribution The Company maintains a worldwide, multi-tiered selling organization that includes a direct sales force, independent manufacturers' representatives, and electronics distributors. In March 1999, the Company announced the appointment of Paul Indaco as Vice President of Worldwide Sales. In August 1999, the Company announced the expansion and reorganization of its senior sales management team. The new sales organization included the appointment of Area Sales Managers for the Western and Central United States, who joined the Area Sales Manager for the Eastern United States to form Actel's area sales management team in North America. The Company also moved to strengthen its distribution channel management with the appointment of a Director of North American Distribution and Sales Operations, and to support its important aerospace product segment with the appointment of a Director of Worldwide Aerospace Sales. These new positions in the sales organization were created to increase sales management coverage and support for new products. The Company's North American sales force consists of 55 sales and administrative personnel and field application engineers ("FAEs") operating from 20 sales offices located in major metropolitan areas. Direct sales personnel call on target accounts and support direct original equipment manufacturers ("OEMs"). Besides overseeing the activities of direct sales personnel, the Company's sales managers also oversee the activities of 20 manufacturers' representative firms that operate from approximately 50 office locations. The manufacturers' representatives concentrate on selling to major industrial companies in North America. To service smaller, geographically dispersed accounts in North America, the Company has distributor agreements with Arrow, Pioneer, and Unique. Arrow, Pioneer, and Unique have approximately 51, 39, and 26 branch offices in North America, respectively. Actel generates a significant portion of its revenues from international sales. Sales to customers outside the United States for 1999, 1998, and 1997 accounted for 29%, 33%, and 31% of net revenues, respectively. Of these export sales, the largest portion was derived from European customers. The Company's European sales organization consists of 17 employees operating from five sales offices and 12 distributors and sales representatives having 31 offices (including Arrow and Unique, which have eight and seven offices in Europe, respectively). Actel's Pan-Asia sales organization consists of 10 employees operating from four sales offices and seven distributors having 15 offices (including Unique, which has eight offices in Pan-Asia). Three additional distributors serve the remaining international markets in which Actel offers its products. The Company's sales cycle for the initial sale of a design system is generally lengthy and often requires the ongoing participation of sales, engineering, and managerial personnel. After a sales representative or distributor evaluates a customer's logic design requirements and determines if there is an application suitable for the Company's FPGAs, the next step typically is a visit to the qualified customer by a regional sales manager or the FAE from Actel or its distributor. The sales manager or FAE may then determine that additional analysis is required by engineers based at the Company's headquarters. In 1999, a majority of the Company's sales were made through distributors. As is common in the semiconductor industry, the Company generally grants price protection to distributors. Under this policy, distributors are granted a credit upon a price reduction for the difference between their original purchase price for products in inventory and the reduced price. From time to time, distributors are also granted credit on an individual basis for Company-approved price reductions on specific transactions to meet competition. The Company also generally grants distributors limited rights to return products. To date, product returns under this policy have not been material. The Company maintains reserves against which these credits and returns are charged. Because of its price protection and return policies, the Company does not recognize revenue on products sold to distributors until the products are resold to end customers. Backlog At December 31, 1999, the Company's backlog was approximately $49.6 million, compared with approximately $25.5 million at December 31, 1998. The Company includes in its backlog all OEM orders scheduled for delivery over the next nine months and all distributor orders scheduled for delivery over the next six months. The Company sells standard products that may be shipped from inventory within a short time after receipt of an order. The Company's business, and to a large extent that of the entire semiconductor industry, is characterized by short-term order and shipment schedules, rather than volume purchase contracts. In accordance with industry practice, the Company's backlog may be cancelled or rescheduled by the customer on short notice without significant penalty. As a result, the Company's backlog may not be indicative of actual sales and therefore should not be used as a measure of future revenue. Customer Service and Support The Company believes that superior customer service and technical support are essential for success in the FPGA market. The Company facilitates service and support through service team meetings that address particular aspects of the overall service strategy and support. The most significant areas of customer service and technical support are regularly measured. The Company's customer service organization emphasizes prompt, accurate responses to questions about product delivery and order status. The Company's FAEs provide technical support to customers in Canada, Europe, Japan, Korea, Taiwan, and the United States. This network of experts is augmented by FAEs working for the Company's sales representatives and distributors throughout the world. Customers in any stage of design can also obtain assistance from the Company's technical support hotline or web-based technical support database called "Guru." In addition, the Company offers technical seminars on its products and comprehensive training classes on its software. The Company generally warrants its products against defects in material and workmanship for one year. The Company also warrants that its automatic place and route software will achieve gate utilization at not less than the rates advertised. To date, the Company has not experienced significant warranty returns. Manufacturing and Assembly The Company's strategy is to utilize third-party manufacturers for its wafer requirements, which permits Actel to allocate its resources to product design, development, and marketing. Wafers used in the Company's FPGAs are manufactured by Chartered Semiconductor in Singapore; by Lockheed Martin SEC in Manassas, Virginia; by MEC in Japan; by UMC in Taiwan; and by Winbond in Taiwan. The Company's FPGAs in production are manufactured by Chartered Semiconductor using 0.6, 0.45, and 0.35 micron design rules; by Lockheed Martin SEC using 0.8 micron design rules; by MEC using 1.0, 0.8, and 0.25 micron design rules; by UMC using 0.22 micron design rules; and by Winbond using 0.8 and 0.6 micron design rules. In addition, the ProASIC flash devices are being manufactured by Infineon in Germany using 0.25 micron design rules. In March 1999, the Company announced that it had, in partnership with MEC, successfully developed a 0.25-micron antifuse process in what was then record time. In March 2000, the Company announced that it had successfully developed a 0.22-micron antifuse process technology at UMC, again in record time. Wafers purchased by the Company from its suppliers are assembled, tested, marked, and inspected by Actel and/or a subcontractor of the Company before shipment to customers. The Company assembles most of its plastic commercial products in Hong Kong, Korea, and Singapore. Ceramic package assembly, which is generally required for military applications, is performed at one or more subcontractor manufacturing facilities, some of which are in the United States. The Company is ISO 9002 certified for the manufacturing and testing of its FPGAs. The certification was granted by DSCC. The ISO standards, developed by the International Organization for Standardization, provide an international benchmark for quality systems. Specifically, ISO 9002 requires compliance in the following areas: management responsibility, customer service, supplier management, internal quality audits, training process control, and inspection. As the Company continues to establish itself as a leading supplier of high-quality FPGAs, ISO certification provides a globally recognized benchmark that Actel's devices have been certified for integrity in the manufacturing and test process. Strategic Relationships In addition to strategic relationships that the Company enjoys with its customers, foundries, assembly houses, distributors, and sales representatives, Actel also has the following strategic partners: BP Microsystems The Company has worked with BP Microsystems of Houston, Texas, to jointly develop Silicon Sculptor based on BP's world class technology. BP Microsystems offers a wide variety of programmers, including EPROM programmers, universal programmers, concurrent programming systems, and fine pitch automated programming systems. The modules of the Silicon Sculptor are designed to be fully upward compatible with all BP Microsystems antifuse FPGA programmers, which permits design engineers to move from prototype programming to high volume production programming. GateField In 1998, the Company entered into a Product Marketing Agreement with GateField and purchased GateField Series C Convertible Preferred Stock. Concurrently, the Company acquired the Design Services Business Unit of GateField in a transaction accounted for as a purchase. Consideration paid in these transactions totaled $10.4 million, consisting entirely of cash. Marketing Rights During the term of the Product Marketing Agreement, the Company has exclusive, worldwide distribution rights to GateField's standard ProASIC FPGA products utilizing less than .35 micron geometries, including FPGA products that are integrated with SRAM or flash memory. For these rights, the Company paid GateField an initial fee and agreed to pay a fee of $1 million upon qualification of the initial .25 micron product. In addition, the Company and GateField will split equally the gross margins from ProASIC product sales. License Rights Pursuant to the terms of a License Agreement, GateField granted to the Company a fully paid, nonexclusive, nontransferable license to sell and, upon certain events, to make, have made, import, and use GateField's standard ProASIC FPGA products utilizing less than .35 micron geometries. Preferred Stock Pursuant to terms of a Series C Preferred Stock Purchase Agreement, the Company purchased 300,000 shares of GateField's Series C Convertible Preferred Stock, par value $0.10. The Series C Shares are convertible into 200,000 shares of GateField common stock and are entitled to certain liquidation and redemption rights. In the event that all of GateField's outstanding shares of Series B Preferred Stock are redeemed, the Company shall be entitled to redeem its Series C Shares, subject to applicable law. The Company is entitled to certain registration rights and has a right of first refusal to purchase its pro rata share of certain new securities GateField may issue. In May 1999, the Company paid $8.0 million to GateField in exchange for a convertible promissory note bearing interest at 5.22% per annum with a five-year term. Interest is payable quarterly and the note is secured by a lien against all the assets of GateField. The note is convertible at the Company's election into 420,000 shares of GateField Series C-1 Convertible Preferred Stock, which are convertible into 1,230,769 shares of GateField common stock, equating to a price of $6.50 per share of GateField common stock. In addition, the Company increased its ownership of GateField common stock during 1999 from 16,500 shares to 190,529 shares. GateField common stock, which is listed on the National Association of Security Dealers Over-The-Counter Bulletin Board, closed at $3.875 on December 31, 1999. The Company assesses the recoverability of its investments in GateField, as well as the amounts due from GateField, on a regular basis. No impairment has been indicated to date. In light of the Company's common and preferred equity interest in GateField, $8.0 million convertible promissory note from GateField, and marketing and licensing agreements with GateField, Actel began accounting for its interests in GateField under the equity method of accounting during 1999. The impact of this implementation was a $1.1 million charge to the Company's net income for 1999 (consisting of $0.9 million in amortization of goodwill and $0.2 million of GateField's net loss). SEi In October 1999, the Company announced that it had expanded its strategic partnership with Space Electronics, Inc. ("SEi") of San Diego, Calif. by making SEi the sole authorized selling agent for the RAD-PAK line of radiation-tolerant FPGAs. RAD-PAK FPGAs provide the survivability and cost-effectiveness sought by growing markets using radiation-tolerant FPGAs. SEi sells 1280A and 14100A RAD-PAK devices of up to 10,000 gates screened to either Class B or Class S levels. In addition, SEi brands the RAD-PAK devices by marking the products with its logo and has full responsibility for RAD-PAK customer design support. SEi also assumed responsibility for maintaining inventory, order processing, and order fulfillment. Synopsys In November 1999, the Company announced an extended partnership agreement with Synopsys. The purpose of this agreement is to forge a closer relationship that will produce increasingly better design flows and quality of results for customers using FPGA Compiler II or FPGA Express to target the Company's programmable logic devices. The first outcome of this new agreement was enhanced support of ProASIC devices (see "BUSINESS -- Products -- ProASIC -- ASICmaster"). Synplicity and VeriBest (Mentor Graphics) In 1998, the Company announced that it had, together with Synplicity and VeriBest, begun developing an integrated tool environment for Actel FPGA designs. The Actel DeskTOP suite of tools was released in the first quarter of 1999 (see "BUSINESS -- Products -- Software -- DeskTOP"). Founded in 1994, Synplicity delivers the benefits of logic synthesis and embedded synthesis technologies to programmable logic designers by developing fast, easy-to-use, affordable tools with excellent quality of results. Synplicity products support industry-standard design languages (VHDL and Verilog), run on popular platforms (Windows '95, Windows NT and UNIX), and support leading PLD manufacturers. VeriBest is a broad-line supplier of enterprise EDA tools that enable customers to solve their critical business issues. VeriBest integrates with many industry-leading tool providers, including Actel, Altera, Bentley Systems, Dynamic Soft Analysis, Lucent Technologies, Minc, Synopsys, Synplicity, and Xilinx. In November 1999, Mentor Graphics Corporation ("Mentor Graphics") purchased all or substantially all of the assets of VeriBest. Mentor Graphics has agreed to continue supporting the DeskTOP tool set for one year. Research and Development In 1999, 1998, and 1997, the Company spent $32.3 million, $31.2 million, and $26.5 million, respectively, on research and development, which represented approximately 19%, 20%, and 17% of net revenues, respectively, for such periods. The Company's research and development expenditures are divided among circuit design, software development, and process technology activities, all of which are involved in the development of new products based on existing or emerging technologies. In the areas of circuit design and process technology, the Company's research and development activities also involve continuing efforts to cut the cost and improve the performance of current products, including reductions in the design rules under which such products are manufactured. The Company's software research and development activities include enhancing the functionality, usability, and availability of high-level CAE tools and IP cores in a complete and automated desktop design environment on popular personal computer and workstation platforms. The research and development projects that the Company publicly discussed in 1999 included the following: ES Architecture and Reprogrammable Embedded IP In 1996, the Company announced its intention to enter the reprogrammable FPGA market by offering an SRAM-based product family utilizing the new ES programmable architecture. The ES architecture combines a fine-grained cell structure with a routing-centric architecture. The expected result is logic cells that are more readily synthesized and more efficient than current programmable architectures. The key to the architectural efficiencies is a technology in which separate transistors are used to implement logic and to drive the interconnects. By separating these functions, Actel believes that more efficient die utilization is achievable, resulting in lower-cost designs. In addition, the interconnect drivers are tailored to routing length, which should provide high performance even for cross-chip routing. The ES architecture also makes greater use of hierarchy than current programmable architectures. A constant, maximum routing delay is associated with each level of hierarchy, which should provide the device with fanout independent delays. This means that, regardless of the number of logic elements being driven, the delay should always be constant, making the chip's performance predictable. Many aspects of the ES architecture are switch-technology independent, making possible future variants of the ES architecture employing antifuse, flash, or other basic programming elements. In 1999, after experiencing significant delays in matching the capabilities of its software and the resources of its silicon, the Company refocused its reprogrammable SRAM strategy. The Company believes that the size and power advantages of the ES architecture can now be used to greatest efficacy in the emerging market for embedded programmable products. The Company has formed a strategic product marketing team to position Actel's SRAM technology at the forefront of this emerging market. In January 2000, the Company announced the appointment of Dennis Kish to the newly-created position of Vice President of Strategic Marketing. In this role, Mr. Kish is responsible for leading the Company's embedded SRAM effort. Competition The FPGA market is highly competitive, and the Company expects that competition will continue to increase as the market grows. The Company's competitors include suppliers of TTLs and ASICs, including conventional gate arrays, standard cells, CPLDs, and FPGAs. Of these, the Company competes principally with suppliers of conventional gate arrays, standard cells, CPLDs, and FPGAs. The primary advantages of conventional gate arrays and standard cells are high capacity, high density, high speed, and low cost in production volumes. The Company competes with conventional gate array and standard cell suppliers by offering lower design costs, shorter design cycles, and reduced inventory risks. However, some customers elect to design and prototype with the Company's products and then convert to conventional gate arrays or standard cells to achieve lower costs for volume production. For this reason, the Company also faces competition from companies that specialize in converting CPLDs and FPGAs, including Actel products, into conventional gate arrays or standard cells. The Company also competes with suppliers of CPLDs. Suppliers of these devices include Altera and Lattice-Vantis Semiconductor Corporation ("Lattice"). The circuit architecture of CPLDs may give them a performance advantage in certain lower capacity applications, although the Company believes that its SX and SX-A families compete favorably with CPLDs. However, Altera and Lattice have larger installed bases of development systems than the Company. In addition, many newer CPLDs are reprogrammable, which permits customers to reuse a circuit multiple times during the design process (unlike antifuse-based FPGAs, which permanently retain the programmed configuration). No assurance can be given that the Company will be able to overcome these competitive disadvantages. The Company competes most directly with established FPGA suppliers, such as Xilinx and Lucent Technologies (which is a licensed second source of some Xilinx products). While the Company believes its products and technology are superior to those of Xilinx in many applications requiring greater speed, lower cost, or nonvolatility, Xilinx came to market with its FPGAs approximately three years before Actel, has a larger installed base of development systems, and its SRAM-based products are reprogrammable. No assurance can be given that the Company will be able to overcome these competitive disadvantages. Several companies have either already marketed antifuse-based FPGAs, including QuickLogic Corporation ("QuickLogic"), or announced their intention to do so. In 1995, the Company acquired the antifuse FPGA business of TI, which was the only second-source supplier of Actel products. Xilinx, which is a licensee of certain of the Company's patents, introduced antifuse-based FPGAs in 1995 and abandoned its antifuse FPGA business in 1996. Cypress Semiconductor Corporation, which was a licensed second source of QuickLogic, sold its antifuse FPGA business to QuickLogic in 1997. QuickLogic is also a licensee of certain of the Company's patents. See "BUSINESS -- Patents and Licenses." The Company believes that important competitive factors in its market are price, performance, density (concentration of usable gates), capacity (total number of usable gates), ease of use and functionality of development system software, installed base of development systems, adaptability of products to specific applications, length of development cycle (including reductions to finer micron design rules), number of I/Os, reliability, adequate wafer fabrication capacity and sources of raw materials, protection of products by effective utilization of intellectual property laws, and technical service and support. Failure of the Company to compete successfully in any of these or other areas could have a materially adverse effect on its business, financial condition, or results of operations. Patents and Licenses As of March 31, 2000, the Company had 174 United States patents and applications pending for an additional 31 United States patents. Actel also had 41 foreign patents and applications pending for 105 patents outside the United States. The Company's patents cover, among other things, Actel's basic circuit architecture, antifuse structure, and programming method. The Company expects to continue filing patent applications as appropriate to protect its proprietary technologies. The Company believes that patents, along with such factors as innovation, technological expertise, and experienced personnel, will become increasingly important. The Company attempts to protect its circuit designs, software, trade secrets, and other proprietary information through patent and copyright protection, agreements with customers and suppliers, proprietary information agreements with employees, and other security measures. No assurance can be given that the steps taken by the Company will be adequate to protect its proprietary rights. On March 29, 2000, Unisys Corporation ("Unisys") brought suit in the United States District Court for the Northern District of California, San Jose Division, against the Company seeking monetary damages and injunctive relief based on Actel's alleged infringement of four patents held by Unisys. The Company believes that it has meritorious defenses to the claims asserted by Unisys and intends to defend itself vigorously in this matter. After consideration of the information currently known, the Company does not believe that the ultimate outcome of this case will have a materially adverse effect on Actel's business, financial condition, or results of operations, although no assurance to that effect can be given. The foregoing is a forward-looking statement subject to all of the risks and uncertainties of a legal proceeding, including the discovery of new information and unpredictability as to the ultimate outcome. In connection with the settlement of patent litigation in 1993, the Company and Xilinx entered into a Patent Cross License Agreement, under which Xilinx was granted a license under certain of Actel's patents that permits Xilinx to make and sell antifuse-based PLDs, and the Company was granted a license under certain of Xilinx's patents to make and sell SRAM-based PLDs. In 1996, Xilinx announced that it had discontinued its antifuse-based FPGA product line. In 1999, the Company refocused its reprogrammable SRAM strategy on the emerging market for embedded programmable products. See "BUSINESS -- Research and Development -- ES Architecture and Reprogrammable Embedded IP." In 1995, the Company and BTR, Inc. ("BTR") entered into a License Agreement pursuant to which BTR licensed its proprietary technology to the Company for development and use in FPGAs and certain multichip modules. As partial consideration for the grant of the license, the Company pays to BTR non-refundable advance royalties. The Company has also employed the principals of BTR to assist Actel in its development and implementation of the licensed technology. In connection with the settlement of patent litigation in 1998, the Company and QuickLogic entered into a Patent Cross License Agreement that protects all existing FPGA products of both companies for the lives of those products. In 1998, the Company also entered into a patent litigation settlement agreement with the Lemelson Medical, Education & Research Foundation. As is typical in the semiconductor industry, the Company has been and expects to be notified from time to time of claims that it may be infringing patents owned by others. During 1999, the Company continued to hold discussions with several third parties regarding potential patent infringement issues, including two semiconductor manufacturers with significantly greater financial and intellectual property resources than Actel. As it has in the past, the Company may obtain licenses under patents that it is alleged to infringe. The Company has made provision for the estimated settlement costs of claims for alleged infringement through end of 1999. While the Company believes that reasonable resolution will occur, no assurance can be given that these claims will be resolved or that the resolution of these claims will not have a materially adverse effect on Actel's business, financial condition, or results of operations. In addition, the Company's evaluation of the probable impact of these pending disputes could change based upon new information learned by Actel. Employees At the end of 1999, the Company had 449 full-time employees, including 136 in marketing, sales, and customer support; 144 in research and development; 122 in operations; 13 in design services; and 34 in administration and finance. None of the Company's employees is represented by a labor union nor does Actel have employment agreements with any of its employees. The Company has not experienced any work stoppages, and believes that its employee relations are satisfactory. Risk Factors Shareholders of Actel and prospective investors should carefully consider, along with the other information in this Annual Report on Form 10-K, the following risk factors: Acts of God The performance of the Company and each of its suppliers, distributors, subcontractors, and agents is subject to events or conditions beyond such party's control, including labor disputes, acts of public enemies or terrorists, war or other military conflicts, blockades, insurrections, riots, epidemics, quarantine restrictions, landslides, lightning, earthquake, fires, storms, floods, washouts, arrests, civil disturbances, restraints by or actions of governmental bodies acting in a sovereign capacity (including export or security restrictions on information, material, personnel, equipment, or otherwise), breakdowns of plant or machinery, inability to obtain transport or supplies, and the like. The occurrence of any of these circumstances could disrupt the Company's operations and may have a materially adverse effect on Actel's business, financial condition, or results of operations. "Blank Check" Preferred Stock; Change in Control Arrangements The Company's Articles of Incorporation authorize the issuance of up to 5,000,000 shares of "blank check" Preferred Stock (of which 4,000,000 shares remain available for issuance) with such designations, rights, and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board is empowered, without approval by holders of the Company's Common Stock, to issue Preferred Stock with dividend, liquidation, redemption, conversion, voting, or other rights that could adversely affect the voting power or other rights of the holders of the Common Stock. Issuance of Preferred Stock could be used as a method of discouraging, delaying, or preventing a change in control of the Company. In addition, such issuance could adversely affect the market price of the Common Stock. Although the Company does not currently intend to issue any additional shares of its Preferred Stock, there can be no assurance that it will not do so in the future. The Company has adopted an Employee Retention Plan that provides for payment of a benefit to Actel's employees who hold unvested stock options in the event of a change of control of the Company. Payment is contingent upon the employee remaining with the Company for six months after the change of control. The Company has also entered into Management Continuity Agreements with each of its executive officers, which provide for the acceleration of stock options unvested at the time of a change of control in the event the executive officer's employment is actually or constructively terminated other than for cause following the change of control. Competition The semiconductor industry is intensely competitive and is characterized by rapid rates of technological change, product obsolescence, and price erosion. The Company's existing competitors include suppliers of conventional gate arrays, standard cells, CPLDs, and FPGAs. The Company's principal competitors are Xilinx, a supplier of SRAM-based FPGAs; Altera, a supplier of CPLDs and SRAM-based FPGAs; QuickLogic, a supplier of antifuse-based FPGAs; and Lattice, a supplier of CPLDs. The Company also faces competition from companies that specialize in converting FPGAs, including Actel's products, into conventional gate arrays or standard cells. See "BUSINESS -- Competition." In addition, all existing FPGAs not based on antifuse technology and certain CPLDs are reprogrammable, a feature that makes them more attractive to designers. The Company also believes that, if there were a downturn in the market for CPLDs and FPGAs, companies with broader product lines and longer-standing customer relationships may be in a stronger competitive position than Actel. Many of the Company's current competitors offer broader product lines and have significantly greater financial, technical, manufacturing, and marketing resources than Actel. Significant additional competition is possible from major domestic and international semiconductor suppliers. All such companies are larger, offer broader product lines, and have substantially greater financial and other resources than the Company, including the capability to manufacture their own wafers. Additional competition could adversely affect the Company's business, financial condition, or results of operations. The Company may also face competition from suppliers of logic products based on new or emerging technologies. The Company seeks to monitor developments in existing and emerging technologies. No assurance can be given that the Company will be able to compete successfully with suppliers offering products based on new or emerging technologies. In any event, given the intensity of the competition and the research and development being done, no assurance can be given that the Company's technologies will remain competitive. Dependence on Customized Manufacturing Processes The Company's antifuse-based FPGAs and, to a lesser extent, flash-based ProASIC FPGAs are manufactured using customized steps that are added to otherwise standard manufacturing processes of independent wafer suppliers. There is considerably less operating history for the customized process steps than for the foundries' standard manufacturing processes. The dependence of Actel on customized processing steps means that, in contrast with competitors using standard manufacturing processes, the Company has more difficulty establishing relationships with independent wafer manufacturers; takes longer to qualify a new wafer manufacturer; takes longer to achieve satisfactory, sustainable wafer yields on new processes; may experience a higher incidence of production yield problems; must pay more for wafers; and generally will not obtain early access to the most advanced processes. Any of the above factors could be a material disadvantage against competitors that use standard manufacturing processes. As a result of these factors, the Company's products typically have been fabricated using processes one or two generations behind the processes used by competing products. As a consequence, the Company generally has not fully realized the price, performance, and power benefits of its antifuse technology. The Company is attempting to accelerate the rate at which its products are reduced to finer geometries and is working with its wafer suppliers to obtain earlier access to advanced processes, but no assurance can be given that such efforts will be successful. Dependence on Design Wins In order for the Company to sell an FPGA to a customer, the customer must incorporate the FPGA into the customer's product in the design phase. The Company therefore devotes substantial resources, which it may not recover through product sales, in support of potential customer design efforts (including, among other things, providing development system software) and to persuade potential customers to incorporate the Company's FPGAs into new or updated products. These efforts usually precede by many months (and often a year or more) the generation of volume FPGA sales, if any, by the Company. The value of any design win, moreover, will depend in large part upon the ultimate success of the customer's product. No assurance can be given that the Company will win sufficient designs or that any design win will result in significant revenues. Dependence on Independent Assembly Subcontractors The Company relies primarily on foreign subcontractors for the assembly and packaging of its products and, to a lesser extent, for the testing of its finished products. The Company generally relies on one or two subcontractors to provide particular services and has from time to time experienced difficulties with the timeliness and quality of product deliveries. The Company has no long-term contracts with its subcontractors and certain of those subcontractors are currently operating at or near full capacity. There can be no assurance that these subcontractors will continue to be able and willing to meet the Company's requirements for such components or services. Any significant disruption in supplies from, or degradation in the quality of components or services supplied by, these subcontractors could delay shipments and result in the loss of customers or revenues or otherwise have a materially adverse effect on the Company's business, financial condition, or results of operations. Dependence on Independent Software and Hardware Developers Actel is dependent upon independent software and hardware developers for the development, maintenance, and support of certain elements of its Designer Series Development Systems and Actel DeskTOP software, Silicon Explorer debugging and verification tool, Silicon Sculptor device programmers, evaluation board, and sockets. The Company's reliance on independent software and hardware developers involves certain risks, including lack of control over development and delivery schedules and the availability of customer support. In 1999, Boulder Creek Corporation, with whom the Company had worked exclusively to jointly develop and manufacturer Silicon Explorer, was acquired by Altera, one of Actel's principal competitors. Also in 1999, Mentor Graphics purchased all or substantially all of the assets of VeriBest, which has software included in the Actel DeskTOP integrated tool suite, and Mentor Graphics refused to assume or agree in writing to be bound by the OEM Agreement between VeriBest and the Company. No assurance can be given that the Company's independent developers will be able to complete software and/or hardware under development, or provide updates or customer support in a timely manner, which could delay future software or FPGA releases and disrupt Actel's ability to provide customer support services. Any significant delays in the availability of the Company's software and/or hardware could be detrimental to the capability of Actel's new families of products to win designs, delay shipments and result in the loss of customers or revenues, or otherwise have a materially adverse effect on the Company's business, financial condition, or results of operations. Dependence on Independent Wafer Manufacturers The Company does not manufacture any of the wafers used in the production of its FPGAs. Such wafers are manufactured by Chartered Semiconductor in Singapore, Lockheed Martin SEC in the United States, MEC in Japan, UMC in Taiwan, and Winbond in Taiwan. The Company's reliance on independent wafer manufacturers to fabricate its wafers involves significant risks, including the risk of events limiting production and reducing yields, such as technical difficulties or damage to production facilities, lack of control over capacity allocation and delivery schedules, and lack of adequate capacity. The Company has from time to time experienced delays in obtaining wafers from its foundries, and no assurance can be given that Actel will not experience similar or more severe delays in the future. In addition, although the Company has supply agreements with several of its wafer manufacturers, a shortage of raw materials or production capacity could lead any of the Company's wafer suppliers to allocate available capacity to customers other than Actel, or to internal uses, which could interrupt the Company's capability to meet its product delivery obligations. Any inability or unwillingness of the Company's wafer suppliers to provide adequate quantities of finished wafers to satisfy Actel's needs in a timely manner would delay production and product shipments and could have a materially adverse effect on the Company's business, financial condition, or results of operations. If the Company's current independent wafer manufacturers were unable or unwilling to manufacture Actel's products as required, the Company would have to identify and qualify additional foundries. The qualification process typically takes one year or longer. No assurance can be given that any additional wafer foundries would become available or be able to satisfy the Company's requirements on a timely basis or that qualification would be successful. In addition, the semiconductor industry has from time to time experienced shortages of manufacturing capacity. To secure an adequate supply of wafers, the Company has considered, and continues to consider, various possible transactions, including the use of substantial nonrefundable deposits to secure commitments from foundries for specified levels of manufacturing capacity over extended periods, equity investments in exchange for guaranteed production, and the formation of joint ventures to own foundries. No assurance can be given as to the effect of any such transaction on the Company's business, financial condition, or results of operations. Dependence on International Operations The Company purchases almost all of its wafers from foreign foundries and has almost all of its commercial products assembled, packaged, and tested by subcontractors located outside the United States. These activities are subject to the uncertainties associated with international business operations, including trade barriers and other restrictions, changes in trade policies, foreign governmental regulations, currency exchange fluctuations, reduced protection for intellectual property, war and other military activities, terrorism, changes in political or economic conditions, and other disruptions or delays in production or shipments, any of which could have a materially adverse effect on the Company's business, financial condition, or results of operations. In order to expand international sales and service, the Company will need to maintain and expand existing foreign operations or establish new foreign operations. This entails hiring additional personnel and maintaining or expanding existing relationships with international distributors and sales representatives. This will require significant management attention and financial resources and could adversely affect the Company's financial condition and operating results. No assurance can be given that the Company will be successful in its maintenance or expansion of existing foreign operations, in its establishment of new foreign operations, or in its efforts to maintain or expand its relationships with international distributors or sales representatives. Dependence on Key Personnel The success of the Company is dependent in large part on the continued service of its key management, engineering, marketing, sales, and support employees. Competition for qualified personnel is intense in the semiconductor industry, and the loss of the Company's key employees, or the inability of Actel to attract other qualified personnel, could have a materially adverse effect on the Company. The Company does not have employment agreements with any of its key employees. Dependence on Military and Aerospace Customers Although the Company is unable to determine with certainty the ultimate uses of its products, Actel estimates that sales of its products to customers in the military and aerospace industries, which sometimes carry higher profit margins than sales of products to other customers, accounted for approximately 21% of net revenues for 1999. In general, the Company believes that the military and aerospace industries have accounted for a significantly greater percentage of the Company's net revenues since the introduction of RH1280 in 1996. No assurance can be given that future sales to customers in the military and aerospace industries will continue at current volume or margin levels. In 1994, Secretary of Defense William Perry directed the Department of Defense to adopt a new way of doing business as it relates to acquisition by avoiding government-unique requirements and relying more on the commercial marketplace. Under the Perry initiative, the Department of Defense must increase access to commercial state-of-the-art technology and facilitate the adoption by its suppliers of business processes characteristic of world class suppliers. Integration of commercial and military development and manufacturing facilitates the development of dual-use processes and products and contributes to an expanded industrial base that is capable of meeting defense needs at lower costs. To that end, many of the cost-driving specifications that have been part of military procurements for many years were cancelled in the interest of buying commercial products. The Company anticipates that this trend toward the use of COTS products will continue, and that it may erode the revenues and/or margins that Actel derives from sales to customers in the military and aerospace industries, which could have a materially adverse effect on the Company's business, financial condition, or results of operations. Orders from the military and aerospace customers tend to be large and irregular, which creates operational challenges and contributes to fluctuations in the Company's net revenues and gross margins. These sales are also subject to more extensive governmental regulations, including greater import and export restrictions. In addition, products for military and aerospace applications require processing and testing that is more lengthy and stringent than for commercial applications, increasing the risk of failure. It is often not possible to determine before the end of processing and testing whether products intended for military or aerospace applications will fail and, if they do fail, a significant period of time is often required to process and test replacements. This makes it difficult to accurately estimate quarterly revenues and could have a materially adverse effect on the Company's business, financial condition, or results of operations. The Strom Thurmond National Defense Authorization Act for 1999 required, among other things, that communications satellites and related items (including components) be controlled on the U.S. Munitions List. The effect of the Act was to transfer jurisdiction over commercial communications satellites from the Department of Commerce to the Department of State and to expand the scope of export licensing applicable to commercial satellites. The need to obtain additional export licenses has caused a delay in the shipment of some of the Company's FPGAs. The Company does not believe that this will have a long-term effect on its business, although significant delays might cause some customers to seek an alternative solution. Dividend Policy The Company has never declared or paid any cash dividends on its capital stock. The Company intends to retain any earnings for use in its business and does not anticipate paying any cash dividends in the future. Fluctuations in Operating Results The Company's quarterly and annual operating results are subject to fluctuations resulting from general economic conditions and a variety of risks specific to Actel or characteristic of the semiconductor industry, including booking and shipment uncertainties, supply problems, and price erosion. Any of these factors can have a materially adverse effect on the Company's business, financial condition, or results of operations, but they also make it difficult to accurately estimate quarterly revenues and other operating results. Booking and Shipment Uncertainties The Company typically generates a large percentage of its quarterly revenues from orders received during the quarter and shipped in the final weeks of the quarter, making it difficult to accurately estimate quarterly revenues. The Company's backlog (which may be cancelled or deferred by customers on short notice without significant penalty) at the beginning of a quarter accounts for only a fraction of Actel's revenues during the quarter. This means that the Company generates the rest of its quarterly revenues from orders received during the quarter and "turned" for shipment within the quarter, and that any shortfall in "turns" orders will have an immediate and adverse impact on quarterly revenues. There are many factors that can cause a shortfall in "turns" orders, including but not limited to a decline in general economic conditions or the businesses of end users, excess inventory in the channel, conversion to conventional gate arrays, or the loss of business to other competitors for price or other reasons. Historically, the Company has shipped a disproportionately large percentage of its quarterly revenues in the final weeks of the quarter. Any failure by the Company to effect scheduled shipments by the end of the quarter can have a materially adverse effect on revenues for such quarter. Since the Company does not recognize revenue on the sale of a product to a distributor until the distributor resells the product, Actel's quarterly revenues are also dependent on, and subject to fluctuations in, shipments by the Company's distributors. When there is a shortfall in revenues, operating results are likely to be adversely affected because most of the Company's expenses do not vary with revenues. Supply Problems In a typical semiconductor manufacturing process, silicon wafers produced by a foundry are sorted and cut into individual die, which are then assembled into individual packages and tested for performance. The manufacture, assembly, and testing of semiconductor products is highly complex and subject to a wide variety of risks, including defects in masks, impurities in the materials used, contaminants in the environment, and performance failures by personnel and equipment. Semiconductor products intended for military and aerospace applications are particularly susceptible to these risks. As is common in the semiconductor industry, the Company's independent wafer suppliers from time to time experience lower than anticipated yields of usable die. For example, the Company experienced a yield problem at one of its foundries in the fourth quarter of 1993 that was severe enough to have a materially adverse effect on Actel's operating results. To the extent yields of usable die decrease, the average cost to the Company of each usable die increases, which reduces gross margin. Wafer yields can decline without warning and may take substantial time to analyze and correct, particularly for a company such as Actel that does not operate its own manufacturing facility, but instead utilizes independent facilities, almost all of which are offshore. Yield problems may also increase the time to market for the Company's products and create inventory shortages and dissatisfied customers. No assurance can be given that the Company will not experience wafer supply problems in the future. In addition, the Company typically experiences difficulties and delays in achieving satisfactory, sustainable yields on new processes or at new foundries, particularly when new technologies are involved. For example, the Company and GateField have struggled for more than a year to achieve acceptable yields on the flash process for ProASIC devices at Infineon. Although the Company eventually has been able to overcome these difficulties in the past, no assurance can be given that it will be able to do so with respect to the flash process at Infineon or any other new process and/or new foundry. Price Erosion The semiconductor industry is characterized by intense competition. Historically, the average selling price of products in the semiconductor industry generally, and for the Company's products in particular, have declined significantly over the life of each product. While the Company expects to reduce the average selling prices of its products over time as it achieves manufacturing cost reductions, Actel is sometimes required by competitive pressures to reduce the prices of its products more quickly than such cost reductions can be achieved. In addition, the Company sometimes approves price reductions on specific sales to meet competition. Declines in the average selling prices of the Company's products will reduce net revenues unless offset by greater unit sales or a shift in the mix of products sold toward higher-priced products. In addition, declines in the average selling prices of the Company's products will reduce gross margins unless offset by reductions in costs or by a shift in the mix of products sold toward higher-margin products. Forward-Looking Statements All forward-looking statements contained in this Annual Report on Form 10-K, including all forward-looking statements contained in any document incorporated herein by reference, are made pursuant to the safe harbor provisions of the Public Securities Litigation Reform Act of 1995. Words such as "anticipates," "believes," "estimates," "expects," intends," "plans," "seeks," and variations of such words and similar expressions are intended to identify the forward-looking statements. The forward-looking statements include projections and trends relating to average selling prices; gross margins; litigation; markets; research and development expenditures; revenues; selling, general, and administrative expenditures; wafer yields; and the Year 2000 compliance issue. All forward-looking statements are based on current expectations and projections about the semiconductor industry and programmable logic market, and assumptions made by the Company's management that reflect its best judgment based on other factors currently known by management, but they are not guarantees of future performance. Accordingly, actual events and results may differ materially from those expressed or forecast in the forward-looking statements due to the risk factors identified herein or for other reasons. The Company undertakes no obligation to update any forward-looking statement contained or incorporated by reference in this Annual Report on Form 10-K. Future Capital Needs The Company must continue to make significant investments in research and development as well as capital equipment and expansion of facilities. The Company's future capital requirements will depend on many factors, including (among others) product development, investments in working capital, and acquisitions of complementary businesses, products, or technologies. To the extent that existing resources and future earnings are insufficient to fund the Company's operations, Actel may need to raise additional funds through public or private debt or equity financings. If additional funds are raised through the issuance of equity securities, the percentage ownership of current shareholders will be reduced and such equity securities may have rights, preferences, or privileges senior to those of the holders of the Company's Common Stock. No assurance can be given that additional financing will be available or that, if available, it can be obtained on terms favorable to the Company and its shareholders. If adequate funds are not available, the Company may be required to delay, limit, or eliminate some or all of its proposed operations. Gross Margin The Company's gross margin is the difference between the revenues it receives from the sale of its products and the cost of those products. The price the Company can charge for a product is constrained principally by its competitors. While competition has always been intense, the Company believes price competition is becoming more acute. This may be due in part to the transition toward high-level design methodologies, which permit designers to wait until later in the design process before selecting a programmable or masked silicon device and make it easier to convert between PLDs and between programmable and masked device. These competitive pressures may cause the Company to reduce the prices of its products more quickly than it can achieve cost reductions, which would reduce the Company's gross margin and may have a materially adverse effect on its operating results. One of the most important variables affecting the cost of the Company's products is manufacturing yields. With its customized antifuse and flash manufacturing process requirements, the Company almost invariably experiences difficulties and delays in achieving satisfactory, sustainable yields on new processes or at new foundries. The Company introduced the ProASIC family of devices in 1999. Until satisfactory yields are achieved on this new product family, they generally will be sold at lower gross margins than the Company's mature product families. Depending upon the rate at which sales of these new products ramp and the extent to which they displace mature products, the lower gross margins could have a materially adverse effect on the Company's operating results. Management of Growth The Company has in the past experienced and expects to again experience growth in the number of its employees and the scope of its operations, resulting in increased responsibilities for management personnel. To manage future growth effectively, the Company will need to continue to hire, train, motivate, and manage a growing number of employees. The future success of the Company will also depend on its ability to attract and retain qualified technical, marketing, and management personnel. In particular, the current availability of qualified silicon design, software design, process, and test engineers is limited, and competition among companies for skilled and experienced engineering personnel is very strong. During strong business cycles, the Company expects to experience difficulty in filling its needs for qualified engineers and other personnel. No assurance can be given that the Company will be able to achieve or manage effectively any such growth, and failure to do so could delay product development and introductions or otherwise have a materially adverse effect on Actel's business, financial condition, or results of operations. Manufacturing Yields The Company depends upon its independent wafer suppliers to produce wafers with acceptable yields and to deliver them to the Company in a timely manner. Currently, substantially all of the Company's revenues are derived from products based on the Company's proprietary antifuse process technologies. Successful implementation of antifuse process technology requires a high degree of coordination between the Company and its foundry. Therefore, significant lead-time is required to reach volume production on new processes and at a new wafer supply locations. Accordingly, no assurance can be given that volume production on the Company's new SX-A or next-generation families will be achieved in the near term or at all. The Company introduced its new ProASIC family of devices in 1999. While ProASIC products are based on a flash process technology that is less customized than an antifuse process, it is also leading-edge technology and less familiar to the Company. In addition, it is generally more difficult to bring up an advanced flash process than it is to bring up an advanced antifuse process. The Company has always experienced difficulty achieving satisfactory, sustainable yields on new process technologies at new foundries, and the flash process for ProASIC devices at Infineon has been no different. Although the Company eventually has been able to overcome these difficulties in the past, no assurance can be given that it will be able to do so with respect to the ProASIC products. In any event, until satisfactory yields are achieved on ProASIC devices, they generally will be sold at lower gross margins than the Company's mature product families, which could have a materially adverse effect on operating results. The fabrication of high-performance antifuse wafers or state-of-the-art flash wafers is a complex process that requires a high degree of technical skill, state-of-the-art equipment, and effective cooperation between the wafer supplier and the circuit designer to produce acceptable yields. Minute impurities, errors in any step of the fabrication process, defects in the masks used to print circuits on a wafer, and other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be non-functional. As is common in the semiconductor industry, the Company has experienced from time to time in the past, and expects to experience in the future, production yield problems and delivery delays. Any prolonged inability to obtain adequate yields or deliveries could have a materially adverse effect on the Company's business, financial condition, or results of operations. One-Time Programmability While the nonvolatility of the Company's antifuse FPGAs is necessary or desirable in some applications, logic designers generally would prefer to prototype with a reprogrammable logic device, all other things being equal. This is because the designer can reuse the device if he or she makes an error. The visibility associated with discarding a one-time programmable device often causes designers to select a reprogrammable device even when the alternative one-time programmable device offers significant advantages. This bias in favor of designing with reprogrammable logic devices appears to increase as the size of the design increases, and is a major reason the Company decided to offer reprogrammable ProASIC devices. Patent Infringement On March 29, 2000, Unisys brought suit in the United States District Court for the Northern District of California, San Jose Division, against the Company seeking monetary damages and injunctive relief based on Actel's alleged infringement of four patents held by Unisys. The Company believes that it has meritorious defenses to the claims asserted by Unisys and intends to defend itself vigorously in this matter. After consideration of the information currently known, the Company does not believe that the ultimate outcome of this case will have a materially adverse effect on Actel's business, financial condition, or results of operations, although no assurance to that effect can be given. The foregoing is a forward-looking statement subject to all of the risks and uncertainties of a legal proceeding, including the discovery of new information and unpredictability as to the ultimate outcome. As is typical in the semiconductor industry, the Company has been and expects to be notified from time to time of claims that it may be infringing patents owned by others. During 1999, the Company continued to hold discussions with several third parties regarding potential patent infringement issues, including two semiconductor manufacturers with significantly greater financial and intellectual property resources than Actel. As it has in the past, the Company may obtain licenses under patents that it is alleged to infringe. The Company has made provision for the estimated settlement costs of claims for alleged infringement through end of 1999. While the Company believes that reasonable resolution will occur, there can be no assurance that these claims will be resolved or that the resolution of these claims will not have a materially adverse effect on Actel's business, financial condition, or results of operations. In addition, the Company's evaluation of the probable impact of these pending disputes could change based upon new information learned by Actel. Although patent holders commonly offer licenses to alleged infringers, no assurance can be given that licenses will be offered or that the terms of any offered licenses will be acceptable to the Company. Failure to obtain a license for technology allegedly used by the Company could result in litigation. All litigation, whether or not determined in favor of the Company, can result in significant expense to Actel and can divert the efforts of the Company's technical and management personnel from productive tasks. The Company has obtained patents covering aspects of its FPGA architecture and logic modules and certain techniques for manufacturing its antifuse, but no assurance can be given that Actel's patents will be determined to be valid or that any assertions of infringement or invalidity by other parties will not be successful. In addition, the Company has agreed to defend and indemnify customers from and against claims that Actel products infringe the patent or other intellectual rights of third parties. In the event of an adverse ruling in any litigation involving intellectual property, the Company could suffer significant (and possibly treble) monetary damages, which could have a materially adverse effect on Actel's business, financial condition, or results of operations. The Company may also be required to discontinue the use of infringing processes; cease the manufacture, use, and sale of infringing products; expend significant resources to develop non-infringing technology; or obtain licenses under patents that it is infringing. In the event of a successful claim against the Company, Actel's failure to develop or license a substitute technology on commercially reasonable terms could have a materially adverse effect on the Company's business, financial condition, and results of operations. Potential Acquisitions In pursuing its business strategy, the Company may acquire products, technologies, or businesses from third parties. Identifying and negotiating these acquisitions may divert substantial management time away from the Company's operations. An acquisition could absorb substantial cash resources, require the Company to incur or assume debt obligations, and/or involve the issuance of additional Actel equity securities. The issuance of additional equity securities may dilute, and could represent an interest senior to the rights of, the holders of the Company's Common Stock. An acquisition accounted for as a purchase could involve significant one-time write-offs (possibility resulting in a loss for the fiscal year in which it is taken) and would require the amortization of any goodwill and indentifiable intangibles over a number of years, which would adversely affect earnings in those years. Any acquisition would require attention from the Company's management to integrate the acquired entity into Actel's operations, may require the Company to develop expertise outside its existing business, and could result in departures of management from either Actel or the acquired entity. An acquired entity may have unknown liabilities, and its business may not achieve the results anticipated at the time it is acquired by the Company. Protection of Intellectual Property The Company has historically devoted significant resources to research and development and believes that the intellectual property derived from such research and development is a valuable asset that has been and will continue to be important to the success of Actel's business. The Company relies primarily on a combination of nondisclosure agreements, other contractual provisions, and patent and copyright laws to protect its proprietary rights. No assurance can be given that the steps taken by the Company will be adequate to protect its proprietary rights. In addition, the laws of certain territories in which the Company's products are or may be developed, manufactured, or sold, including Asia and Europe, may not protect Actel products and intellectual property rights to the same extent as the laws of the United States. Failure of the Company to enforce its patents or copyrights or to protect its trade secrets could have a materially adverse effect on Actel's business, financial condition, or results of operations. Reliance on Distributors In 1999, a majority of the Company's sales were made through distributors. Three of the Company's distributors, Arrow, Pioneer, and Unique, accounted for approximately 16%, 12%, and 13%, respectively, of the Company's net revenues in 1999. No assurance can be given that future sales by these or other distributors will continue at current levels or that the Company will be able to retain its current distributors on terms that are acceptable to Actel. The Company's distributors generally offer products of several different companies, including products that are competitive with Actel's products. Accordingly, there is a risk that these distributors may give higher priority to products of other suppliers, thus reducing their efforts to sell the Company's products. In addition, the Company's agreements with its distributors are generally terminable at the distributor's option. A reduction in sales efforts by one or more of the Company's current distributors or a termination of any distributor's relationship with Actel could have a materially adverse effect on the Company's business, financial condition, or results of operations. The Company defers recognition of revenue on shipments to distributors until the product is resold by the distributor to the end user. The Company's distributors have on occasion built inventories in anticipation of substantial growth in sales and, when such growth did not occur as rapidly as anticipated, substantially reduced the amount of product ordered from Actel in subsequent quarters. Such a slowdown in orders would generally reduce the Company's profit margins on future sales of higher cost products because Actel would be unable to take advantage of any manufacturing cost reductions while the distributor depleted its inventory at lower average selling prices. In addition, while the Company believes that its major distributors are currently adequately capitalized, no assurance can be given that one or more of Actel's distributors will not experience financial difficulties. The failure of one or more of the Company's distributors to pay for products ordered from Actel or to continue operations because of financial difficulties or for other reasons could have a materially adverse effect on the Company's business, financial condition, or results of operations. Reliance on International Sales Sales to customers outside the United States accounted for 29%, 33%, and 31% of the Company's net revenues for 1999, 1998, and 1997, respectively. Of these export sales, the largest portion was derived from European customers. The Company expects that revenues derived from international sales will continue to represent a significant portion of its total revenues. International sales are subject to a variety of risks, including longer payment cycles, greater difficulty in accounts receivable collection, currency restrictions, tariffs, trade barriers, taxes, export license requirements, and the impact of recessionary environments in economies outside the United States. All of the Company's foreign sales are denominated in U.S. dollars, so Actel's products become less price competitive in countries with currencies that are declining in value against the dollar. In addition, since a majority of the Company's foreign sales are made through distributors, such sales are subject to the risks described above in "Reliance on Distributors." Semiconductor Industry Risks The semiconductor industry has historically been cyclical and periodically subject to significant economic downturns, which are characterized by diminished product demand, accelerated price erosion, and overcapacity. The Company may in the future experience substantial period-to-period fluctuations in business and results of operations due to general semiconductor industry conditions, overall economic conditions, or other factors, including legislation and regulations governing the import or export of semiconductor products. Technological Change and Dependence on New Product Development The market for the Company's products is characterized by rapidly changing technology, frequent new product introductions, and declining average selling prices over product life cycles, each of which makes the timely introduction of new products a critical objective of Actel. The Company's future success is highly dependent upon the timely completion and introduction of new products at competitive price and performance levels. In evaluating new product decisions, the Company must anticipate well in advance both the future demand and the technology that will be available to supply such demand. Failure to anticipate customer demand, delays in developing new products with anticipated technological advances, or failure to coordinate the design and development of silicon and associated software products could have a materially adverse effect on the Company's business, financial condition, or results of operation. No assurance can be given that the Company's design and introduction schedules for new products or the supporting software will be met or that such products will be well-received by customers. No assurance can be given that any new products will gain market acceptance or that the Company will respond effectively to new technological changes or new product announcements by others. Any failure of the Company to successfully define, develop, market, manufacture, assemble, or test competitive new products could have a materially adverse effect on its business, financial condition, or results of operations. In addition, there are greater technological and operational risks associated with new products. The inability of the Company's wafer suppliers to produce advanced products; delays in commencing or maintaining volume shipments of new products; the discovery of product, process, software, or programming failures; and any related product returns could each have a materially adverse effect on Actel's business, financial condition, or results of operation. The Company must also continue to make significant investments in research and development to develop new products and achieve market acceptance for such products. The Company conducts most of its research and development activities at facilities operated by its foundries. Although the Company has not to date experienced any significant difficulty in obtaining access to such facilities, no assurance can be given that access will not be limited or that such facilities will be adequate to meet Actel's needs in the future. Volatility of Stock The price of the Company's Common Stock can fluctuate substantially on the basis of such factors as announcements of new products by Actel or its competitors, quarterly fluctuations in the Company's financial results or the financial results of other semiconductor companies, or general conditions in the semiconductor industry or in the financial markets. In addition, stock markets have experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of the securities issued by high technology companies, at times for reasons unrelated to the operating performance of the specific companies. Year 2000 Compliance In late 1999, the Company completed Year 2000 remediation and testing of its mission-critical computer systems. As a result of its planning and implementation efforts, the Company experienced no significant disruptions in information or non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company incurred expenses of approximately $0.4 million during 1999 and $0.5 million during 1998 in connection with the remediation of its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products or internal systems or with the products or services of third parties. The Company will continue to monitor its mission-critical computer applications and those of its suppliers and vendors throughout 2000 and promptly address any latent Year 2000 matters that may arise. Based on its current understanding, the Company believes that the Year 2000 issue will not have a materially adverse effect on the Company's business, financial position, or results of operations, but no assurance to that effect can be given. Executive Officers of the Registrant The following table identifies each executive officer of the Company as of March 31, 2000:
Name Age Position - ------------------------------------- ----- -------------------------------------------------------------- John C. East......................... 55 President and Chief Executive Officer Henry L. Perret...................... 54 Vice President of Finance and Chief Financial Officer Esmat Z. Hamdy....................... 50 Senior Vice President of Technology & Operations Carl N. Burrow....................... 39 Vice President of Marketing Anthony Farinaro..................... 37 Vice President & General Manager of Design Services Paul V. Indaco....................... 49 Vice President of Worldwide Sales Dennis M. Kish....................... 36 Vice President of Strategic Product Marketing Fares N. Mubarak..................... 38 Vice President of Engineering David L. Van De Hey.................. 44 Vice President & General Counsel and Secretary
Mr. East has served as President and Chief Executive Officer of the Company since December 1988. From April 1979 until joining the Company, Mr. East served in various positions with Advanced Micro Devices, a semiconductor manufacturer, including Senior Vice President of Logic Products from November 1986 to November 1988. From December 1976 to March 1979, he served as Operations Manager for Raytheon Semiconductor. From September 1968 to December 1976, Mr. East served in various marketing, manufacturing, and engineering positions for Fairchild Camera and Instrument Corporation, a semiconductor manufacturer. Mr. Perret joined the Company in January 1996 as Controller and has been Vice President of Finance and Chief Financial Officer since June 1997. From April 1992 until joining the Company, he was the Site Controller for the manufacturing division of Applied Materials, a maker of semiconductor manufacturing equipment, in Austin, Texas. From 1978 to 1991, Mr. Perret held various financial positions with National Semiconductor, a semiconductor manufacturer. Dr. Hamdy is a founder of the Company, was Vice President of Technology from August 1991 to March 1996 and Senior Vice President of Technology from March 1996 to September 1996, and has been Senior Vice President of Technology and Operations since September 1996. From November 1985 to July 1991, he held a number of management positions with the Company's technology and development group. From January 1981 to November 1985, Dr. Hamdy held various positions at Intel Corporation, a semiconductor manufacturer, lastly as project manager. Mr. Burrow joined the Company in January 1992 as Southwest Regional Sales Manager, was Director of Western Area Sales from February 1996 to October 1997, and has been Vice President of Marketing since October 1997. From June 1983 until January 1992, he held various sales and marketing positions at Texas Instruments, a semiconductor manufacturer. Mr. Farinaro joined the Company in August 1998 as Vice President & General Manager of Design Services. From February 1990 until joining the Company, he held various engineering and management positions with GateField (formally Zycad Corporation until 1997), a semiconductor company, with the most recent position of Vice President of Application & Design Services. From 1985 to 1990, Mr. Farinaro held various engineering and management positions at Singer Kearfott, an aerospace electronics company, and it's spin-off, Plessey Electronic Systems Corporation. Mr. Indaco joined the Company in March 1999 as Vice President of Worldwide Sales. From January 1996 until joining the Company, he served as Vice President of Sales for Chip Express, a semiconductor manufacturer. From January Septemebr 1994 to January 1996, Mr. Indaco was Vice President of Sales for Redwood Microsystems, a semiconductor manufacturer. From February 1984 to September 1994, he held senior sales management positions with LSI Logic, a semiconductor manufacturer. From June 1978 to February 1984, Mr. Indaco held various field engineering sales and marketing positions with Intel Corporation, a semiconductor manufacturer. From June 1976 to June 1978, he held various marketing positions with Texas Instruments, a semiconductor manufacturer. Mr. Kish joined the Company in December 1999 as Vice President of Strategic Product Marketing. Prior to joining the Company, he held senior management positions at Synopsys, an EDA company, and Atmel, a semiconductor manufacturer. Before that, Mr. Kish held sales and engineering positions with Texas Instruments, a semiconductor manufacturer. Mr. Mubarak joined the Company in November 1992, was Director of Product and Test Engineering until October 1997, and has been Vice President of Engineering since October 1997. From 1989 until joining the Company, he held various engineering and engineering management positions with Samsung Semiconductor Inc., a semiconductor manufacturer, and its spin-off, IC Works, Inc. From 1984 to 1989, Mr. Mubarak held various engineering, product planning, and engineering management positions with Advanced Micro Devices, a semiconductor manufacturer. Mr. Van De Hey joined the Company in July 1993 as Corporate Counsel, became Secretary in May 1994, and has been Vice President & General Counsel since August 1995. From November 1988 to September 1993, he was an associate with Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, a law firm in Palo Alto, California, and the Company's outside legal counsel. From August 1985 until October 1988, he was an associate with the Cleveland office of Jones, Day, Reavis & Pogue, a law firm. Executive officers serve at the discretion of the Board of Directors. ITEM 2. PROPERTIES Actel's principal administrative, marketing, sales, customer support, design, research and development, and testing facilities are located in Sunnyvale, California, in three buildings that comprise approximately 138,000 square feet. These buildings are leased through June 2003, and the Company has a renewal option for an additional five-year term. Actel also leases sales offices in the metropolitan areas of Atlanta, Basingstoke (England), Boston, Chicago, Dallas, Denver, Hong Kong (China), Kanata (Ontario) Los Angeles, Milano (Italy), Minneapolis, Munich (Germany), New York, Orlando, Paris (France), Philadelphia, Raleigh, Seattle, Seoul (Korea), Stockholm (Sweden), Taipei (Taiwan), Tokyo (Japan), and Washington D.C., as well as the facilities of the Design Services Group in Mt. Arlington, New Jersey. The Company believes its facilities will be adequate for its needs in 2000, but is investigating options for continued expansion beyond that time. ITEM 3. LEGAL PROCEEDINGS Except as described below, there are no pending legal proceedings of a material nature to which the Company is a party or of which any of its property is the subject. There are no such legal proceedings known by the Company to be contemplated by any governmental authority. Unisys v. Actel and QuickLogic (CV C-00 01114 WDB) On March 29, 2000, Unisys brought suit in the United States District Court for the Northern District of California, San Jose Division, against the Company seeking monetary damages and injunctive relief based on Actel's alleged infringement of four patents held by Unisys. The Company believes that it has meritorious defenses to the claims asserted by Unisys and intends to defend itself vigorously in this matter. After consideration of the information currently known, the Company does not believe that the ultimate outcome of this case will have a materially adverse effect on Actel's business, financial condition, or results of operations, although no assurance to that effect can be given. The foregoing is a forward-looking statement subject to all of the risks and uncertainties of a legal proceeding, including the discovery of new information and unpredictability as to the ultimate outcome. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The information appearing under the caption "Stock Listing" in the Registrant's annual report to security holders for the fiscal year ended January 2, 2000 (the "1999 Annual Report"), is incorporated herein by this reference. On March 30, 1998, the Company and Crosspoint Solutions, Inc. ("Crosspoint") entered into a Patent Sale and Purchase Agreement, pursuant to which the Company purchased from Crosspoint its patents and patent applications in consideration of 25,000 shares of the Company's Common Stock. On the same day, Crosspoint assigned its right to receive such shares to ASCII of America, Inc. ("AOA"). The shares issued and delivered to AOA, as assignee of Crosspoint, were exempt from registration pursuant to Section 4(2) of the Securities Act because such shares were sold to an accredited investor who had access to financial and other relevant data concerning the Company. On December 21, 1999, the Company acquired AGL by merger. The purchase price of $7.2 million included the issuance of 285,943 shares of Actel Common Stock and the assumption of options to purchase 89,057 shares of Actel Common Stock. The shares issued and delivered to AGL shareholders were exempt from registration pursuant to Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder because such shares were sold to investors who were "accredited" and had access to financial and other relevant data concerning the Company or were represented by a qualified "purchaser representative" under Regulation D. ITEM 6. SELECTED FINANCIAL DATA The information appearing under the caption "Selected Consolidated Financial Data" in the 1999 Annual Report is incorporated herein by this reference. ITEM 7. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information appearing under the caption "Management's Discussion and Analysis of Financial Conditions and Results of Operations" of the 1999 Annual Report is incorporated herein by this reference. ITEM 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information appearing under the caption "Market Risk" under the main caption "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in the 1999 Annual Report is incorporated herein by this reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information appearing under the captions "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Shareholders' Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements," and "Report of Ernst & Young LLP, Independent Auditors" in the 1999 Annual Report is incorporated herein by this reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Except for the information specifically incorporated by reference from Actel's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 19, 2000, as filed on or about April 4, 2000, with the Securities and Exchange Commission (the "2000 Proxy Statement") in Part III of this Annual Report on Form 10-K, the 2000 Proxy Statement shall not be deemed to be filed as part of this Report. Without limiting the foregoing, the information under the captions "Compensation Committee Report" and "Company Stock Performance" under the main caption "OTHER INFORMATION" in the 2000 Proxy Statement are not incorporated by reference in this Annual Report on Form 10-K. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding the identification and business experience of Actel's directors under the caption "Nominees" under the main caption "PROPOSAL NO. 1 -- ELECTION OF DIRECTORS" in the 2000 Proxy Statement and the information under the main caption "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934" in the 2000 Proxy Statement are incorporated herein by this reference. For information regarding the identification and business experience of Actel's executive officers, see "Executive Officers of the Registrant" at the end of Item 1 in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information under the caption "Director Compensation" under the main caption "PROPOSAL NO. 1 -- ELECTION OF DIRECTORS" in the 2000 Proxy Statement and the information under the caption "Executive Compensation" under the main caption "OTHER INFORMATION" in the 2000 Proxy Statement are incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the caption "Share Ownership" under the main caption "INFORMATION CONCERNING SOLICITATION AND VOTING" in the 2000 Proxy Statement and the information under the caption "Security Ownership of Management" under the main caption "OTHER INFORMATION" in the 2000 Proxy Statement are incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Certain Transactions" under the main caption "OTHER INFORMATION" in the 2000 Proxy Statement is incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report on Form 10-K: (1) Financial Statements. The following consolidated financial statements of Actel Corporation included in the 1999 Annual Report are incorporated by reference in Item 8 of this Annual Report on Form 10-K: Consolidated balance sheets at December 31, 1999 and 1998 Consolidated statements of income for each of the three years in the period ended December 31, 1999 Consolidated statements of shareholders' equity for each of the three years in the period ended December 31, 1999 Consolidated statements of cash flows for each of the three years in the period ended December 31, 1999 Notes to consolidated financial statements (2) Financial Statement Schedule. The financial statement schedule listed under 14(d) hereof is filed with this Annual Report on Form 10-K. (3) Exhibits. The exhibits listed under Item 14(c) hereof are filed with, or incorporated by reference into, this Annual Report on Form 10-K. (b) Reports on Form 8-K. Actel filed no reports on Form 8-K during the quarter ended January 2, 2000. (c) Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this Report on Form 10-K: Exhibit Number Description - ----------------------- ------------------------------------------------------- 3.1 Restated Articles of Incorporation (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993). 3.2 Restated Bylaws of the Registrant (filed as Exhibit 3.3 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993). 10.1 (2) Form of Indemnification Agreement for directors and officers (filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704) , declared effective on August 2, 1993). 10.2 (2) 1986 Incentive Stock Option Plan, as amended and restated. 10.3 (2) 1993 Directors' Stock Option Plan, as amended and restated (filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 28, 1997). 10.4 (2) 1993 Employee Stock Purchase Plan, as amended and restated (filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 28, 1997). 10.5 (2) 1995 Employee and Consultant Stock Plan, as amended and restated (filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 29, 1996). 10.6 Form of Distribution Agreement (filed as Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993). 10.7 (1) Patent Cross License Agreement dated April 22, 1993 between the Registrant and Xilinx, Inc. (filed as Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993). 10.8 Subscription and Participation Agreement dated February 3, 1994 between the Registrant, Singapore Technologies Ventures Pte Ltd and Chartered Semiconductor Manufacturing Pte Ltd (filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 2, 1994). 10.9 Manufacturing Agreement dated February 3, 1994 between the Registrant and Chartered Semiconductor Manufacturing Pte Ltd (filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 2, 1994). 10.10 Distribution Agreement dated June 1, 1994, between the Registrant and Arrow Electronics, Inc. (filed as Exhibit 10.18 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21970) for the quarterly period ended July 3, 1994). 10.11 (1) Product Development and Marketing Agreement dated August 1, 1994, between the Registrant and Loral Federal Systems Company (filed as Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21970) for the quarterly period ended October 2, 1994). 10.12 (1) Foundry Agreement dated as of June 29, 1995, between the Registrant and Matsushita Electric Industrial Co., Ltd and Matsushita Electronics Corporation (filed as Exhibit 10.25 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21970) for the quarterly period ended July 2, 1995). 10.13 Lease Agreement for the Registrant's offices in Sunnyvale, California, dated May 10, 1995 (filed as Exhibit 10.19 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 31, 1995). 10.14 (1) License Agreement dated as of March 6, 1995, between the Registrant and BTR, Inc. (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 29, 1996). 10.15 Asset Purchase Agreement dated August 14, 1998, between GateField Corporation and Actel Corporation (filed as Exhibit 2.1 to GateField Corporation's Current Report on Form 8-K (File No. 0-13244) on August 14, 1998, and incorporated herein by this reference). 10.16 Series C Preferred Stock Purchase Agreement dated August 14, 1998 between GateField Corporation and Actel Corporation (filed as Exhibit 4.1 to GateField Corporation's Current Report on Form 8-K/A (File No. 0-13244) on August 31, 1998, and incorporated herein by this reference). 10.17 Product Marketing Agreement dated August 14, 1998, between the GateField Corporation and Actel Corporation (filed as Exhibit 10.24 to GateField Corporation's Quarterly Report on Form 10-Q (File No. 0-13244) on November 19, 1998, and incorporated herein by this reference.) 10.18 License Agreement dated August 14, 1998, between GateField Corporation and Actel Corporation (filed as Exhibit 10.25 to GateField Corporation's Quarterly Report on Form 10-Q (File No. 0-13244) on November 19, 1998, and incorporated herein by this reference.) 10.19 (1) Patent Cross License Agreement dated August 25, 1998, between Actel Corporation and QuickLogic Corporation. (filed as Exhibit 10.19 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 3, 1999). 10.20 Convertible Promissory Note dated May 25, 1999, in the aggregate principle amount of $8.0 million issued to Actel Corporation (filed as Exhibit 4.1 to GateField Corporation's Current Report on Form 8-K (File No. 0-13244) on May 28, 1999, and incorporated herein by this reference). 10.21 Security Agreement dated May 25, 1999, between GateField Corporation and Actel Corporation (filed as Exhibit 10.1 to GateField Corporation's Current Report on Form 8-K (File No. 0-13244) on May 28, 1999, and incorporated herein by this reference). 10.22 Amendment No. 1 to the Series C Preferred Stock Purchase Agreement dated May 25, 1999, between GateField Corporation and Actel Corporation (filed as Exhibit 10.2 to GateField Corporation's Current Report on Form 8-K (File No. 0-13244) on May 28, 1999, and incorporated herein by this reference). 10.23 Amendment No. 1 to the Registration Rights Agreement dated May 25, 1999, between GateField Corporation and Actel Corporation (filed as Exhibit 10.3 to GateField Corporation's Current Report on Form 8-K (File No. 0-13244) on May 28, 1999, and incorporated herein by this reference). 13 Portions of Registrant's Annual Report to Shareholders for the fiscal year ended January 2, 2000, incorporated by reference into this Report on Form 10-K. 21 Subsidiaries of Registrant (see page --) 23 Consent of Ernst & Young LLP, Independent Auditors (see page --) 24 Power of Attorney (see page --) - ------------------------- (1) Confidential treatment requested as to a portion of this Exhibit. (2) This Exhibit is a management contract or compensatory plan or arrangement. (d) Financial Statement Schedule. The following financial statement schedule of Actel Corporation is filed as part of this Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements of Actel Corporation, including the notes thereto, and the Report of Independent Auditors with respect thereto: Schedule Description Page - -------- ------------------------------------------------------- ------ II Valuation and qualifying accounts -- All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 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 to be signed on its behalf by the undersigned, thereunto duly authorized. ACTEL CORPORATION March 31, 2000 By: By: /s/ John C. East ------------------------------ John C. East President and Chief Executive Officer SCHEDULE II ACTEL CORPORATION -------------------------------------- Valuation and Qualifying Accounts (in thousands)
Balance at Balance at beginning end of of period Provisions Write-Offs period ------------ ------------ ------------ ------------ Allowance for doubtful accounts: Year ended December 31, 1997........................... $ 633 $ 1,611 $ 612 $ 1,632 Year ended December 31, 1998........................... 1,632 5 83 1,554 Year ended December 31, 1999........................... 1,554 -- 475 1,079
EX-10 2 1985 INCENTIVE STOCK OPTION PLAN ACTEL CORPORATION 1986 INCENTIVE STOCK OPTION PLAN Amended and Restated Effective February 18, 2000 1. Purposes of the Plan. The purposes of this Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to the Employees and Consultants of the Company and to promote the success of the Company's business. Options granted hereunder may be either "incentive stock options", as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or "non-statutory stock options", at the discretion of the Administrator and as reflected in the terms of the written option agreement. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" shall mean the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" shall mean the legal requirements relating to the administration of stock option plans under California corporate and securities laws and the Code. (c) "Board" shall mean the Board of Directors of the Company. (d) "Common Stock" shall mean the Common Stock of the Company. (e) "Company" shall mean Actel Corporation, a California corporation. (f) "Committee" shall mean the Committee appointed by the Board of Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is appointed. (g) "Consultant" shall mean any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (h) "Continuous Status as an Employee or Consultant" shall mean that the employment or consulting relationship is not interrupted or terminated by the Company, any Parent or Subsidiary. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; provided, however, that for purposes of Incentive Stock Options, any such leave may not exceed ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract (including certain Company policies) or statute; or (ii) transfers between locations of the Company or between the Company, its Parent, its Subsidiaries or its successor. (i) "Employee" shall mean any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. (j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (k) "Incentive Stock Option" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. (l) "Officer" shall mean a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (m) "Option" shall mean a stock option granted pursuant to the Plan. (n) "Optioned Stock" shall mean the Common Stock subject to an Option. (o) "Optionee" shall mean an Employee or Consultant who receives an Option. (p) "Parent" shall mean a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Internal Revenue Code of 1986, as amended. (q) "Plan" shall mean this 1986 Incentive Stock Option Plan, as amended. (r) "Rule 16b-3" shall mean Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (s) "Share" shall mean a share of the Common Stock, as adjusted in accordance with Section 12 of the Plan. (t) "Subsidiary" shall mean a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of shares which may be optioned and sold under the Plan is 5,502,897 shares of Common Stock, increased annually on the first day of each of the Company's fiscal years during the term of the Plan (and subsequent to the May 2, 1996, amendment to and restatement of the Plan) in an amount equal to 5% of the Company's common stock issued and outstanding at the close of business on the last day of the immediately preceding fiscal year (the "Annual Replenishment"), with only the 5,502,897 shares and subsequent annual increases in an amount equal to the lesser of (i) 885,781 shares and (ii) the number of shares subject to the Annual Replenishment to be available for issuance as "incentive stock options" qualified under Section 422 of the Internal Revenue Code. All of the shares issuable under the Plan may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. If permitted by Rule 16b-3, the Plan may be administered by different bodies with respect to Directors, Officers who are not Directors, and Employees who are neither Directors nor Officers. (ii) Administration With Respect to Directors and Officers Subject to Section 16(b). With respect to Option grants made to Employees who are also Officers or Directors subject to Section 16(b) of the Exchange Act, the Plan shall be administered by (A) the Board, if the Board may administer the Plan in compliance with the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3, or (B) a committee designated by the Board to administer the Plan, which committee shall be constituted to comply with the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3. (iii) Administration With Respect to Other Persons. With respect to Option grants made to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a committee designated by the Board, which committee shall be constituted to satisfy Applicable Laws. Once appointed, such Committee shall serve in its designated capacity until otherwise directed by the Board. The Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 9(b) of the Plan; (ii) to select the Consultants and Employees to whom Options may be granted hereunder; (iii) to determine whether and to what extent Options are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each Option granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (viii) to prescribe, amend and rescind rules and regulations relating to the Plan; (ix) to modify or amend each Option (subject to Section 14(c) of the Plan); (x) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option previously granted by the Administrator; (xi) to determine the terms and restrictions applicable to Options; and (xii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options granted under the Plan. 5. Eligibility. Options may be granted only to Employees and Consultants. Incentive Stock Options may be granted only to Employees. An Employee or Consultant who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options. 6. Limitations. (a) Each Option shall be designated in the Notice of Grant as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of Shares subject to an Optionee's incentive stock options granted by the Company, any Parent or Subsidiary, that become exercisable for the first time during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), incentive stock options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time of grant. (b) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate his or her employment or consulting relationship at any time. (c) The following limitations shall apply to grants of Options to Employees: (i) No Employee shall be granted, in any fiscal year of the Company, Options to purchase more than five hundred thousand Shares. (ii) The foregoing limitation shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 12(a). (iii) If an Option is canceled (other than in connection with a transaction described in Section 12), the canceled Option will be counted against the limit set forth in Section 6(c)(i). For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. The Plan shall continue in effect until February 18, 2010. 8. Term of Option. The term of each Option shall be stated in the Notice of Grant; provided, however, that in the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Notice of Grant. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Notice of Grant. 9. Exercise Price and Consideration. (a) The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant, unless expressly granted in lieu of salary or a cash bonus, in which case the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant; provided, however, that the Administrator may grant in any fiscal year Nonstatutory Stock Options at per Share exercise prices less than that provided herein covering, in the aggregate, shares of Common Stock equal to or less than 0.5% of the number of shares of Common Stock issued and outstanding at the beginning of such fiscal year. (b) The fair market value shall be determined by the Administrator in its discretion; provided, however, that where there is a public market for the Common Stock, the fair market value per Share shall be the mean of the bid and asked prices, or closing price in the event quotations for the Common Stock are reported on the National Market System, of the Common Stock on the date of grant, as reported in the Wall Street Journal (or, if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation (NASDAQ) System) or, in the event the Common Stock is listed on a stock exchange, the fair market value per Share shall be the closing price on such exchange on the date of grant of the Option, as reported in the Wall Street Journal. (c) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator and may consist entirely of cash; check; promissory note; other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; for options granted subsequent to the effective date of the 1993 amendments to the Plan, delivery of a properly executed exercise notice together with such other documentation as the Committee and the broker, if applicable, shall require to effect an exercise of the option and delivery to the Company of the sale or loan proceeds required; or any combination of such methods of payment, or such other consideration and method of payment for the issuance of Shares to the extent permitted under Applicable Law. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan; provided, however, that an Incentive Stock Option granted prior to January 1, 1987 shall not be exercisable while there is outstanding any incentive stock option which was granted, before the granting of such Incentive Stock Option, to the same Optionee to purchase stock of the Company, any Parent or Subsidiary, or any predecessor corporation of such corporations. For purposes of this provision, an incentive stock option shall be treated as outstanding until such option is exercised in full or expires by reason of lapse of time. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 9(c) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Status as an Employee or Consultant. If an Employee or Consultant ceases to serve as an Employee or Consultant, he or she may, but only within 30 days (or such other period of time not exceeding three months as is determined by the Administrator at the time of grant of the Option) after the date he or she ceases to be an Employee or Consultant (as the case may be) of the Company, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. To the extent that he or she was not entitled to exercise the Option at the date of such termination, or if he or she does not exercise such Option (which he or she was entitled to exercise) within the time specified herein, the Option shall terminate. (c) Disability of Optionee. Notwithstanding the provisions of Section 10(b) above, in the event an Employee or Consultant is unable to continue his or her employment or consulting relationship with the Company as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Internal Revenue Code), he or she may, but only within six (6) months (or such other period of time not exceeding 12 months as is determined by the Administrator at the time of grant of the Option) from the date of termination, exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination (or to such greater extent as the Administrator may provide). To the extent that he or she was not entitled to exercise the Option at the date of termination, or if he or she does not exercise such Option (which he or she was entitled to exercise) within the time specified herein, the Option shall terminate. (d) Death of Optionee. In the event of the death of an Optionee, the entire Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant) by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance. If, after death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. 11. Non-Transferability of Options. The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it will terminate immediately prior to the consummation of such proposed action. The Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his or her Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option shall be substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that such successor corporation refuses to assume such Option or to substitute an equivalent option, such Options shall become fully vested and exercisable as to all of the Optioned Stock, including the Shares as to which the Options would not otherwise be vested and exercisable. If Options become fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option will terminate upon the expiration of such period. 13. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination granting such Option. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Rule 16b-3 or with Section 422 of the Code (or any successor rule or statute or other applicable law, rule or regulation, including the requirements of any exchange or quotation system on which the Common Stock is listed or quoted). Such shareholder approval, if required, shall be obtained in such a manner and to such a degree as is required by the applicable law, rule or regulation. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. 15. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to render to the Company a written statement containing such representations and warranties as, in the opinion of counsel for the Company, may be required to ensure compliance with any of the aforementioned relevant provisions of law, including a representation that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required. 16. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. Option Agreement. Options shall be evidenced by written option agreements in such form as the Administrator shall approve. 18. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within 12 months before or after the date the Plan is adopted. EX-13 3 PORTIONS OF 1999 ANNUAL REPORT TO SHAREHOLDERS ACTEL CORPORATION SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share data)
Years Ended December 31, ----------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Statements of Operations Data: Net revenues ........................................ $ 171,661 $ 154,427 $ 155,858 $ 148,779 $ 108,516 Costs and expenses: Cost of revenues ................................. 66,387 61,642 64,244 64,420 52,517 Research and development ......................... 32,338 31,220 26,465 23,934 20,560 Selling, general, and administrative ............. 45,903 40,558 40,317 37,518 26,706 Amortization of goodwill and other acquisition-related intangibles ................ 1,185 877 877 658 2,226 Restructuring charge (1) ......................... 1,963 -- -- -- -- Purchased in-process research and development (2) ................................ -- -- -- 16,600 600 --------- --------- --------- --------- --------- Total costs and expenses ................... 149,417 134,605 131,903 126,749 117,041 --------- --------- --------- --------- --------- Income (loss) from operations ....................... 22,244 19,822 23,955 22,030 (8,525) Interest expense .................................... -- -- -- (13) (93) Interest income and other, net ...................... 3,642 2,380 1,842 1,068 846 --------- --------- --------- --------- --------- Income (loss) before tax provision (benefit) and equity in net loss of equity method investee ......................................... 22,202 25,797 23,085 (7,772) 25,886 Equity in net (loss) of equity method investee ......................................... (193) -- -- -- -- Tax provision (benefit) ............................. 8,055 7,215 9,029 8,147 (6,640) --------- --------- --------- --------- --------- Net income (loss) ................................... $ 17,638 $ 14,987 $ 16,768 $ 14,938 $ (1,132) ========= ========= ========= ========= ========= Net income (loss) per share: Basic (3) ........................................ $ 0.81 $ 0.71 $ 0.82 $ 0.84 $ (0.07) ========= ========= ========= ========= ========= Diluted (3) ...................................... $ 0.76 $ 0.68 $ 0.76 $ 0.70 $ (0.07) ========= ========= ========= ========= ========= Shares used in computing net income (loss) per share: Basic ............................................ 21,664 21,251 20,370 17,826 17,367 ========= ========= ========= ========= ========= Diluted .......................................... 23,058 21,921 21,968 21,485 17,367 ========= ========= ========= ========= =========
December 31, ---------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Consolidated Balance Sheet Data: Working capital ................ $ 108,818 $ 85,858 $ 76,279 $ 55,397 $ 39,867 Total assets ................... 259,211 179,708 159,994 136,712 107,119 Redeemable convertible preferred stock (4) ..................... -- -- -- 18,147 18,147 Total shareholders' equity ..... $ 178,630 $ 127,054 $ 109,010 $ 69,357 $ 50,920 - ------------------------------------------------------------ (1) During the second quarter of 1999, the Company completed a restructuring plan that resulted in a reduction in force along with the elimination of certain projects and non-critical activities. (2) The 1995 expense represents a charge for in-process research and development incurred in the first quarter of 1995 in connection with the Company's acquisition of the field programmable gate array business of Texas Instruments Incorporated ("TI"). The 1999 expense represents a charge for in-process research and development incurred in the fourth quarter of 1999 in connection with the Company's acquisition of AutoGate Logic, Inc. (3) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." See Note 16 of Notes to Consolidated Financial Statements for further discussion of earnings per share and the impact of Statement No. 128. (4) Represents redeemable convertible preferred stock issued to TI in connection with the acquisition of TI's field programmable gate array business. On March 12, 1997, TI converted the Series A preferred stock into 2,631,578 shares of common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Actel Corporation ("Actel" or "the Company") is the world's leading supplier of antifuse-based field programmable gate arrays ("FPGAs") and associated software development tools. FPGAs are used by designers of communication, computer, industrial control, military/aerospace, and other electronic systems to differentiate their products and get them to market faster. Business Developments GateField In May 1999, the Company paid $8.0 million to GateField Corporation ("GateField") in exchange for a convertible promissory note bearing interest at 5.22% per annum with a five-year term. Interest is payable quarterly and the note is secured by a lien against all the assets of GateField. The note is convertible at Actel's election into 420,000 shares of GateField Series C-1 Convertible Preferred Stock, which are convertible into 1,230,769 shares of GateField common stock, equating to a price of $6.50 per share of GateField common stock. Additionally, during 1999, the Company increased its ownership of GateField common stock from 16,500 shares to 190,529 shares. The cost of these shares (less the amount of GateField's losses recognized by Actel under the equity method of accounting) is included in "other assets." In light of Actel's common and preferred equity interest in GateField, its $8.0 million convertible promissory note from GateField, and its marketing and licensing agreements with GateField, Actel began accounting for its equity interest in GateField under the equity method of accounting during 1999. The impact of this implementation was a $1.1 million charge to the Company's net income for 1999 ($0.9 million in amortization of goodwill and $0.2 million of equity in net loss of equity method investee). GateField common stock, which is listed on the National Association of Security Dealers ("NASD") Over-The-Counter Bulletin Board, closed at $3.875 on December 31, 1999. The Company assesses the recoverability of its investments in, and amounts due from GateField on a regular basis. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. No impairment has been indicated to date. AGL On December 21, 1999, the Company completed the acquisition of AutoGate Logic, Inc. ("AGL") in a transaction accounted for as a purchase. AGL developed a wide range of VLSI (very large scale integration) development tools, including FPGA and custom IC place and route and timing analysis software. In connection with the acquisition, the Company issued a total of 375,000 shares, of which 285,943 were shares issued and 89,057 represents options assumed, at $18.29 per share in exchange for all outstanding common shares and options of AGL. The price per share of common stock was based on an average of five days closing market prices for Actel common stock during the period of October 1, 1999 through October 7, 1999 when the Agreement to acquire AGL was announced. Amounts prepaid by Actel for a source code license and amounts payable to AGL were netted into the purchase price to arrive at a total purchase price of $7,199,000. In accordance with provisions of Accounting Principles Board Opinion No. 16, "Business Combinations", all identifiable assets were assigned a portion of the total consideration on the basis of their respective fair values. The consideration was allocated as follows based on the valuation report of an independent valuation specialist:
Allocation of AGL purchase price (in thousands): In-process research and development ......... $ 600 Completed technology ........................ 2,100 Assembled work force ........................ 200 Cash ........................................ 281 Deferred tax liability ...................... (920) Goodwill .................................... 4,938 ------- $ 7,199 =======
A portion of the purchase price has been allocated to developed technology and acquired in-process research and development ("IPRD"). Completed technology and IPRD were identified and valued through extensive interviews, analysis of data provided by AGL concerning developmental products, their stage of development, the time and resources needed to complete them, and associated risks. The cost approach, which establishes value based on the cost of reproducing or replacing the assets, less depreciation for functional or economic obsolescence, was the primary technique utilized in valuing the completed technology and IPRD. Where development projects had reached technological feasibility, they were classified as completed technology and the value assigned to completed technology was capitalized. Where the development projects had not reached technological feasibility and had no future alternative uses, they were classified as IPRD and charged to expense upon closing of the merger. The nature of the efforts required to develop the IPRD into completed product principally relate to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the products can be produced to meet their design specifications, including functions, features and technological performance requirements. Associated risks include the inherent difficulties and uncertainties in completing each project and thereby achieving technological feasibility, anticipated levels of market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets. The acquired completed technology, which is comprised of products that are already technologically feasible, includes product neutral software tools for place and route and architecture evaluation. The Company expects to amortize the acquired completed technology of approximately $2.1 million on a straight-line basis over an average estimated remaining useful life of five years. The acquired assembled workforce is comprised of employees from AGL's engineering group. The Company expects to amortize the value assigned to the assembled workforce of approximately $200 thousand on a straight-line basis over an estimated remaining useful life of six months. Goodwill, which represents the excess of the purchase price of an investment in an acquired business over the fair value of the underlying net identifiable assets, is amortized on a straight-line basis over its estimated remaining life of 5 years. Results of Operations The following table sets forth certain financial data from the Consolidated Statements of Operations expressed as a percentage of net revenues:
Years Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- Net revenues ...................................................... 100.0% 100.0% 100.0% Cost of revenues .................................................. 38.7 39.9 41.2 -------- -------- -------- Gross margin ...................................................... 61.3 60.1 58.8 Research and development .......................................... 18.8 20.2 17.0 Selling, general, and administrative .............................. 26.7 26.3 25.9 Amortization of goodwill and other acquisition-related intangibles 0.7 0.5 1.3 Restructure and other charges ..................................... 1.2 -- -- Purchased in-process research and development ..................... 0.3 -- -- -------- -------- -------- Income from operations ............................................ 13.0 12.9 15.4 Interest and other income, net .................................... 2.1 1.5 1.2 -------- -------- -------- Income (loss) before tax provision and equity in net loss of equity method investee ............................................... 14.4 16.6 15.1 Equity in net (loss) of equity method investee .................... (0.1) -- -- Tax provision ..................................................... 4.7 4.7 5.8 -------- -------- -------- Net income ........................................................ 10.3% 9.7% 10.8% ======== ======== ========
For 1997, the Company's fiscal year ended on the Sunday closest to December 31. For 1998 and 1999, the Company's fiscal year ended on the first Sunday in January. Fiscal 1999, 1998, and 1997 ended on January 2, 2000, January 3, 1999, and December 28, 1997, respectively. Fiscal 1998 was a fifty-three week fiscal year,rather than a normal fifty-two week fiscal year. For ease of presentation, December 31 has been indicated as the fiscal year-end for all years. Net Revenues Net revenues for 1999 were $171.7 million, an increase of 11% over 1998. This compares with a decrease in net revenues of 1% for 1998 from 1997. The Company derives its revenues primarily from the sale of FPGAs, which accounted for 96% of net revenues for 1999, compared with 97% for 1998 and 98% for 1997. The Company also derives revenues from royalties and the sale of software, hardware, maintenance, and design services. The increase in non-FPGA net revenues over the last two years is primarily driven by the Actel Design Services Group, which was acquired from GateField in 1998. Net revenues from the sale of FPGAs for 1999 increased 10% over 1998. This compares with a decrease of 2% for 1998 from 1997. The increase in net revenues from the sale of FPGAs for 1999 from 1998 resulted primarily from a 21% increase in unit sales, which was offset by a 10% decrease in the overall average selling price of FPGAs. The decrease in net revenues from the sale of FPGAs for 1998 from 1997 was due primarily to an 11% decrease in the overall average selling prices of FPGAs, which was offset by an increase of 12% in unit sales. The increases in unit sales and declines in the overall average selling price of FPGAs for 1999 and 1998 were caused by higher percentage shipments of MX product, which had lower average selling prices than other families, coupled with selling price erosion typical to the semiconductor industry. Revenues were also favorably impacted in 1999 by the increase in sales to Nortel Networks, which accounted for nine percent of sales in 1999, compared to three percent in 1998 and two percent in 1997. As is typical in the semiconductor industry, the average selling prices of the Company's products generally decline over the lives of such products. To increase revenues, the Company seeks to increase unit sales of existing products, principally by reducing prices, and to introduce and sell new products. No assurance can be given that these efforts will be successful. As is also common in the semiconductor industry, the Company generates significant revenues from the sales of its products through distributors. The Company's principal distributors are Unique Technologies, Inc. ("Unique") and Pioneer-Standard Electronics, Inc. ("Pioneer") in North America and Arrow Electronics, Inc. and Zeus Electronics (collectively, "Arrow") worldwide. Unique replaced Wyle Electronics Marketing Group ("Wyle") as an Actel distributor in the second half of 1998. Unique and Wyle are both part of the worldwide Veba Electronics Group. The Company is now strategically positioned as Unique's only FPGA supplier. This provides the Company with a partner whose FPGA focus will be exclusively on the Company's channel distribution, service, and support requirements. The following table sets forth, for each of the last three years, the percentage of revenues derived from all customers accounting for 10% or more of net revenues in any of such years:
1999 1998 1997 ---- ---- ---- Wyle/Unique .................. 13% 14% 17% Arrow ........................ 16% 14% 17% Pioneer ...................... 12% 9% 12%
The Company does not recognize revenue on product shipped to a distributor until the distributor resells the product to its customer. Sales to customers outside the United States for 1999, 1998, and 1997 accounted for 29%, 33%, and 31% of net revenues, respectively. Of these export sales, the largest portion was derived from European customers. Gross Margin Gross margin for 1999 was 61% of net revenues, compared with 60% for 1998 and 59% for 1997. The improved gross margin resulted primarily from improved sort yields (especially on newer products) and better utilization of manufacturing capacity. These improvements were offset in part by the unfavorable impact of the strengthening yen against the dollar during 1999. The improvement in margin in 1998 versus 1997 resulted primarily from improved manufacturing yields, wafer price reductions and the appreciation in the value of the United States dollar versus the Japanese yen, in which some of the Company's wafer purchases are denominated. The Company seeks to reduce costs by improving wafer yields, negotiating price reductions with suppliers, increasing the level and efficiency of its testing and packaging operations, achieving economies of scale by means of higher production levels, and increasing the number of die produced per wafer by shrinking the die size of its products. No assurance can be given that these efforts will be successful. The capability of the Company to shrink the die size of its FPGAs is dependent on the availability of more advanced manufacturing processes. Due to the custom steps involved in manufacturing antifuse FPGAs, the Company typically obtains access to new manufacturing processes later than its competitors using standard manufacturing processes. Research and Development Research and development expenditures for 1999 were $32.3 million, or 19% of net revenues, compared with $31.2 million, or 20% of net revenues, for 1998 and $26.5 million, or 17% of net revenues, for 1997. Research and development expenditures for 1999 increased by 4% compared with 1998, but decreased as a percentage of net revenues. The increase in expenditures in the last two years is driven by the Company's effort to accelerate the introduction of new products. The Company's research and development consists of circuit design, software development, and process technology activities. The Company believes that continued substantial investment in research and development is critical to maintaining a strong technological position in the industry. Since the Company's antifuse FPGAs are manufactured using a customized process, the Company's research and development expenditures will probably always be higher as a percentage of net revenues than that of its major competitors. Selling, General, and Administrative Selling, general, and administrative expenses for 1999 were $45.9 million, or 27% of net revenues, compared with $40.6 million, or 26% of net revenues, for 1998 and $40.3 million, or 26% of net revenues, for 1997. Selling, general, and administrative expenses for 1999 increased by 13% compared with 1998, while the Company's net revenues for 1999 increased by 11% compared with 1998. Selling, general, and administrative expenses for 1999 increased principally because of an accrual of estimated settlement costs of claims for alleged infringement prior to the balance sheet date, an increased level of sales and marketing activities in support of new products and expenses related to the termination of a distributor. Selling, general, and administrative expenses for 1998 increased by 1% compared with 1997. The increase in expenditures in 1998 over 1997 was principally because of an increased level of sales and marketing activities in support of new products. Amortization of Goodwill and Other Acquisition-Related Intangibles Amortization of goodwill and other acquisition-related intangibles for 1999 were $2.2 million compared with $1.2 million in 1998 and $0.9 million in 1997. The increase in 1999 versus 1998 was mainly attributable to a $0.9 million charge related to goodwill amortization for the equity investment in GateField. The increase in 1998 over 1997 was due to the amortization of goodwill for the acquisition of the Design Services Business Unit of GateField in 1998. For future years, amortization expenses are expected to increase, as amortization begins on the intangible assets related to the AGL acquisition and the GateField product marketing agreement. Restructuring Charges During the second quarter of fiscal 1999, the Company completed a restructuring plan that resulted in a reduction in force along with the elimination of certain projects and non-critical activities. The total pretax restructure and other charges for these activities amounted to $1,963,000. These measures were taken to bring overall spending in line with current revenue projections for the balance of the year and to sharpen the Company's focus on new product development.
Restruc- Balance at Cash/ turing December Description Non-Cash Charge Activity 31, 1999 - -------------------------------------------------- -------- -------- -------- -------- (in thousands) Employee severance and outplacement .............. Cash $ 586 $ 586 $ -- Write-off of prepaid license ..................... Non-cash 734 734 -- Abandoned capital assets ......................... Non-cash 643 643 -- -------- -------- -------- $ 1,963 $ 1,963 $ -- ======== ======== ========
Employee Severance and Outplacement Expenses were comprised primarily of severance packages for 31 employees who were terminated across all functions as part of a reduction in force. The severance was computed based upon severance compensation, benefits, and related employer payroll taxes. Write-Off of Prepaid License was associated with the cancellation of a certain product and related development project. The product was eliminated from the Company's future revenue stream and therefore the license has no future economic benefit to the Company. Abandoned Capital Assets consisted of the write-off of capitalized costs associated with a new building project that was abandoned and fixed assets no longer utilized by the Company that were scrapped. The abandonment of the building project and fixed assets were a direct result of the reduction in force and elimination of certain non-critical activities. Interest Income and Other Interest and other income for 1999, 1998, and 1997 were $3.6 million, $2.4 million, and $1.8 million, respectively. The increase in interest and other income for the three years was due primarily to increased cash, cash equivalents, and short term investments available for investing by the Company. Tax Provision The Company's effective tax rates for 1999, 1998, and 1997 were 31.4%, 32.5%, and 35.0%, respectively. Significant components affecting the effective tax rate include benefits of federal research and development credits, income from tax exempt securities, the state composite rate, and recognition of certain deferred tax assets subject to valuation allowances as of December 31, 1998, December 31, 1997, and December 31, 1996, respectively. The effective tax rate for 1999 was less than the effective tax rate for 1998 due primarily to increased research and development spending, increased income from tax exempt securities, and a lower state composite rate. Financial Condition, Liquidity, and Capital Resources The Company's total assets were $259.2 million at the end of 1999, compared with $179.7 million at the end of 1998. The increase in total assets was attributable principally to increases in cash, cash equivalents, short-term investments, accounts receivable, appreciation in the value of the Company's investment in Chartered Semiconductor, a semiconductor manufacturer that went public in 1999, and the additional investments made in GateField during 1999. The following table sets forth certain financial data from the consolidated balance sheets expressed as the percentage change from the end of 1998 to the end of 1999:
Percentage Change From 1998 to 1999 ----------------- Cash, cash equivalents, and short-term investments 52.2% Accounts receivable, net ......................... 9.3 Inventories ...................................... (1.3) Property and equipment, net ...................... (13.9) Investment in Chartered Semiconductor ............ 252.2 Other assets (primarily advances to and investment in GateField and AGL) ........................... 95.6 Total assets ..................................... 44.2 Total current liabilities ........................ 31.2 Shareholders' equity ............................. 40.6
Cash, Cash Equivalents, and Short-Term Investments The Company's cash, cash equivalents, and short-term investments were $107.1 million at the end of 1999, compared with $70.4 million at the end of 1998. The amount of cash, cash equivalents, and short-term investments increased as a result of $44.3 million of cash provided by operations and $9.0 million of cash provided by financing activities, which were offset in part by $16.1 million of cash used in investing activities. These activities included cash used in the loan of $8.0 million to GateField and purchases of property and equipment of $6.4 million. Wafer manufacturers are increasingly demanding financial support from customers in the form of equity investments and advance purchase price deposits, which in some cases are substantial. Should the Company require additional capacity, it may be required to incur significant expenditures to secure such capacity. The Company believes that the availability of adequate financial resources is a substantial competitive factor. To take advantage of opportunities as they arise, or to withstand adverse business conditions should they occur, it may become prudent or necessary for the Company to raise additional capital. The Company monitors the availability and cost of potential capital resources, including equity, debt, and off-balance sheet financing arrangements, with a view toward raising additional capital on terms that are acceptable to the Company. No assurance can be given that additional capital will become available on acceptable terms. The Company has a line of credit with a bank that provides for borrowings not to exceed $5,000,000. The agreement contains covenants that require the Company to maintain certain financial ratios and levels of net worth. At December 31, 1999, the Company was in compliance with the covenants for the line of credit. Borrowings against the line of credit bear interest at the bank's prime rate. There were no borrowings against the line of credit at December 31, 1999. The line of credit expires in May 2000. Notwithstanding the foregoing, the Company believes that existing cash, cash equivalents, and short-term investments, together with cash generated from operations, will be sufficient to meet its cash requirements for 2000. A portion of available cash may be used for investment in or acquisition of complementary businesses, products, or technologies. Investment in Chartered Semiconductor The Company holds an equity investment in Chartered Semiconductor Manufacturing Ltd. ("Chartered Semiconductor"), a semiconductor company located in Singapore. The Company's investment in Chartered Semiconductor amounts to less than 1% of the total equity of Chartered Semiconductor. Chartered Semiconductor issued shares to the public and began trading on the Nasdaq Stock Market in November 1999 for the first time. As a result the Company changed the classification of its equity investment to available-for-sale. Previously the investment had been accounted for under the cost method. Accordingly, the Chartered Semiconductor investment was valued at $37,619,000 at the end of 1999, compared with $10,680,000 at the end of 1998. Accounts Receivable The Company's net accounts receivable were $22.8 million at the end of 1999, compared with $20.8 million at the end of 1998. Accounts receivable for 1999 increased by 9% compared with 1998, while the Company's net revenues for 1999 increased by 11%. The increase in accounts receivable was less than commensurate with increases in sales due to more timely collection of receivables. Inventories The Company's inventories were $25.3 million at the end of 1999, compared with $25.7 million at the end of 1998. Days of inventory decreased from 148 to 132 days, approaching the Company's inventory model of 120 days. The decrease in days of inventory is due to the higher level of sales for 1999 compared to prior year. Since the Company's FPGAs are manufactured using customized steps that are added to the standard manufacturing processes of its independent wafer suppliers, the Company's manufacturing cycle is longer and hence more difficult to adjust in response to changing demands or delivery schedules. Accordingly, the Company's inventory model will probably always be higher than that of its major competitors using standard processes. Property and Equipment The Company's net property and equipment was $12.6 million at the end of 1999, compared with $14.6 million at the end of 1998. The Company invested $6.4 million in property and equipment in 1999, compared with $7.6 million in 1998. Depreciation of property and equipment was $8.1 million for both 1998 and 1999. Capital expenditures during the past two years have been primarily for engineering, manufacturing, and office equipment. Other Assets The Company's other assets grew to $31.1 million at the end of 1999, compared with $15.9 million at the end of 1998. This increase was attributable primarily to the Company's investments in GateField common stock, an $8.0 million convertible note receivable from GateField and the acquisition of certain intangibles ($4.9 million in goodwill and $2.3 million in other intangibles) relating to the purchase of AGL in December 1999. See Notes 4 and 6 of Notes to Consolidated Financial Statements. Current Liabilities The Company's total current liabilities were $69.1 million at the end of 1999, compared with $52.7 million at the end of 1998. The increase was attributable primarily to increases of $5.5 million in deferred revenue from the settlement of a lawsuit. (which will be recognized ratably over the anticipated life of the benefit); $3.8 million in general accounts payable and $2.4 million in deferred income on shipments to distributors arising from the Company's increased level of operations; and $1.9 million in accrued salaries and employee benefits. Shareholders' Equity Shareholders' equity was $178.6 million at the end of 1999, compared with $127.1 million at the end of 1998. The increase included $17.6 million of net income, proceeds of $9.0 million from the sale of common stock under employee stock plans, $2.2 million from the tax benefit from employee stock plans, a $15.9 million increase in unrealized gain on the Chartered Semiconductor investment net of a deferred tax liability of $10.6 million, and $6.9 million from the issuance of common stock in connection with the AGL acquisition. Employees At the end of 1999, the Company had 449 full-time employees, including 136 in marketing, sales, and customer support; 144 in research and development; 122 in operations; 13 in Design Services; and 34 in administration and finance. This compares with 457 full-time employees at the end of 1998, a decrease of 2%. Net revenues per employee were approximately $382,000 for 1999, compared with approximately $338,000 for 1998, which represents an increase of 13%. Impact of Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is required to be adopted in years beginning after June 15, 2000. SFAS 133 requires that all derivatives be recognized on the balance sheet at fair market value. Depending on whether or not a derivative is an effective hedge and certain other criteria, changes in the fair value of the derivative instrument will be recognized in earnings or in accumulated other comprehensive income until the hedged item is recognized in earnings. The Company is currently evaluating the impact the adoption of SFAS 133 will have on financial position, operating results, and cash flow. Market Risk As of December 31, 1999, the Company's investment portfolio consisted primarily of corporate bonds, floating rate notes, and federal and municipal obligations. The primary objectives of the Company's investment activities are to preserve principal, meet liquidity needs, and maximize yields. To meet these objectives, the Company invests only in high credit quality debt securities with average maturities of less than two years. The Company also limits the percentage of total investments that may be invested in any one issuer. Corporate investments as a group are also limited to a maximum percentage of the Company's investment portfolio. The Company's investments are subject to interest rate risk. An increase in interest rates could subject the Company to a decline in the market value of its investments. These risks are mitigated by the ability of the Company to hold these investments to maturity. A hypothetical 75 basis point increase in interest rates would result in a decrease of approximately $861,000 (less than 0.9%) in the fair value of the Company's available-for-sale securities. The Company purchases a portion of the wafers it uses in production from Japanese suppliers, which are denominated in Japanese yen. An adverse change in the foreign exchange rate would affect the price the Company pays for a portion of the wafers used in production over the long term. The Company attempts to mitigate its exposure to risks from foreign currency fluctuations by purchasing forward foreign exchange contracts to hedge firm purchase commitments denominated in foreign currencies. Forward exchange contracts are short term and do not hedge purchases that will be made for anticipated longer-term wafer needs. An adverse change of 10% in exchange rates would result in a decline in income before taxes of approximately $1,097,000 based on projected yen denominated wafer purchases for the next year. The Company is exposed to equity price risk on the investment in Chartered Semiconductor that is held as an available-for-sale marketable equity security entered into for the promotion of business and strategic objectives. The Company does not attempt to reduce or eliminate it's market risk on this equity security. For every 10% adverse change in the market price of Chartered Semiconductor from December 31, 1999 levels, the Company's investment in Chartered Semiconductor would decrease in value by approximately $3,762,000. All of the potential changes noted above are based upon sensitivity analysis performed on the Company's financial position at December 31, 1999. Actual results may differ materially. Impact of Year 2000 In late 1999, the Company completed Year 2000 remediation and testing of its mission-critical computer systems. As a result of its planning and implementation efforts, the Company experienced no significant disruptions in information or non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company incurred expenses of approximately $0.4 million during 1999 and $0.5 million during 1998 in connection with the remediation of its systems. The Company is unaware of any material problems resulting from Year 2000 issues, either with its products or internal systems or with the products or services of third parties. The Company will continue to monitor its mission-critical computer applications and those of its suppliers and vendors throughout 2000 to assure that any latent Year 2000 matters that may arise are promptly addressed. Other Risks The Company's operating results are subject to general economic conditions and a variety of risks characteristic of the semiconductor industry (including booking and shipment uncertainties, wafer supply fluctuations, and price erosion) or specific to the Company, any of which could cause the Company's operating results to differ materially from past results. For a discussion of such risks, see "Risk Factors" in Part I of the Company's Annual Report on Form 10-K for 1999, which is incorporated herein by this reference. On March 29, 2000, Unisys Corporation ("Unisys") brought suit in the United States District Court for the Northern District of California, San Jose Division, against the Company seeking monetary damages and injunctive relief based on Actel's alleged infringement of four patents held by Unisys. The Company believes that it has meritorious defenses to the claims asserted by Unisys and intends to defend itself vigorously in this matter. After consideration of the information currently known, the Company does not believe that the ultimate outcome of case will have a materially adverse effect on Actel's business, financial condition, or results of operations, although no assurance can be given to that effect. The foregoing is a forward-looking statement subject to all of the risks and uncertainties of a legal proceeding, including the discovery of new information and unpredictability as to the ultimate outcome. Quarterly Information The following table presents certain unaudited quarterly results for each of the eight quarters in the period ended January 2, 2000. In the opinion of management, this information has been presented on the same basis as the audited consolidated financial statements appearing elsewhere in this Annual Report and all necessary adjustments (consisting only of normal recurring accruals) have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with the audited consolidated financial statements of the Company and notes thereto. However, these quarterly operating results are not indicative of the results for any future period.
Three Months Ended Jan. 2, Oct. 3, Jul. 4, Apr. 4, Jan. 3, Oct. 4, June 28, Mar. 29, 2000 1999 1999 1999 1999 1998 1998 1998 -------- -------- -------- -------- -------- -------- -------- -------- (in thousands, except per share amounts) Statements of Income Data: Net revenues ................................. $46,042 $43,162 $41,619 $40,838 $40,174 $38,628 $37,160 $38,465 Gross profit ................................. 28,546 26,503 25,381 24,844 24,377 23,383 22,345 22,680 Income from operations ....................... 7,175 7,492 2,111 5,466 5,535 5,012 4,426 4,849 Net income ................................... $ 5,823 $ 5,668 $ 1,926 $ 4,221 $ 4,118 $ 3,837 $ 3,419 $ 3,613 Net income per share: Basic ..................................... $ 0.26 $ 0.26 $ 0.09 $ 0.20 $ 0.20 $ 0.18 $ 0.16 $ 0.17 ======== ======== ======== ======== ======== ======== ======== ======== Diluted ................................... $ 0.24 $ 0.25 $ 0.09 $ 0.19 $ 0.19 $ 0.18 $ 0.16 $ 0.17 ======== ======== ======== ======== ======== ======== ======== ======== Shares used in computing net income per share: Basic ..................................... 22,048 21,748 21,511 21,347 21,091 21,449 21,288 21,163 ======== ======== ======== ======== ======== ======== ======== ======== Diluted ................................... 24,015 23,003 22,454 22,673 22,201 21,724 21,968 21,864 ======== ======== ======== ======== ======== ======== ======== ========
Three Months Ended Jan. 2, Oct. 3, Jul. 4, Apr. 4, Jan. 3, Oct. 4, June 28, Mar. 29, 2000 1999 1999 1999 1999 1998 1998 1998 -------- -------- -------- -------- -------- -------- -------- -------- As a Percentage of Net Revenues: Net revenues ................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit ................................. 62.0 61.4 61.0 60.8 60.7 60.5 60.1 59.0 Income from operations ....................... 15.6 17.4 5.1 13.4 13.8 13.0 11.9 12.6 Net income ................................... 12.6 13.1 4.6 10.3 10.3 9.9 9.2 9.4
ACTEL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
December 31, ------------------- 1999 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents ..................... $ 4,939 $ 13,947 Short-term investments ........................ 102,201 56,449 Accounts receivable, net ...................... 22,753 20,820 Inventories, net .............................. 25,324 25,669 Deferred income taxes ......................... 20,622 18,169 Notes receivable from officers ................ 73 356 Prepaid expenses and other current assets ..... 1,972 3,102 -------- -------- Total current assets .................... 177,884 138,512 Property and equipment, net ...................... 12,564 14,592 Investment in Chartered Semiconductor ............ 37,619 10,680 Other assets, net ................................ 31,144 15,924 -------- -------- $259,211 $179,708 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .............................. $ 15,374 $ 11,525 Accrued salaries and employee benefits ........ 6,884 4,960 Other accrued liabilities ..................... 2,887 828 Income taxes payable .......................... 4,025 3,370 Deferred income ............................... 39,896 31,971 -------- -------- Total current liabilities ............... 69,066 52,654 Deferred tax liability ........................ 11,515 -- -------- -------- Total liabilities ....................... 80,581 52,654 Commitments and contingencies Shareholders' equity: Preferred stock, $.001 par value; 5,000,000 shares authorized; 1,000,000 issued and converted to common stock, and none outstanding ................................. -- -- Common stock, $.001 par value; 55,000,000 shares authorized; 22,422,418 and 21,181,930 shares issued and outstanding at December 31, 1999 and 1998, respectively . 22 21 Additional paid-in capital .................... 110,146 92,092 Retained earnings ............................. 52,401 34,763 Accumulated other comprehensive income ........ 16,061 178 -------- -------- Total shareholders' equity .............. 178,630 127,054 -------- -------- $259,211 $179,708 ======== ========
ACTEL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
Years Ended December 31, 1999 1998 1997 --------- --------- --------- Net revenues ..................................... $ 171,661 $ 154,427 $ 155,858 Costs and expenses: Cost of revenues .............................. 66,387 61,642 64,244 Research and development ...................... 32,338 31,220 26,465 Selling, general, and administrative .......... 45,903 40,558 40,317 Amortization of goodwill and other acquisition- related intangibles ......................... 2,226 1,185 877 Restructuring charge .......................... 1,963 -- -- Purchased in-process research and development . 600 -- -- --------- --------- --------- Total costs and expenses ................ 149,417 134,605 131,903 --------- --------- --------- Income from operations ........................... 22,244 19,822 23,955 Interest expense ................................. -- -- -- Interest income and other, net ................... 3,642 2,380 1,842 --------- --------- --------- Income before tax provision and equity in net loss of equity method investee ....................... 25,886 22,202 25,797 Equity in net (loss) of equity method investee ... (193) -- -- Tax provision .................................... 8,055 7,215 9,029 --------- --------- --------- Net income ....................................... $ 17,638 $ 14,987 $ 16,768 ========= ========= ========= Net income per share: Basic ......................................... $ 0.81 $ 0.71 $ 0.82 ========= ========= ========= Diluted ....................................... $ 0.76 $ 0.68 $ 0.76 ========= ========= ========= Shares used in computing net income per share: Basic ......................................... 21,664 21,251 20,370 ========= ========= ========= Diluted ....................................... 23,058 21,921 21,968 ========= ========= =========
ACTEL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share amounts)
Accumu- Earnings Other Total Additional (Accumu- Compre- Stock- Common Paid-In lated hensive holders' Stock Capital Deficit) Income Equity --------- --------- --------- --------- --------- Balance at December 31, 1996 ................. $ 18 $ 63,133 $ 6,205 $ 1 $ 69,357 ========= ========= ========= ========= ========= Net income ................................... -- -- 16,768 -- 16,768 Other comprehensive income: Change in unrealized gain on investments ... -- -- -- 50 50 --------- Comprehensive income ....................... 16,818 Conversion of 1,000,000 shares of redeemable, convertible preferred stock into 2,631,578 shares of common stock .................... 3 18,144 -- -- 18,147 Issuance of 423,813 shares of common stock under employee stock plans ................ -- 3,970 -- -- 3,970 Tax benefit from exercise of stock options ... -- 718 -- -- 718 --------- --------- --------- --------- --------- Balance at December 31, 1997 ................. $ 21 $ 85,965 $ 22,973 $ 51 $ 109,010 ========= ========= ========= ========= ========= Net income ................................... -- -- 14,987 -- 14,987 Other comprehensive income: Change in unrealized gain on investments ... -- -- -- 127 127 --------- Comprehensive income ......................... 15,114 Issuance of 785,036 shares of common stock under employee stock plans ................ 1 7,599 -- -- 7,600 Issuance of 25,000 shares of common stock for patent acquisition ........................ -- 366 -- -- 366 Tax benefit from exercise of stock options ... -- 1,097 -- -- 1,097 Repurchase of common stock ................... (1) (2,935) (3,197) -- (6,133) --------- --------- --------- --------- --------- Balance at December 31, 1998 ................. $ 21 $ 92,092 $ 34,763 $ 178 $ 127,054 ========= ========= ========= ========= ========= Net income ................................... -- -- 17,638 -- 17,638 Other comprehensive income: Change in unrealized gain on investments ... -- -- -- 15,883 15,883 --------- Comprehensive income ......................... 33,521 Issuance of 954,569 shares of common stock under employee stock plans, net of repurchases ............................... 1 9,003 -- -- 9,004 Issuance of 285,943 shares of common stock for purchase of AGL ........................... -- 6,858 -- -- 6,858 Tax benefit from exercise of stock options ... -- 2,193 -- -- 2,193 --------- --------- --------- --------- --------- Balance at December 31, 1999 ................. $ 22 $ 110,146 $ 52,401 $ 16,061 $ 178,630 ========= ========= ========= ========= =========
ACTEL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, 1999 1998 1997 --------- --------- --------- Operating activities: Net income ....................................................... $ 17,638 $ 14,987 $ 16,768 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................................. 10,294 9,320 8,358 Non-cash portion of restructure and other charges and other .... 2,695 -- -- Purchased in-process research and development .................. 600 -- -- Equity in net loss of equity method investee ................... 193 -- -- Loss on disposal of fixed assets ............................... 136 -- 175 Changes in operating assets and liabilities: Accounts receivable .......................................... (1,933) 4,315 4,360 Inventories .................................................. 345 (5,197) 6,376 Deferred income taxes ........................................ (3,775) 2,613 (5,050) Other current assets and notes receivable from officers ...... 429 (1,619) 577 Accounts payable, accrued salaries and employee benefits, and other accrued liabilities .................................. 9,769 1,724 (1,048) Deferred income .............................................. 7,925 1,043 3,542 --------- --------- --------- Net cash provided by operating activities ........................ 44,316 27,186 34,058 Investing activities: Purchases of property and equipment .............................. (6,407) (7,646) (6,764) Purchases of available-for-sale securities ....................... (178,616) (134,630) (157,753) Sales and maturities of available for sale securities ............ 132,342 129,580 132,156 Cash acquired in AutoGate Logic acquisition ...................... 281 -- -- Investment in note receivable from GateField ..................... (8,000) -- -- Investments in GateField including purchase of design center, preferred stock and other intangible assets .................... -- (10,000) -- Other assets ..................................................... (1,928) 227 (1,447) --------- --------- --------- Net cash used in investing activities ............................ (62,328) (22,469) (33,808) Financing activities: Sale of common stock ............................................. 9,004 7,600 3,970 Repurchase of common stock ....................................... -- (6,133) -- --------- --------- --------- Net cash provided by financing activities ........................ 9,004 1,467 3,970 Net increase (decrease) in cash and cash equivalents ................ (9008) 6,184 4,220 Cash and cash equivalents, beginning of year ........................ 13,947 7,763 3,543 --------- --------- --------- Cash and cash equivalents, end of year .............................. $ 4,939 $ 13,947 $ 7,763 ========= ========= ========= Supplemental disclosures of cash flows information and non-cash investing and financing activities: Cash paid during the year for interest ........................... $ -- $ -- $ -- Cash paid during the year for taxes .............................. 10,195 2,207 15,398 Tax benefits from exercise of stock options ...................... 2,193 1,097 718 Issuance of common stock for patent acquisition .................. -- 366 -- Issuance of common stock for AGL acquisition ..................... 6,858 -- -- Unrealized gain on available-for-sale securities ................. 26,478 -- -- Conversion of preferred stock into common stock .................. -- -- (18,147)
ACTEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies Actel Corporation ("Actel" or "the Company") was incorporated under the laws of California on October 17, 1985. The Company designs, develops, and markets field programmable gate arrays ("FPGAs") and associated development system software and programming hardware. The Company also provides design services, including FPGA, application specific integrated circuit ("ASIC"), and system design, software development and implementation, and development of prototypes, first articles, and production units. Net revenues from the sale of FPGAs accounted for 96% of the Company's net revenues for 1999, compared with 97% for 1998 and 98% for 1997. Design Services, which the Company acquired from GateField Corporation ("GateField") in the third quarter of 1998, accounted for 2% of the Company's net revenues for 1999 and 1% for 1998. FPGAs are logic integrated circuits that adapt the processing and memory capabilities of electronic systems to specific applications. FPGAs are used by designers of communication, computer, industrial control, military/aerospace, and other electronic systems to differentiate their products and get them to market faster. Information on the Company's sales by geographic area is included in Note 14. Advertising and Promotion Costs The Company's policy is to expense advertising and promotion costs as they are incurred. The Company's advertising and promotion expenses were approximately $3,345,000, $3,454,000, and $4,050,000 for 1999, 1998, and 1997, respectively. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. For 1997, the Company's fiscal year ended on the Sunday closest to December 31. For 1998 and 1999, the Company's fiscal year ended on the first Sunday in January. Fiscal 1999, 1998, and 1997 ended on January 2, 2000, January 3, 1999, and December 28, 1997, respectively. Fiscal 1998 was a fifty-three week fiscal year, rather than a normal fifty-two week fiscal year. For ease of presentation, December 31 has been indicated as the fiscal year-end for all years in the consolidated financial statements and accompanying notes. Cash Equivalents and Short-Term Investments For financial statement purposes, the Company considers all highly liquid debt instruments with insignificant interest rate risk and with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist primarily of cash deposits in money market funds that are available for withdrawal without restriction. Short-term investments consist principally of federal, state, and local municipal obligations. The Company accounts for its investment in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. At December 31, 1999, all debt securities are designated as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as a component of comprehensive income in shareholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest and other income. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in interest income and other. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income and other. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash investments and trade receivables and amounts due from and invested in GateField. The Company limits its exposure to credit risk by only investing in securities of A, A1, or P1 grade. The Company is exposed to credit risks in the event of default by the financial institutions or issuers of investments to the extent of amounts recorded on the balance sheet. The Company sells its products to customers in diversified industries. The Company is exposed to credit risks in the event of non-payment by customers to the extent of amounts recorded on the balance sheet. The Company limits its exposure to credit risk by performing ongoing credit evaluations of its customers' financial condition and generally requires no collateral. The Company holds an investment in the common stock ($843,000), preferred stock ($1,390,000) of GateField, as well as an $8,000,000 note receivable, and is exposed to credit risks in the event of default by GateField to the extent of the amounts recorded on its balance sheet. The Company holds a lien against the total assets of GateField. The Company is exposed to credit risks in the event of insolvency by its customers and limits its exposure to accounting losses by limiting the amount of credit extended whenever deemed necessary. Three of the Company's distributors -- Unique (Wyle), Arrow, and Pioneer -- accounted for approximately 13%, 16%, and 12% of the Company's net revenues for 1999, respectively. The same three distributors accounted in the aggregate for approximately 37% of the Company's net revenues for 1998 and 46% for 1997. Unique replaced Wyle as a distributor in the second half of 1998. Unique and Wyle are both part of the worldwide Veba Electronics Group. The loss of any one of these distributors could have a materially adverse effect on the Company's results of operations and financial position. Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Accounts Payable. The carrying amount reported in the balance sheets for accounts payable approximates fair value. Cash and Cash Equivalents. The carrying amount reported in the balance sheets for cash and cash equivalents approximate fair value. Investment Securities. The fair values for marketable debt and equity securities are based on quoted market prices. Foreign Currency Exchange Contracts. The fair value of the Company's foreign currency exchange forward contracts are estimated based on quoted market prices of comparable contracts. Goodwill and other acquisition-related intangibles Goodwill is recorded when the consideration paid for acquisitions exceeds the fair value of net intangible assets acquired. Goodwill and other acquisition-related intangibles are amortized on a straight-line basis over their useful lives. Reviews are regularly performed to determine whether facts or circumstances exist which indicate that the carrying value of assets are impaired. No impairment has been indicated to date. Impact of Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is required to be adopted in years beginning after June 15, 2000. SFAS 133 requires that all derivatives be recognized on the balance sheet at fair market value. Depending on whether or not a derivative is an effective hedge and certain other criteria, changes in the fair value of the derivative instrument will be recognized in earnings or in accumulated other comprehensive income until the hedged item is recognized in earnings. The Company is currently evaluating the impact adoption of SFAS 133 will have on financial position, operating results, and cash flow. Income Taxes The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, the liability method is used in accounting for income taxes. Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). Given the volatility of the market for the Company's products, the Company makes inventory provisions for potentially excess and obsolete inventory based on backlog and forecast demand. However, such backlog demand is subject to revisions, cancellations, and rescheduling. Actual demand inevitably differs from such backlog and forecast demand, and such differences may be material to the financial statements. Off-Balance-Sheet Risk The Company enters into foreign exchange contracts to hedge firm purchase commitments denominated in foreign currencies. The Company does not use forward foreign exchange contracts for speculative or trading purposes. The Company's accounting policies for these instruments are based on the Company's designation of such instruments as hedging transactions. The criteria the Company uses for designating an instrument as a hedge includes its effectiveness in exposure reduction and one-to-one matching of the derivative financial instrument with the underlying transaction being hedged. Gains and losses on these contracts are recognized upon maturity of the contracts and are included in cost of sales. If the criteria for designation of these instruments as hedging transactions are not met, then the instruments would be marked to market, with gains and losses recognized in that period. At December 31, 1999, the Company had no forward foreign exchange contracts outstanding. In addition, the Company had an outstanding standby letter of credit in the amount of $1,174,985 at December 31, 1999. Property and Equipment Property and equipment are carried at cost less accumulated depreciation (see Note 2). Depreciation and amortization have been provided on a straight-line basis over the following estimated useful lives: Equipment......................................... 2 to 5 years Furniture and fixtures............................ 3 to 5 years Leasehold improvements............................ Estimated useful life or lease term, whichever is shorter. Revenue Recognition Revenue from product shipped to end customers is generally recorded upon transfer of title. Revenue related to products shipped subject to customers' evaluation is recognized upon final acceptance. Shipments to distributors are made under agreements allowing certain rights of return and price protection on unsold merchandise. For that reason, the Company defers recognition of revenues and related cost of revenues on sales of products to distributors until such products are sold by the distributor. Royalty income is recognized upon the sale by others of products subject to royalties. Design Services revenues are recognized as the services are performed. Research and Development Research and development expenditures are charged to expense as incurred. Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed" requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. Through December 31, 1999, software development has been completed concurrently with the establishment of technological feasibility and, as a result, the Company has charged all costs to research and development expense in the periods incurred. Stock-Based Compensation The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, no compensation cost has been recognized for its fixed-cost stock option plans or its stock purchase plan. In Note 11, the Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. Balance Sheet Detail
December 31, ---------------------- 1999 1998 -------- -------- (in thousands) Accounts receivable: Trade accounts receivable ....................... $ 24,690 $ 22,374 Allowance for doubtful accounts ................. (1,937) (1,554) -------- -------- $ 22,753 $ 20,820 ======== ======== Inventories: Purchased parts and raw materials ............... $ 3,363 $ 1,285 Work-in-process ................................. 8,366 12,052 Finished goods .................................. 13,595 12,332 -------- -------- $ 25,324 $ 25,669 ======== ======== Property and equipment: Equipment ....................................... $ 43,971 $ 39,711 Furniture and fixtures .......................... 2,298 2,267 Leasehold improvements .......................... 5,050 4,728 -------- -------- 51,319 46,706 Accumulated depreciation and amortization ....... (38,755) (32,114) -------- -------- $ 12,564 $ 14,592 ======== ========
Depreciation expense was approximately $8,068,442, $8,134,563, and $7,481,000 for 1999, 1998 and 1997, respectively.
December 31, ---------------------- 1999 1998 -------- -------- (in thousands) Other Assets: GateField intangible asset ........................... $ 2,050 $ 2,050 GateField product marketing agreement ................ 6,000 6,000 GateField preferred and common stock ................. 2,612 1,650 GateField note receivable ............................ 8,000 -- AutoGate Logic identifiable intangible assets ........ 2,300 -- AutoGate Logic goodwill .............................. 4,938 -- TI intangible asset .................................. 3,958 3,958 Other ................................................ 6,810 5,713 Accumulated amortization expenses .................... (5,524) (3,447) -------- -------- $ 31,144 $ 15,924 ======== ========
Amortization expense was approximately $2,226,000, $1,185,000, and $877,000 for 1999, 1998, and 1997, respectively. Approximately $149,000 of 1999 amortization expense was related to other current assets. The intangible asset acquired from Texas Instruments Incorporated ("TI") was fully amortized as of December 31, 1999. For further discussion of AGL and GateField, see Notes 4 and 6, respectively. 3. Available-for-Sale Securities The following is a summary of available-for-sale securities at December 31, 1999 and 1998:
Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Values -------- -------- -------- -------- (in thousands) December 31, 1999 Auction Market Preferred ............................ $ 1,900 $ -- $ -- $ 1,900 Corporate bonds ..................................... 13,619 4 (45) 13,578 Commercial paper .................................... 1,265 -- -- 1,265 U.S. government securities .......................... 6,970 -- (61) 6,909 Floating rate notes ................................. 17,146 4 -- 17,150 Municipal obligations ............................... 58,584 9 (194) 58,399 Weekly floater ...................................... 3,000 -- -- 3,000 -------- -------- -------- -------- Total available-for-sale securities ................. 102,484 17 (300) 102,201 Less amounts classified as cash equivalents .......... -- -- -- -- -------- -------- -------- -------- Total short-term available-for-sale debt securities .... 102,484 17 (300) 102,201 ======== ======== ======== ======== Long-term marketable strategic investment in Chartered Semiconductor ..................................... 10,680 26,939 -- 37,619 -------- -------- -------- -------- Total available-for-sale securities .................... 113,164 26,956 (300) 139,820 ======== ======== ======== ========
Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Values -------- -------- -------- -------- (in thousands) December 31, 1998 Corporate bonds ..................................... $ 3,500 $ -- $ -- $ 3,500 Commercial paper .................................... 4,415 -- -- 4,415 Floating rate notes ................................. 5,500 -- -- 5,500 Municipal obligations ............................... 47,271 180 (2) 47,449 Total available-for-sale securities ................. 60,686 180 (2) 60,864 Less amounts classified as cash equivalents .......... (4,415) -- -- (4,415) -------- -------- -------- -------- Total available-for-sale securities .................... $ 56,271 $ 180 $ (2) $ 56,449 ======== ======== ======== ========
The adjustments to net unrealized gains and (losses) on investments included as a separate component of shareholders' equity totaled approximately $15,883,000, $127,000, and $50,000 for the years ended December 31, 1999, 1998, and 1997, respectively. Realized gains and losses during 1999, 1998, and 1997 were not material. See Note 1 for discussion of the Company's policy on accounting for investments and the manner in which fair values were determined. The expected maturities of the Company's investments at December 31, 1999, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
Available-for-sale debt securities (in thousands): Due in less than one year .............. $ 27,990 Due in one to five years ............... 34,820 Due after five years ................... 39,391 -------- $102,201 ========
A significant proportion of the Company's securities represent investments in floating rate municipal bonds with contractual maturities greater than ten years. However, the interest rates on these debt securities generally reset every ninety days, at which time the Company has the option to sell the security or roll over the investment at the new interest rate. As it is not the Company's intention to hold these securities until their contractual maturities, these amounts have been classified as short-term investments. 4. AGL Acquisition On December 21, 1999, the Company completed the acquisition of AutoGate Logic, Inc. ("AGL") in a transaction accounted for as a purchase. AGL developed a wide range of VLSI (very large scale integration) development tools, including FPGA and custom IC place and route and timing analysis software. In connection with the acquisition, the Company issued a total of 375,000 shares, of which 285,943 are shares issued and 89,057 represents options assumed, of common stock and options at $18.29 per share in exchange for all outstanding common shares and options of AGL. The price per share of common stock was based on an average of five days closing market prices for Actel common stock during the period of October 1, 1999 through October 7, 1999 when the Agreement to acquire AGL was made public. Amounts prepaid by Actel for a source code license and amounts payable to AGL were netted into the purchase price to arrive at a total purchase price of $7,199,000. In accordance with provisions of Accounting Principles Board Opinion No. 16, "Business Combinations", all identifiable assets were assigned a portion of the total consideration on the basis of their respective fair values. The consideration was allocated as follows based on the valuation report of an independent valuation specialist:
Allocation of AGL purchase price (in thousands): In-process research and development ................... $ 600 Completed technology .................................. 2,100 Assembled work force .................................. 200 Cash .................................................. 281 Deferred tax liability ................................ (920) Goodwill .............................................. 4,938 ------- $ 7,199 =======
A portion of the purchase price has been allocated to developed technology and acquired in-process research and development ("IPRD"). Completed technology and IPRD were identified and valued through extensive interviews, analysis of data provided by AGL concerning developmental products, their stage of development, the time and resources needed to complete them, and associated risks. The cost approach, which establishes value based on the cost of reproducing or replacing the assets, less depreciation for functional or economic obsolescence, was the primary technique utilized in valuing the completed technology and IPRD. Where development projects had reached technological feasibility, they were classified as completed technology and the value assigned to completed technology was capitalized. Where the development projects had not reached technological feasibility and had no future alternative uses, they were classified as IPRD and charged to expense upon closing of the merger. The nature of the efforts required to develop the IPRD into completed product principally relate to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the products can be produced to meet their design specifications, including functions, features and technological performance requirements. Associated risks include the inherent difficulties and uncertainties in completing each project and thereby achieving technological feasibility, anticipated levels of market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets. The acquired completed technology, which is comprised of products that are already technologically feasible, includes product neutral software tools for place and route and architecture evaluation. The Company expects to amortize the acquired completed technology of approximately $2.1 million on a straight-line basis over an average estimated remaining useful life of five years. The acquired assembled workforce is comprised of employees from AGL's engineering group. The Company expects to amortize the value assigned to the assembled workforce of approximately $200 thousand on a straight-line basis over an estimated remaining useful life of six months. Goodwill, which represents the excess of the purchase price of an investment in an acquired business over the fair value of the underlying net identifiable assets, is amortized on a straight-line basis over its estimated remaining life of five years. The following unaudited pro forma results of operations for the periods ending 1998 and 1999 are presented are as if the acquisition of AGL had occurred as of the beginning of 1998, and includes certain estimated adjustments including amortization of intangibles. The pro forma results exclude the one-time write-off of $600,000 of in-process research and development and the tax effect of the charge. The pro-forma information has been prepared for comparative purposes only and does not purport to be indicative of what operating results would have been if the acquisition had actually taken place at the beginning of 1998 or of future operating results.
Years Ended December 31, 1999 1998 --------- --------- (in thousands, except per share amounts) Net revenues ....................................... $171,272 $156,534 Net income ......................................... 15,739 15,101 Diluted earnings per share ......................... 0.67 0.68
5. Investment in Chartered Semiconductor The Company holds an equity investment in Chartered Semiconductor Manufacturing Ltd. ("Chartered Semiconductor"), a semiconductor company located in Singapore. The Company's investment in Chartered Semiconductor amounts to less than 1% of the total equity of Chartered Semiconductor. Chartered Semiconductor issued shares to the public and began trading on the Nasdaq Stock Market in November 1999 for the first time. As a result, the Company changed the classification of its equity investment to available-for-sale. Previously the investment had been accounted for under the cost method. Accordingly, the Chartered Semiconductor investment was valued at $37,619,000 at the end of 1999, compared with $10,680,000 at the end of 1998. 6. GateField In the third quarter of 1998, the Company entered into a product marketing rights agreement with GateField and purchased GateField convertible preferred stock. Concurrently, the Company acquired the Design Services Business Unit of GateField in a transaction accounted for as a purchase. Consideration paid in these transactions totaled $10,447,000, consisting entirely of cash. In accordance with provisions of Accounting Principles Board Opinion No. 16, "Business Combinations," all identifiable assets (including identifiable intangible assets) were assigned a portion of the total consideration on the basis of their respective fair values. The consideration was allocated as follows: $6,000,000 to the product marketing rights agreement; $1,650,000 to the convertible preferred stock; and $2,797,000 (consisting of $447,000 related to net assets and $2,350,000 related to intangible assets) to Design Services. The product marketing rights agreement provides the Company with an exclusive right to market and sell GateField's standard ProASIC products in process geometries of 0.35 micron and smaller as part of the Company's product line. Under the terms of the agreement, development of the underlying technology and products is managed and executed primarily by GateField. The Company has agreed to pay additional consideration of $1,000,000 upon qualification of the initial .25 micron product. The $6,000,000 allocated to product marketing rights will be amortized over the related products' currently estimated revenue-producing life of seven years; the Company will re-evaluate the expected life if product sales do not commence as scheduled or fail to achieve expected volumes in the future. The amount allocated to the product marketing rights agreement is included in "other assets." The Company's investment in GateField's convertible preferred stock consists of 300,000 shares of GateField Series C Preferred Stock that are convertible, at the Company's election, into 200,000 shares of GateField Common Stock. The amount allocated to the Company's investment in GateField convertible preferred stock is also included in "other assets." The Design Services Business Unit purchased form GateField in 1998 is located in Mt. Arlington, New Jersey. Design Services provides varying levels of design services, including: design methodology and tool consulting; turnkey FPGA and ASIC design; IP development and integration; board and system design; software design and implementation; and development of prototypes, first articles, and production units. The Company was the first FPGA provider to offer system-level design expertise, expanding the Company's ability to support a greater portion of the customers' overall design and risk management. Design Services is a secure facility certified to handle government, military, and proprietary designs. Design Services is not involved in the development efforts underlying the product marketing rights agreement. The net tangible assets of the Design Services Business Unit was valued at $447,000 and consisted principally of fixed assets, accounts receivable, deposits, and accounts payable. Intangible assets were valued at $2,350,000 and consisted of $300,000 related to backlog, $1,000,000 related to workforce-in-place, and $1,050,000 related to goodwill. Backlog was amortized over its estimated useful life of six months. The workforce and goodwill associated with Design Services are being amortized over their estimated useful life of five years and are also included in "other assets." In May 1999, the Company paid $8,000,000 to GateField Corporation ("GateField") in exchange for a convertible promissory note bearing interest at 5.22% per annum with a five-year term. Interest is payable quarterly and the note is secured by a lien against all the assets of GateField. The note is convertible at Actel's election into 420,000 shares of GateField Series C-1 Convertible Preferred Stock, which are convertible into 1,230,769 shares of GateField common stock, equating to a price of $6.50 per share of GateField common stock. During 1999, the Company increased its ownership of GateField common stock from 16,500 shares to 190,529 shares. The cost of these shares (less the amount of GateField's losses recognized by Actel under the equity method of accounting) is included in "other assets." In light of Actel's common and preferred equity interest in GateField, $8.0 million convertible promissory note from GateField, and marketing and licensing agreements with GateField, Actel began accounting for its equity interest in GateField under the equity method of accounting during 1999. The impact of this implementation was a $1.1 million charge to the Company's net income for 1999 ($0.9 million included in amortization of goodwill and $0.2 million included in equity in net losses of equity method investee). Assuming conversion of all outstanding GateField convertible preferred stock owned by Actel, and conversion of the convertible promissory note due from GateField, the aggregate total of GateField common stock owned by Actel would be 1,621,298 shares, or 26.7% of the total common shares of GateField. GateField common stock, which is listed on the National Association of Security Dealers ("NASD") Over-The-Counter Bulletin Board, closed at $3.875 on December 31, 1999. The Company assesses the recoverability of its investments in, and amounts due from GateField on a regular basis. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. No impairment has been indicated to date. 7. Restructure and Other Charges During the second quarter of fiscal 1999, the Company completed a restructuring plan that resulted in a reduction in force along with the elimination of certain projects and non-critical activities. The total pretax restructure and other charges for these activities amounted to $1,963,000. These measures were taken to bring overall spending in line with current revenue projections for the balance of the year and to sharpen the Company's focus on new product development.
Restruc- Balance at Cash/ turing December Description Non-Cash Charge Activity 31, 1999 - -------------------------------------------------- -------- -------- -------- -------- (in thousands) Employee severance and outplacement .............. Cash $ 586 $ 586 $ -- Write-off of prepaid license ..................... Non-cash 734 734 -- Abandoned capital assets ......................... Non-cash 643 643 -- -------- -------- -------- $ 1,963 $ 1,963 $ -- ======== ======== ========
Employee severance and outplacement expenses were comprised primarily of severance packages for 31 employees who were terminated across all functions as part of a reduction in force. The severance was computed based upon severance compensation, benefits, and related employer payroll taxes. Write-off of prepaid license was associated with the cancellation of a certain product and project. The product was eliminated from the Company's future revenue stream and therefore the license has no future economic benefit to the Company. Abandoned capital assets consisted of the write-off of capitalized costs associated with a new building project that was abandoned and fixed assets no longer utilized by the Company that were scrapped. 8. Line of Credit The Company has a line of credit with a bank that provides for borrowings not to exceed $5,000,000. The agreement contains covenants that require the Company to maintain certain financial ratios and levels of net worth. At December 31, 1999, the Company was in compliance with the covenants for the line of credit. Borrowings against the line of credit bear interest at the bank's prime rate. There were no borrowings against the line of credit at December 31, 1999. The line of credit expires in May 2000. 9. Commitments The Company leases its facilities and certain equipment under non-cancelable lease agreements. The current lease agreement expires in June 2003, with one additional five-year renewal option. The equipment leases are accounted for as operating leases. The lease terms expire at various dates through September 2001. All of these leases require the Company to pay property taxes, insurance, and maintenance and repair costs. At December 31, 1999 and 1998, the Company had no capital lease obligations. Future minimum lease payments under all non-cancelable leases are as follows: Operating Leases ------- 2000 .................................................. $ 3,516 2001 .................................................. 2,983 2002 .................................................. 3,070 2003 .................................................. 1,539 2004 .................................................. 35 ------- Total minimum lease payments .......................... $11,143 ======= Rental expense under operating leases was approximately $4,172,307, $3,282,730, and $2,481,313 for 1999, 1998, and 1997, respectively. 10. Retirement Plan Effective December 10, 1987, the Company adopted a tax deferred savings plan for the benefit of qualified employees. The plan is designed to provide employees with an accumulation of funds at retirement. Employees may elect at any time to have salary reduction contributions made to the plan. The Company may make contributions to the plan at the discretion of the Board of Directors. The Company made distributions to the plan for the 1998 plan year of $387,166 based on net revenues and net income for the 1998 fiscal year. The Company also made distributions to the plan for the 1997 plan year of $340,750 based on net revenues and net income for the 1997 fiscal year. The Company made no contributions to the plan for the 1999 plan year. The contributions vest annually, retroactively from an eligible employee's date of hire, at the rate of 25% per year. In addition, contributions become fully vested upon retirement from the Company at age 65. There is no guarantee the Company will make any contributions to the plan in the future, regardless of its financial performance. If the Company, in its discretion, chooses to make a contribution again in the future, the amount could be higher or lower. Shareholders' Equity Stock Repurchase The Company authorized a stock repurchase program in September 1998 whereby up to 1,000,000 shares of the Company's common stock may be purchased from time to time in the open market at the discretion of management. The program was amended in 1999 for an additional 1,000,000 shares, for a total of 2,000,000 shares that can be repurchased. The Company made no stock repurchases in 1999. During 1998, the Company repurchased 675,000 shares of common stock for $6,133,000. The Company has reissued these shares in its employee stock option and purchase plans. Stock Option Plans The Company has adopted stock option plans under which officers, employees, and consultants may be granted incentive stock options or nonqualified options to purchase shares of the Company's common stock. At December 31, 1999, 9,917,991 shares of common stock were reserved for issuance under these plans, of which 375,014 were available for grant. The Company has also adopted a Directors' Stock Option Plan, under which directors who are not employees of the Company may be granted nonqualified options to purchase shares of the Company's common stock. At December 31, 1999, 237,500 shares of common stock were reserved for issuance under such plan, of which 80,000 were available for grant. The Company grants stock options under its plans at a price equal to the fair value of the Company's common stock on the date of grant. Subject to continued service, options generally vest over a period of four years and expire ten years from the date of grant. The following table summarizes the Company's stock option activity and related information for the three years ended December 31, 1999:
1999 1998 1997 --------------------- --------------------- --------------------- Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price --------- ---------- --------- ---------- --------- ---------- Outstanding at January 1...... 5,051,840 $ 11.41 4,252,115 $ 13.98 3,542,836 $ 12.38 Granted....................... 2,339,561 14.34 3,626,060 11.44 1,252,895 17.39 Exercised..................... (620,226) 9.94 (495,997) 9.50 (214,821) 8.29 Cancelled..................... (908,242) 12.14 (2,330,338) 16.57 (328,795) 13.40 --------- ---------- --------- ---------- --------- ---------- Outstanding at December 31.... 5,862,933 12.62 5,051,840 11.41 4,252,115 13.98 ========= ========== ========= ========== ========= ==========
The Company has, in connection with the acquisition of AGL, assumed the stock option plan of AGL and the related options are included in the preceding table. The following table summarizes information about stock options outstanding at December 31, 1999:
December 31, 1999 ----------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------- ------------------------ Weighted Average Weighted Weighted Remaining Average Average Number of Contract Exercise Number of Exercise Range of Exercise Prices Shares Life Price Shares Price --------- ---------- ------------ --------- -------- $ 0.87 - $ 10.00.................... 459,943 5.86 years $ 6.79 341,124 $ 5.86 10.06.................... 709,881 8.57 10.06 75,639 10.06 10.25 - 11.13.................... 734,116 6.47 10.76 519,034 10.69 11.75.................... 998,732 7.10 11.75 374,325 11.75 11.88 - 13.06.................... 879,847 8.72 12.91 157,650 12.90 13.38.................... 10,000 7.92 13.38 4,999 13.38 13.56.................... 653,375 9.59 13.56 5,900 13.56 13.63 - 14.88.................... 637,746 8.73 14.67 88,299 14.53 15.00 - 20.38.................... 624,593 8.49 17.46 124,444 16.53 21.88 - 22.94.................... 154,700 9.67 22.37 10,124 22.43 --------- --------- 0.87 - 22.94.................... 5,862,933 8.02 12.62 1,701,538 10.85 ========= =========
At December 31, 1998, 1,306,424 outstanding options were exercisable; and at December 31, 1997, 1,099,059 outstanding options were exercisable. The weighted-average fair value of options granted during 1999, 1998, and 1997 were $7.17, $4.69, and $7.38, respectively. Employee Stock Purchase Plan The Company has adopted an Employee Stock Purchase Plan (the "ESPP"), under which eligible employees may designate not more than 15% of their cash compensation to be deducted each pay period for the purchase of common stock (up to a maximum of $25,000 worth of common stock in any year). At December 31, 1999, 3,019,680 shares of common stock were authorized for issuance under the ESPP. The ESPP is administered in consecutive, overlapping offering periods of up to 24 months each, with each offering period divided into four consecutive six-month purchase periods beginning August 1 and February 1 of each year. On the last business day of each purchase period, shares of common stock are purchased with employees' payroll deductions accumulated during the six months at a price per share equal to 85% of the market price of the common stock on the first day of the applicable offering period or the last day of the purchase period, whichever is lower. There were 364,163 and 291,469 shares issued under the ESPP in 1999 and 1998, respectively, and 1,601,340 remained available for issuance at December 31, 1999. The weighted-average fair value of employee stock purchase rights granted during 1999, 1998, and 1997 were $5.76, $5.52, and $4.69, respectively. Pro Forma Disclosures Pro forma information regarding net income and net income per share is required by SFAS 123, which also requires that the information be determined as if the Company had accounted for its stock-based awards to employees granted subsequent to December 31, 1994, under the fair value method. The fair value for these stock-based awards to employees was estimated at the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions for 1999, 1998, and 1997: risk-free interest rates of 5.55%, 5.34%, and 5.95%, respectively; no dividend yield; volatility factor of the expected market price of the Company's common stock of 54%, 51%, and 48%, respectively; and a weighted average expected life for the options and employee stock purchase rights of four years and two years respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. For purposes of pro forma disclosures, the estimated fair value of the Company's stock-based awards to employees is amortized to expense over the options' vesting period (for options). The Company's pro forma information is as follows:
Years Ended December 31, ---------------------------------- 1999 1998 1997 --------- --------- ---------- (in thousands, except per share amounts) Pro forma net income .............. $ 9,186 $ 5,117 $ 11,405 Pro forma earnings per share: Basic .......................... 0.42 0.24 0.56 Diluted ........................ 0.41 0.24 0.54
The effects on pro forma disclosures of applying SFAS 123 are not likely to be representative of the effects on pro forma disclosures in future years. 12. Comprehensive Income The following schedule of other comprehensive income shows the gross current-period gain and the reclassification adjustment.
Years Ended December 31, 1999 1998 1997 ------------ ------------ ------------ (in thousands) Gains on investments during the period, net of tax of $(10,595) in 1999. $ 15,892 $ 178 $ 51 Less reclassification adjustment for gains included in net income....... (9) (51) (1) ------------ ------------ ------------ Other comprehensive income.............................................. $ 15,883 $ 127 $ 50 ============ ============ ============
The tax on unrealized gains prior to 1999 was not material. 13. Tax Provision The tax provision consists of:
Years Ended December 31, 1999 1998 1997 ------------ ---------- ----------- (in thousands) Federal - current ................. $ 11,709 $ 3,565 $ 11,585 Federal - deferred ................ (5,073) 1,416 (4,544) State - current ................... 1,720 592 2,304 State - deferred .................. (591) 1,197 (506) Foreign - current ................. 290 445 190 ------------ ---------- ----------- $ 8,055 $ 7,215 $ 9,029 ============ ========== ===========
The tax provision reconciles to the amount computed by multiplying income before tax by the U.S. statutory rate as follows:
December 31, ------------------------------------ 1999 1998 1997 --------- --------- ---------- (in thousands) Provision at statutory rate ........... $ 8,993 $ 7,771 $ 9,029 Change in valuation allowance .......... (440) (440) (440) Tax exempt income ...................... (770) (875) -- Federal research credits ............... (1,031) (856) (772) State taxes, net of federal benefit .... 734 1,163 1,169 Other .................................. 569 452 43 --------- --------- ---------- Tax provision .......................... $ 8,055 $ 7,215 $ 9,029 ========= ========= ==========
Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes are as follows:
December 31, -------------------- 1999 1998 ------- ------- (in thousands) Deferred tax assets: Depreciation ................................. $ 2,297 $ 1,618 Distributor reserve .......................... 15,574 12,452 Charge for in-process research expenses ...... 4,210 4,752 Inventories .................................. 1,950 1,455 Other, net ................................... 4,417 3,917 ------- ------- 28,448 24,194 Valuation allowance .......................... (1,726) (2,166) ------- ------- Net deferred tax assets .............. $26,722 $22,028 ======= ======= Deferred tax liabilities: AGL intangible assets ....................... $ 920 $ -- Unrealized gain on investments .............. 10,595 -- ------- ------- Deferred tax liability ............... $11,515 $ -- ======= =======
The valuation allowance declined by approximately $440,000 during 1998 and 1997. 14. Segment Disclosures The Company operates in a single industry segment: designing, developing, and marketing FPGAs. FPGA sales accounted for 96%, 97%, and 98% of net revenues for the years ended December 31, 1999, 1998, and 1997, respectively. The Company also derives revenues from the sale of software and hardware systems, which are used to design and program FPGAs. In addition, the Company derives revenues from the performance of design services, including FPGA, ASIC, and system design; software development and implementation; and development of prototypes, first articles and production units. Design Services, which the Company acquired from GateField in the third quarter of 1998, accounted for 2% of the Company's net revenue in 1999 and 1% in 1998. The Chief Executive Officer has been identified as the Chief Operating Decision Maker (CODM) because he has final authority over resource allocation decisions and performance assessment. The CODM does not receive discrete financial information about its system sales or Design Services activities, nor does the CODM use any financial information to make decisions regarding asset allocation, expense allocation or profitability with respect to system sales or Design Services activities. Accordingly, these business units are not considered to be reportable segments. The Company markets its products in the United States and in foreign countries through its sales personnel, independent sales representatives, and distributors. The Company's geographic sales are as follows:
Years Ended December 31, ------------------------------------------------------- 1999 1998 1997 ---------------- ---------------- ----------------- (in thousands, except percentages) United States ............ $ 121,819 71% $ 102,817 67% $ 107,308 69% Export: Europe .............. 29,010 17 29,675 19 26,239 17 Japan ............... 9,562 6 10,658 7 13,328 8 Other international . 11,270 6 11,277 7 8,983 6 ---------- ---- ---------- ---- ---------- ---- $ 171,661 100% $ 154,427 100% $ 155,858 100% ========== ==== ========== ==== ========== ====
As is common in the semiconductor industry, the Company generates significant revenues from the sales of its products through distributors. The Company's principal distributors are Unique Technologies, Inc. ("Unique") and Pioneer-Standard Electronics, Inc. ("Pioneer") in North America and Arrow Electronics, Inc. and Zeus Electronics (collectively, "Arrow") worldwide. Unique replaced Wyle Electronics Marketing Group ("Wyle") as a distributor in the second half of 1998. Unique and Wyle are both part of the worldwide Veba Electronics Group. The following table sets forth, for each of the last three years, the percentage of revenues derived from all customers accounting for 10% or more of net revenues in any of such years:
1999 1998 1997 ---- ---- ---- Wyle/Unique ........ 13% 14% 17% Arrow .............. 16% 14% 17% Pioneer ............ 12% 9% 12%
The Company does not recognize revenue on product shipped to a distributor until the distributor resells the product to its customer. 15. Patent Infringement Periodically, the Company is made aware that technology used by the Company may infringe intellectual property rights held by others. During 1999, the Company continued to hold discussions with several third parties regarding potential patent infringement issues, including two semiconductor manufacturers with significantly greater financial and intellectual property resources than the Company. As it has in the past, the Company may obtain licenses under patents that it is alleged to infringe. The Company has made adequate provision for the estimated settlement costs of claims for alleged infringement prior to the balance sheet date. While management believes that a reasonable resolution will occur, there can be no assurance that these claims will be resolved or that the resolution of these claims will not have a materially adverse effect on future results of operations or require changes in the Company's products or processes. In addition, management's evaluation of the likely impact of these pending disputes could change in the future based upon new information learned by management. Subject to the foregoing, management does not believe any pending disputes, including those described above, would be likely to have a materially adverse effect on the Company's financial condition, results of operations, or liquidity for the year ended December 31, 1999. On March 29, 2000, Unisys Corporation ("Unisys") brought suit in the United States District Court for the Northern District of California, San Jose Division, against the Company seeking monetary damages and injunctive relief based on Actel's alleged infringement of four patents held by Unisys. The Company believes that it has meritorious defenses to the claims asserted by Unisys and intends to defend itself vigorously in this matter. After consideration of the information currently known, the Company does not believe that the ultimate outcome of this case will have a materially adverse effect on Actel's business, financial condition, or results of operations, although no assurance to that effect can be given. The foregoing is a forward-looking statement subject to all of the risks and uncertainties of a legal proceeding, including the discovery of new information and unpredictability as to the ultimate outcome. 16. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Years Ended December 31, --------------------------- 1999 1998 1997 ------- ------- ------- (in thousands, except per share amounts) Basic: Weighted-average common shares outstanding .............................. 21,664 21,251 20,370 ------- ------- ------- Shares used in computing net income per share ........................... 21,664 21,251 20,370 ======= ======= ======= Net income .............................................................. $17,638 $14,987 $16,768 ======= ======= ======= Net income per share .................................................... $ 0.81 $ 0.71 $ 0.82 ======= ======= ======= Diluted: Weighted-average common shares outstanding .............................. 21,664 21,251 20,370 Net effect of dilutive stock options, warrants, and convertible preferred stock - based on the treasury stock method ........................... 1,394 670 1,598 ------- ------- ------- Shares used in computing net income per share ........................... 23,058 21,921 21,968 ======= ======= ======= Net income .............................................................. $17,638 $14,987 $16,768 ======= ======= ======= Net income per share .................................................... $ 0.76 $ 0.68 $ 0.76 ======= ======= =======
Options outstanding under the Company's stock option plans to purchase approximately 218,000, 1,096,000, and 623,000 shares of Actel common stock were not included in the calculation to derive diluted income per share for the years 1999, 1998, and 1997, respectively, as their inclusion would have had an anti-dilutive effect. 17. Subsequent Events (unaudited) As of March 15, 2000, the Company's investment in Chartered Semiconductor had a market value of $52,435,000, reflecting an additional unrealized gain of $14,816,000 subsequent to December 31, 1999. REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS ACTEL CORPORATION We have audited the accompanying consolidated balance sheets of Actel Corporation as of December 31, 1999 and 1998, and the related consolidated statements of income, cash flows, and shareholders' equity for each of the three years in the period ended December 31, 1999. 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 in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Actel Corporation at December 31, 1999 and 1998 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP San Jose, California January 21, 2000, except for the second paragraph of Note 15,as to which the date is March 31, 2000 STOCK LISTING Actel's common stock has been traded on the Nasdaq Stock Market under the symbol "ACTL" since the Company's initial public offering (IPO) on August 2, 1993. The Company has never paid cash dividends on its common stock and has no present plans to do so. On March 20, 2000, there were 249 shareholders of record. Since many shareholders have their shares held of record in the names of their brokerage firm, the actual number of shareholders is estimated by the Company to be about 9,000. During the last two years, the quarterly high and low sales prices for the common stock were: 1999 High Low - ------------------------------------- ----------------- ----------------- First Quarter 22 5/8 12 1/2 Second Quarter 20 5/16 11 - Third Quarter 20 - 13 - Fourth Quarter 24 1/2 16 - 1998 High Low - ------------------------------------- ----------------- ----------------- First Quarter 16 3/8 10 5/16 Second Quarter 16 5/8 10 1/4 Third Quarter 13 1/2 8 5/8 Fourth Quarter 21 1/2 7 1/4 EX-21 4 SUBSIDIARIES EXHIBIT 21 ACTEL CORPORATION -------------------------------------- Subsidiaries Actel Europe, Ltd., a U.K. corporation Actel Europe SARL, a French corporation Actel GmbH, a German corporation Actel Pan-Asia Corporation, a Nevada corporation Actel Pan-Asia, Hong Kong Ltd., a Hong Kong corporation Actel Japan, KK, a Japanese corporation EX-23 5 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Actel Corporation of our report dated January 21, 2000, except for the second paragraph of Note 15, as to which the date is March 31, 2000, included in the 1999 Annual Report to Shareholders of Actel Corporation. Our audits also included the financial statement schedule of Actel Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-74492, Form S-8 No. 333-3398, and Form S-8 No. 333-71627) of our report dated January 21, 2000, except for the second paragraph of Note 15, as to which the date is March 31, 2000, with respect to the consolidated financial statements of Actel Corporation incorporated by reference in its Annual Report (Form 10-K) for the year ended December 31, 1999, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Actel Corporation. /s/ Ernst & Young LLP San Jose, California March 31, 2000 EX-24 6 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints John C. East, Henry L. Perret, and David L. Van De Hey, and each of them acting individually, as his attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual 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 each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual 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 Title Date - ----------------------------------------- -------------------------------------------------- -------------- /s/ John C. East President and Chief Executive Officer (Principal March 31, 2000 - ----------------------------------------- Executive Officer) and Director (John C. East) /s/ Henry L. Perret Vice President of Finance and Chief Financial March 31, 2000 - ----------------------------------------- Officer (Principal Financial and Accounting (Henry L. Perret) Officer) /s/ Jos C. Henkens Director March 31, 2000 - ----------------------------------------- (Jos C. Henkens) /s/ Jacob S. Jacobsson Director March 31, 2000 - ----------------------------------------- (Jacob S. Jacobsson) /s/ Frederic N. Schwettmann Director March 31, 2000 - ----------------------------------------- (Frederic N. Schwettmann) /s/ Robert G. Spencer Director March 31, 2000 - ----------------------------------------- (Robert G. Spencer)
EX-27 7 FDS
5 1,000 YEAR Jan-02-2000 Jan-04-1999 Jan-02-2000 4,947 102,201 24,690 1,937 25,324 177,884 51,318 38,754 259,211 69,066 0 0 0 22 178,608 259,211 171,661 171,661 66,387 66,387 83,223 0 (3,642) 25,693 8,055 17,638 0 0 0 17,638 0.81 0.76
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