-----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, A/oZ0dNTSh46tzgaDfK/LgCJzjawMJNh2uxnmECJlZx8pEaGARE8dO+tdUga9oxp YLVINXtgs07UboDxKYhkGA== 0000907687-98-000026.txt : 19980401 0000907687-98-000026.hdr.sgml : 19980401 ACCESSION NUMBER: 0000907687-98-000026 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971228 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACTEL CORP CENTRAL INDEX KEY: 0000907687 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 770097724 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21970 FILM NUMBER: 98580085 BUSINESS ADDRESS: STREET 1: 955 EAST ARQUES AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087391010 MAIL ADDRESS: STREET 2: 955 EAST ARQUES AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-K 1 ANNUAL REPORT ON FORM 10-K FOR 1997 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 December 28, 1997 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. X 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 27, 1998, as reported by the National Market System of the National Association of Securities Dealers Automated Quotation System, was approximately $203,525,747. 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 27, 1998: 21,246,215. -------------------------------------- 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 December 28, 1997 (Parts II and IV), and (ii) portions of Registrant's proxy statement for its annual meeting of shareholders to be held on May 22, 1998 (Part III). PART I ITEM 1. BUSINESS Overview Actel designs, develops, and markets field programmable gate arrays ("FPGAs") and associated development system software and programming hardware. FPGAs are used by designers of communications, computer, industrial, military/aerospace, and other electronic systems to differentiate their products and get them to market faster. The Company is the leading supplier of FPGAs based on antifuse switching elements, which are smaller than alternative switching elements (such as static random access memories ("SRAMs") or erasable programmable read only memories ("EPROMs")), permitting reduced circuit size and cost and increased design efficiencies. Actel shipped its first products in 1988 and thousands of its development systems are in the hands of customers, including Allen Bradley/Rockwell, AST Computer, Alcatel, Bay Networks, Cabletron, DSC Communications, Hughes Aircraft, Lockheed-Martin, Lucent Technologies, and Siemens. The Company has foundry relationships with Chartered Semiconductor Manufacturing Pte Ltd ("Chartered Semiconductor") in Singapore, Lockheed-Martin Federal Systems Company ("Lockheed-Martin FSC") in the United States, Matsushita Electronics Company and Matsushita Electrical Industry Company Ltd. (collectively, "Matsushita") in Japan, and Winbond Electronics Corp. ("Winbond") in Taiwan, permitting Actel to focus its resources on its core strengths of designing, developing, and marketing FPGAs. The Company's FPGAs currently are based on two proprietary technologies: the Actel antifuse and a circuit architecture that takes advantage of the Company's antifuse. The principal advantages of the antifuse over alternative switching elements are smaller size and lower electrical resistance. The smaller size of the antifuse generally permits Actel to make programmable circuits that are smaller, and hence less costly, than circuits of comparable performance and capacity made under comparable design rules using alternative switch technologies. Similarly, for circuits of comparable size and capacity manufactured under comparable design rules, the antifuse facilitates the design of circuits with a greater number of switches, which, in combination with the lower electrical resistance of the antifuse, tends to enhance flexibility and/or performance. In addition, the Company believes that its antifuse-based architecture is better suited for the high-level logic synthesis tools that are increasingly employed to design higher capacity devices than existing architectures using other types of switching elements. Actel believes that the demand for higher capacity devices will increase faster than that for programmable devices as a whole. Accordingly, the Company is focusing its attention on the transition to higher capacity devices and the associated high-level design methodologies. Actel's strategy is to provide the best FPGA solutions by giving logic designers the capability and confidence to successfully move up to higher level designs. The Company is implementing this strategy by enhancing the functionality, usability, and accessibility of high-level design tools for its antifuse-based architecture; by increasing its support for high-level design methodologies; and by developing a new, SRAM-based architecture that Actel believes will be better suited for use with high-level design tools than existing non-antifuse architectures. The Company's product line currently consists of seven families of FPGAs, Designer Series Development System and CoreHDL software, Silicon Explorer debugging and diagnostic tools, and Activator device programmers. 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 typically use popular third-party software for circuit design and then translate the design into a programmed FPGA using Actel's proprietary, highly automated software (Designer Series Development System) and device programmers (Activator). CoreHDL blocks or "cores" that can be used to reduce development time by being "dropped into" designs, and Silicon Explorer can be used to reduce design-verification time by enabling the user to monitor the functionality of a programmed FPGA in "real time." During 1997, Actel introduced a number of new silicon products. In January 1997, the Company announced the immediate availability of the world's highest capacity antifuse-based FPGA, the 30,000-gate A32300DX. In April 1997, Actel expanded its 3.3-volt product line to include additional members of its 1200XL and 3200DX FPGA families. Most significantly, in October 1997, the Company introduced its new MX family of antifuse FPGAs, which is expected to feature six devices ranging from 2,000 to 36,000 logic gates. At introduction, the MX family was believed to be the world's fastest FPGA family. The MX family is being marketed as a single-chip alternative to ASICs and offered at pricing levels that are intended to be attractive to high-volume users of FPGAs. In April 1997, the Company introduced its Silicon Explorer desktop debugging and diagnostic tool. Silicon Explorer permits designers to monitor and hence debug the internal operation of an Actel FPGA while running within a real system at system speeds, a capability that is unique to Actel. During the course of 1997, the Company's Designer Series software products were significantly enhanced in terms of both functionality and support for the various new silicon products. In addition, notable improvements were made in the packaging of the software to enhance both its usability and accessibility. For example, the requirement for a licensing security block in order to run the software was removed in June 1997. More significantly, certain software packages were offered free of charge and made available for downloading from Actel's web site. Actel markets its products through a worldwide, multi-tiered sales and distribution network. The North American network includes six sales management offices, seven technical sales offices, 21 manufacturers' representative firms, and three major industrial distributors. The European network includes sales management offices in England, France, Italy, and Germany, as well as two Pan-European distributors and five regional distributors. In Japan, the Company has a sales management and technical office and markets its products through three distributors. In Korea, the Company has a sales management and technical office and markets its products through one distributor. Six additional distributors serve the remaining international markets in which Actel offers its products. The Company was incorporated in California in 1985. Actel'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. "Actel" and the Actel logo are registered trademarks of the Company. This Annual Report on Form 10-K also includes unregistered trademarks of the Company and trademarks of companies other than Actel. Industry Background The three principal types of integrated circuits used in most digital electronic systems are microprocessor, memory, and logic circuits. Microprocessors are used for control and computing tasks; memory devices are used to store program instructions and data; and logic devices are used to adapt these processing and storage capabilities to a specific application. Logic circuits are found in virtually every electronic system. The logic design of competing electronic systems is often a principal area of differentiation. Unlike the microprocessor and memory markets, which are dominated by a relatively few standard designs, the logic market is highly fragmented and includes, among many other segments, low-density standard transistor-transistor logic circuits ("TTLs") and custom-designed ASICs. TTLs are standard logic circuits that can be purchased "off the shelf" and interconnected on a printed circuit board, but they tend to limit system performance and increase system size and cost compared with logic functions integrated at the circuit (rather than the board) level. ASICs are customized circuits that offer electronic system manufacturers the benefits of higher levels of circuit integration: improved system performance, reduced system size, and lower system cost. ASICs include conventional gate arrays and programmable logic circuits. Conventional gate arrays are customized to perform desired logical functions at the time the device is manufactured. Since they are "hard wired" at the wafer foundry, conventional gate arrays are subject to the time and expense risks associated with any development cycle involving a foundry. Typically, conventional gate arrays are first delivered in production volumes months after the successful production of acceptable prototypes. In addition, conventional gate arrays cannot be modified after they are manufactured, which subjects them to the risk of inventory obsolescence and constrains the system manufacturer's ability to change the logic design. Programmable logic circuits, on the other hand, are manufactured as standard devices and customized "in the field" by electronic system manufacturers using computer-aided engineering ("CAE") design and programming systems. Programmable logic circuits are being used by a growing number of electronic system manufacturers as a solution to their increasing demands for differentiation, rapid time to market, and manufacturing flexibility. While conventional gate array designs are generally more complex than programmable logic circuit designs, the average capacity (or "gates" per circuit) of both conventional gate arrays and programmable logic circuits has increased over time. This indicates that long-term growth in sales within each market segment has increased faster for circuits with higher capacities. Programmable logic circuits include programmable logic devices ("PLDs") and FPGAs. The market for complex PLDs ("CPLDs") and FPGAs has grown rapidly because they generally offer greater capacity, lower total cost per usable logic gate, and lower power consumption than TTLs and simple PLDs, and faster time to market and lower development costs than conventional gate arrays. For many electronic system manufacturers, the time-to-market and manufacturing-flexibility benefits of CPLDs and FPGAs outweigh their price premium over conventional gate arrays of comparable capacity. This is particularly true with respect to communications applications. Electronic system manufacturers customize programmable logic circuits to perform the desired logical functions by using CAE systems to define a device's function and then a device programmer to change the state of the device's programming elements (such as antifuses or memory cells) through the application of an electrical signal. Most CPLDs currently are programmed with EPROM or other "floating gate" technologies. Many FPGAs currently are programmed with SRAM technology. FPGAs based on antifuse programming elements are one-time programmable, meaning they will retain their circuit configurations permanently, even in the absence of electrical power. FPGAs and CPLDs based on EPROM- or SRAM-controlled programming elements are reprogrammable. The principal limitation on the wider use of CPLDs and FPGAs has been the difficulty in developing devices with price and performance factors approaching those of conventional gate arrays. Programming elements based on existing reprogrammable architectures occupy relatively large amounts of area within a circuit, which tends to increase the overall size and, in turn, the cost of each circuit. In addition, the size of programming elements based on existing reprogrammable architectures tends to limit the number of interconnect points in a circuit, which, in combination with the relatively high electrical resistance of such programming elements, tends to limit to limit design flexibility and/or circuit performance. Before an FPGA can be programmed there are various steps that must be accomplished by a designer using CAE design software. These steps include defining the function of the FPGA, verifying the design, and laying out the circuit. Traditionally, logic functions have been defined using schematic capture tools, which essentially permit the designer to construct a circuit diagram on the computer. As FPGA designers have begun to design higher capacity circuits, the time required to create schematic diagrams using schematic capture tools has become prohibitive. To address this problem, designers are increasingly turning to hardware description languages ("HDLs"), also known as high-level description ("HLD"). VHDL and Verilog are the most common HDLs, which permit the designer to describe the circuit functions at an abstract level and to verify the performance of logic functions at that level. The HDL can then be fed into logic synthesis software that automatically converts the abstract or high-level description to a gate-level representation equivalent to that produced by schematic capture tools. After a gate-level representation of the logic function has been created and verified, it must be translated or "laid out" onto the generic logic modules of the FPGA. This is achieved by placing the logic gates and routing their interconnections, a process referred to as "place and route." As designers have begun to design higher capacity circuits, the need for automatic (instead of manual) place and route capability has become increasingly important. This transition to the use of HDLs presents a challenge to the designer to learn new design methods and to use new design tools. In addition, not all programmable logic circuit architectures are equally well suited for use with logic synthesis and place and route tools. Actel Strategy Actel believes that the demand for higher capacity devices will increase faster than that for programmable devices as a whole. Accordingly, the Company is focusing its attention on the transition to higher capacity devices and the associated high-level design methodologies. Actel's strategy is to provide the best FPGA solutions by giving logic designers the capability and confidence to successfully move up to higher level designs. The Company is implementing this strategy by enhancing the functionality, usability, and accessibility of high-level design tools for its antifuse-based architecture; by increasing its support for high-level design methodologies; and by developing a new, SRAM-based architecture that Actel believes will be better suited for use with high-level design tools than existing reprogrammable architectures. Technology Actel's FPGAs currently are based on two proprietary technologies: the Actel antifuse and a circuit architecture that takes advantage of the Company's antifuse. The antifuse is a two-terminal switch that is open before being programmed. In contrast to a conventional fuse, the application of sufficient voltage to an antifuse causes the switch to close permanently, allowing current to pass. Actel is the leading supplier of FPGAs based on antifuses. Antifuse Actel believes that it was first to achieve volume production of antifuse-based FPGAs. The patented antifuse structure used by Actel in its current product families consists of a "sandwich" of silicon oxide, silicon nitride, and silicon oxide ("ONO"). This structure is similar to that of ONO capacitors employed in the volume manufacture of many dynamic random access memory (DRAM) circuits. Actel has continued to develop antifuse technology and plans to introduce a family of FPGAs during 1998 based on a new "metal-to-metal" fuse structure that further enhances the benefits of the antifuse, which the Company believes include the following: Small Size Antifuses are smaller than alternative switching elements (such as those utilizing SRAM and EPROM elements), so antifuse-based circuits tend to be smaller, and hence less costly, than circuits of comparable performance and capacity manufactured under comparable design rules with alternative switching elements. Similarly, for circuits of comparable size and capacity manufactured under comparable design rules, the antifuse facilitates the design of circuits with a greater number of switches, which tends to enhance flexibility and/or performance. Low Resistance Antifuses typically exhibit lower electrical resistance than alternative switching elements. Lower electrical resistance also tends to enhance circuit performance. High Reliability The Company has performed extensive reliability testing on its antifuses over many years with excellent results. The negligible rate of individual antifuse failure permits antifuses to be used in substantial numbers without degrading overall circuit reliability, which in turn permits the small size and low resistance attributes of the antifuse to be fully exploited. Nonvolatility After an antifuse-based FPGA is programmed, it retains its circuit configuration permanently, even in the absence of electrical power. This is not true of SRAM-based FPGAs. Although the reprogrammability of SRAM and EPROM switches is desirable in some applications, nonvolatility is necessary in certain military, aerospace, and communications applications. Circuit Architecture The Company believes that the principal advantages of its proprietary circuit architecture include the following: Synthesisizability All of Actel's FPGAs are "synthesis friendly" by virtue of their use of many, relatively simple logic building blocks (referred to as "fine granularity") made possible by the antifuse. The Company believes that this characteristic will become increasingly important to designers as circuit capacity increases. Few Programming Elements in Interconnect Path Actel's circuit architecture usually provides for the minimum number of antifuses in an interconnect path (two), and never permits more than four antifuses in any interconnect path. In general, the fewer the number of switches in an interconnect path, the faster the connection. Many competing FPGAs include interconnect paths with considerably more than four programming elements, which increase resistance and therefore impede circuit performance. Routability The plentiful number of antifuses and the patented segmented routing tracks of different lengths in Actel's products provide numerous routing alternatives, which generally facilitates efficient results with automatic place and route software even when a high percentage of the FPGA's potential gate capacity is used. Actel believes that these features make its circuits easier to design with than most competing FPGAs. Flexibility and Utilization A key competitive factor in the programmable logic market is utilization, or the extent to which a particular design can use the potential number of logic resources within a particular chip. A measure of logic resources frequently used in the programmable logic industry is ASIC-gate equivalents. Since this gate counting measure is interpreted differently by the various suppliers and end-users of programmable logic, however, it is not a reliable measure. A more accurate assessment of utilization is the number of logic modules within the chip that are actually accessible to the customer's real design. In the case of existing SRAM-based FPGAs and EPROM-based CPLDs, logic module utilization can vary substantially from design to design, so that a "400 logic module" chip may in practice yield only a fraction of that number as true usable logic resources. By contrast, Actel's circuit architecture permits its products to have a more predictable capacity over a broad range of applications. This enables Actel's customers to select with a relatively high degree of confidence the product that is most economical for a desired application. It is not uncommon for a design implemented within an Actel chip to use 100% of the potentially available logic modules and still be fully and automatically placed and routed. Users of existing SRAM-based FPGAs, on the other hand, often restrict their designs to 60% or less of the claimed logic resources in order to give their "automatic" place and route tools an improved chance of successful completion. Products Actel's product line currently consists of seven families of FPGAs, Designer Series Development System and Core HDL software, Silicon Explorer debugging and diagnostic tools, and Activator device programmers. In 1997, the first members of the MX family of FPGAs were shipped for revenue and the Company adopted a number of new software strategies intended to broaden market acceptance of high-level design methodologies by mainstream FPGA designers. FPGAs Currently, all seven of the Company's FPGA families are in production. To meet the diverse customer requirements in the broad high-capacity programmable logic market, each member of a family (except RadHard) 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 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. The A1020 is capable of integrating the equivalent of 60 TTLs into a single package. This family of circuits was introduced at 2.0 micron and currently is manufactured under 1.0 and 0.9 micron design rules. The Company offers 3.3-volt versions of its ACT 1 products. ACT 2 The ACT 2 family 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. The A1280 is capable of integrating the equivalent of 240 TTLs into a single package. This family of circuits was introduced at 1.2 micron and currently is manufactured under 1.0 micron design rules. ACT 3 The ACT 3 family 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 more than 70 speed, packaging, screening, and tolerance variations. The Company offers 3.3-volt and PCI-compliant versions of its ACT 3 products. The ACT 3 family was introduced at 0.8 micron and currently is manufactured under 0.6 micron design rules. 1200XL The 1200XL family, which was first shipped for revenue in 1995, consists of three members ranging from 2,500 to 8,000 gates that can be ordered in more than 50 speed, packaging, screening, and tolerance variations. 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. In 1997, Actel began offering all three members of its 1200XL family in 84-pin Plastic Leaded Chip Carriers ("PL84"). Designers using the new packages will be able to migrate to higher density devices without changing packages. In 1997, the Company also expanded its 3.3-volt offering to include all members of the 1200XL family. 3200DX The 3200DX family consists of 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 A32100 and the 30,000-gate A32300, 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. In 1997, Actel began offering A3265DX, A32100DX, and A32140DX in PL84 packages, which will enable designers to migrate easily from smaller PL84 devices. In 1997, the Company also expanded its 3.3-volt offering to include all members of the 3200DX family. The 3200DX family is based on 0.6 micron design rules. MX In 1997, the Company shipped for revenue the first two devices in its new MX family of FPGAs: the 4,000-gate A40MX04 and the 16,000-gate A42MX16. The third member of the family, the 9,000-gate A40MX09, was announced as immediately available during first week of 1998. The MX family includes the best features from Actel's earlier ACT 1, ACT2, 1200XL, and 3200DX families and is based on 0.45 micron design rules, which will permit the MX family to work in pure 5-volt, pure 3.3-volt, and mixed 5- and 3.3-volt systems. It is anticipated that the larger MX devices will be PCI compliant. At the time of introduction, the MX devices were believed to be the world's fastest FPGAs. Like ASICs and all previous Actel FPGAs, MX devices are nonvolatile and do not require any external configuration devices or circuitry. The MX family was introduced with volume production pricing that the Company believes, in combination with its performance and functionality, should make it attractive as a single-chip ASIC alternative. Over time, the MX family should replace all of Actel's earlier FPGA families in new commercial designs. RH The RadHard family currently consists of the 8,000-gate RH1280, which was first shipped for revenue in 1996, and the 2,000-gate RH1020, which was first shipped in 1997. Actel and Lockheed-Martin FSC are jointly developing the RadHard family to meet the demands of applications requiring guaranteed levels of performance and radiation immunity, including the growing commercial satellite market. The RadHard family is based on a high-reliability, radiation-hardened 0.8 micron process. Software A key element of the Company's strategy is to support users' electronic design automation ("EDA") tools of choice by establishing and maintaining relationships with leading synthesis software vendors for the purpose of permitting such tools to be used as a "front end" to Actel's proprietary Designer Series Development System. Rather than developing this capability alone, the Company has established the Actel Industry Alliance, which Actel uses to establish relationships with EDA vendors for the purpose of developing interfaces between such vendors' EDA tools and Actel's proprietary software. Under the Alliance program, Actel provides members with, among other things, access to its 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 Cadence Design Systems, Exemplar Logic, Mentor Graphics, Synopsys, Synplicity, and Viewlogic. Designer Series Development System In 1997, the Company introduced two significant updates to its Designer Series software. The first of these releases, known as Designer Series 3.1.1, provided support for many of the new silicon products, including various new 3200DX family members and the RH1280. Designer Series 3.1.1 runs on both PC and UNIX platforms. On PCs, Designer Series 3.1.1 runs on Windows 3.1, Windows for Workgroups, Windows NT 4.01, and Windows 95 operating systems. On UNIX platforms, Designer Series 3.1.1 runs on Sun SparcStation workstations running SunOS or Solaris operating systems and Hewlett Packard HP 9000 workstations running HP-UX operating systems. In July 1997, Actel announced a new approach to its Designer Series software products, offering a series of integrated, high-level design FPGA development tools suites and cutting prices in all packages. The Company believes the aggressive pricing strategy will prove attractive to schematic designers moving up to high level design methodologies as well as to experienced synthesis designers. In total, the new Designer Series product line consists of eight separate packages. The new suites integrate high-level design tools from Viewlogic, including ViewSynthesis FPGA Synthesis, SpeedWave VHDL Simulator, and WorkView Office, and Synopsys with Actel Designer Series 3.1.1. The product line also includes Designer Lite, the first no-cost FPGA development software downloadable from the worldwide web. Designer Lite is a complete package of design tools for the PC with device libraries initially up to 8,000 gates. In October 1997, an enhanced version of Designer Series 3.1.1 was released to support the initial members of the new MX family of FPGAs. The first family member was rated as a 16,000-gate device and Designer Lite was extended to include this and the smaller devices in the MX family. Between July 1997 and the end of the year, more than 10,000 copies of Designer Lite were downloaded, thereby greatly expanding the number of potential designers for Actel's silicon products. CoreHDL Intellectual Property As integrated circuits move to ever higher levels of capacity and integration, the use of intellectual property ("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. Actel's CoreHDL IP portfolio includes CorePCI, telecommunications cores, and industrial cores. In 1997, the Company enhanced its CorePCI models, which are Peripheral Component Interface (PCI) compliant blocks or "cores" that can be used to save development time by being "dropped into" designs for ACT 3 PCI devices. Actel offers CorePCI models, which were developed internally, in both VHDL and Verilog-HDL. The remaining cores were developed by Inicore AG, a Swiss IP provider. The telecommunications cores include an ISDN G704-EI Framer, an Asynchronous Transfer Mode (ATM) UTOPIA receiver interface, and an ATM UTOPIA transmitter interface. The cores targeted to industrial control applications include a Universal Asynchronous Receiver/Transmitter (UART), a Controller Area Network (CAN) Interface, and a Serial Control Bus Interface. The Company has terminated its agreement with Inicore and currently does not have a contractual right of access to cores developed by any third party. Silicon Explorer In April 1997, Actel introduced a powerful debugging and diagnostic tool known as the Silicon Explorer. This tool can significantly reduce the FPGA design verification time by enabling the user to monitor the internal operation of a programmed FPGA as it performs its functions at speed within a real system. The Silicon Explorer tool suite includes ProbePilot, a high-speed signal acquisition hardware interface between the Actel FPGA, the board on which the FPGA resides, and the designer's desktop computer; Explore, an easy-to-use point-and-click software tool that is integrated with the Company's Designer Series development software; and Analyze, a PC-hosted logic analyzer that graphically displays the waveforms accessed through ProbePilot. The ProbePilot signal acquisition control takes advantage of the Company's ActionProbe circuitry, a patented architectural feature included in all Actel devices that provides 100% observability of internal nodes from selected external pins. ProbePilot supports 18 separate probing channels and features high-speed 100 MHz asynchronous or 66 MHz synchronous sampling rates. ProbePilot connects directly to any desktop or laptop computer or workstation through the series port and operates off the test board's 5.0 volt or 3.3 volt power supply. The Explore windows-based software drives the entire diagnostic and debug process and resides on the designer's PC or workstation as part of Actel's Designer Series FPGA development tools. The Analyze software tool essentially turns the designer's PC or workstation into a full-featured 18 channel logic analyzer, eliminating the need for a costly stand-alone logic analyzer. Activator The Company's Activator device programmers are used to program Actel's FPGAs. The Activator accepts data from Designer Series Development System software, converts the data to the proper protocol, and applies the appropriate electrical signals to the device so as to imprint the user's circuit design on the device permanently. There are currently two Activator device programmers, Activator 2 and Activator 2S, both of which execute all programming, verification, and debugging functions. Customized programming adapters for each device type permit different packages to be programmed by switching adapters. Activator 2 programs up to four FPGAs at a time; Activator 2S programs one FPGA at a time. Actel also supports programmers that are manufactured by third parties, including Data I/O and BP Microsystems Inc. Market and Applications FPGAs can be used in a broad range of applications across nearly all electronic system market segments. Most customers use the Company's FPGAs in low- to medium-volumes in the final production form of their products. Some high-volume electronic system manufacturers use Actel's FPGAs as a prototyping vehicle and convert production to lower-cost conventional gate arrays, while others with time-to-market constraints use the Company's FPGAs in the initial production and then convert to conventional gate arrays. As product life cycles continue to shorten and manufacturing efficiencies increase in FPGAs, some high-volume electronic system manufacturers are electing to retain FPGAs in volume production because conversion to conventional gate arrays may not yield sufficiently attractive savings before the electronic system reaches the end of its life. With the introduction of the MX family, Actel believes that its FPGAs will increasingly be used in high-volume production. Communications The high capacity, high performance, and low power consumption of FPGAs make them well suited for use in communications equipment. Increasingly complex equipment must frequently be designed to fit in the space occupied by previous product generations. The rapidly changing communications environment rewards short development times and early market entry. Representative Actel customers in the communications market include: 3Com, ADC Kentrox, Advanced Fibre Communications, Alcatel, Ascend Communications, Bay Networks, Cabletron, Cascade, Cisco Systems, Chipcom, DSC Communications, Hughes Network Systems, Lucent Technologies, Motorola, and Nortel. Computer Systems and Peripherals The computer systems markets are intensely competitive, placing a premium on early market entry for new products. FPGAs decrease the time to market and facilitate early completion of production models so that development of hardware and software can occur in parallel. Representative Actel customers in the computer market include: AST Computer, Hewlett-Packard, IBM, Olivetti, Sky Computer, and Tandem Computer. Industrial Control Equipment Industrial control and instrumentation applications often require complex electronic functions tailored to specific needs. FPGAs offer programmability and high capacity, making them attractive to this segment of the electronic equipment market. Representative Actel customers in the industrial market include: Allen Bradley/Rockwell, Eastman Kodak, General Electric, Hewlett-Packard, Marquette, and Siemens. 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 FPGAs have high quality, reliability, and capacity, and are virtually impossible to reverse engineer, making them suitable for many military and aerospace applications. Actel's FPGAs are especially well suited for space applications, due to the high radiation tolerance of the Company's antifuse, and for many aircraft and missile flight applications, due to the high density and performance of Actel's FPGAs. Representative Actel customers in the military market include: Alliant Technology, Boeing, E-Systems, Harris, Honeywell, Hughes Aircraft, Jet Propulsion Labs (JPL), Lockheed-Martin, Loral, National Aeronautics Space Administration (NASA), Northrup, Olin Corporation, Raytheon, SCI Systems, Texas Instruments Incorporated ("TI"), 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. Actel's domestic sales force currently consists of 77 sales and administrative personnel and field application engineers ("FAEs") operating from 15 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 21 manufacturers' representative firms that operate from approximately 43 office locations. The manufacturers' representatives concentrate on selling to major industrial companies in North America. To service smaller, geographically dispersed accounts in North America, Actel has distributor agreements with Pioneer-Standard Electronics, Inc. ("Pioneer"), Arrow Electronics, Inc. and Zeus Electronics (collectively, "Arrow"), and Wyle Electronics ("Wyle"). Arrow has approximately 50 branch offices in North America; Pioneer and Wyle have a total of approximately 60 branch locations in North America. The Company generates a significant portion of its revenues from international sales. Sales to customers outside the United States for 1997, 1996, and 1995 accounted for 31%, 33%, and 38% of net revenues, respectively. Of these export sales, the largest portion was derived from European customers. Export sales have declined as a percentage of net revenues principally because the Company's radiation-hardened (RH) product family, which was introduced in 1996, is sold almost exclusively to customers within the United States. Actel's European sales organization currently consists of 23 distributors (including Arrow and Memec, which have 16 subsidiary companies in Europe) having approximately 45 branch offices. The activities of these distributors are supervised from sales management offices in Basingstoke (England), Paris (France), Milano (Italy), and Munich (Germany), where a total of 17 people are employed. Matsushita, which is a foundry and strategic partner of the Company, markets Actel's products in Japan under the Company's brand name. The Company has two additional distributors in Japan: Innotech Corporation and Teksel Ltd. Actel also has distributors in Australia, China, Egypt, Hong Kong, India, Korea, Malaysia, Singapore, South Africa, and Taiwan. In 1997, the Company appointed I&C Microsystems, Co., Ltd. as its new distribution partner for Korea. The activities of these distributors are supervised from sales management offices in Japan and Korea. Actel officially opened its Korean office in 1997, and currently plans to open an office in Hong Kong in 1998. After the Company's sales representatives and distributors evaluate a customer's logic design requirements and determine if there is an application suitable for Actel's FPGAs, the next step typically is a visit to the qualified customer by a regional sales manager or the FAE from the Company or its distributor. The sales manager or FAE may then determine that additional analysis is required by engineers based at Actel's headquarters. The Company's sales cycle for the initial sale of a design system is generally lengthy and requires the continued participation of salespersons, FAEs, engineers, and management. In 1997, more than half of Actel's sales in the United States and virtually all of the Company's sales outside the United States were made through distributors. As is common in the semiconductor industry, Actel 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. Actel maintains reserves against which these credits and returns are charged. Because of its price protection and return policies, the Company generally does not recognize revenue on products sold to distributors until the products are resold to end customers. Backlog At December 31, 1997, Actel's backlog was approximately $28.0 million, compared with approximately $27.0 million at December 31, 1996. 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. Actel produces 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, Actel'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 Actel 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. Actel'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 the United States, Japan, Korea and Europe. This network of experts is augmented by FAEs working for Actel'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. In addition, Actel offers technical seminars on its products and comprehensive training classes on its software. In 1997, Actel moved to better address the design concerns of its customers by establishing Actel Design Services, an international network of design centers. With offices now in Basingstoke, Boston, Chicago, and Sunnyvale, Actel has an enhanced capability to support the increasing technical needs of customers developing with synthesis tools. In November 1997, Actel further enhanced its worldwide technical support capabilities with the introduction of a web-based technical support database called "Guru." Actel users can access Guru from their familiar web browser through a series of "push button" forms and key words. The Guru system will return relevant information to the questioner in a matter of seconds. The Company generally warrants its products against defects in material and workmanship for one year. Actel also warrants that its automatic place and route software will achieve gate utilization at not less than the rates advertised. The Company has not experienced significant warranty returns to date. Manufacturing and Strategic Relationships Actel's current strategy is to utilize third-party manufacturers for its wafer requirements, which permits the Company to allocate its resources to product design, development, and marketing. Wafers used in Actel's FPGAs are manufactured by Chartered Semiconductor in Singapore, by Lockheed-Martin FSC in the United States, by Matsushita in Japan, and by Winbond in Taiwan. The Company historically purchased wafers from Matsushita and TI. Chartered Semiconductor, Lockheed-Martin FSC, and Winbond were added in 1994. During 1997, Actel phased out wafer purchases from TI in favor of its other suppliers. The active foundry relationships for Actel's production FPGAs are currently manufactured by Chartered Semiconductor using 0.6 0.45 micron design rules; by Lockheed-Martin FSC using 0.8 micron design rules; by Matsushita using 0.8, 0.9, and 1.0 micron design rules; and by Winbond using 0.6 and 0.8 micron design rules. Pre-production wafers have been received from Chartered Semiconductor for products designed using 0.35 micron design rules. 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. Actel assembles most of its plastic commercial products in Hong Kong and Korea. Ceramic package assembly, which is generally required for military applications, currently is performed at one or more subcontractor manufacturing facilities, some of which are in the United States. In 1997, the Company and Lockheed-Martin FSC entered into an Amended and Restated M2M Joint Development and Marketing Agreement. The Agreement calls for the parties to establish production capability at Lockheed-Martin FSC for space quality, radiation-hardened versions of Actel's first metal-to-metal antifuse FPGAs (see "Research and Development -- SX Family"). After the production capability is established, Lockheed-Martin FSC will manufacture, assemble, and test the radiation-hardened FPGAs, and the Company will market and sell them. In 1997, Actel announced the availability of two new sockets tooled specifically for the Company by Yamaichi Electronics of Japan, one of the leading suppliers of prototype and production sockets. 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 two new sockets increase the total number of Actel sockets offered by Yamaichi to nine. The complete line of sockets accommodates all Actel FPGAs in TQFP, PQFP, RQFP, and VQFP packages. Research and Development In 1997, 1996, and 1995, the Company spent $26.5 million, $23.9 million, and $20.6 million, respectively, on research and development, which represented approximately 17%, 16%, and 19% of net revenues, respectively, for such periods. Actel's research and development expenditures are currently divided among circuit design, software development, and process technology activities. In the areas of circuit design and process technology, the Company's research and development activities include continuing efforts to reduce the cost and improve the performance of current products, principally by reducing the design rules under which such products are manufactured, and to develop new families of FPGA products based on existing or emerging technologies. Actel's software research and development activities are dedicated to providing customers with access to a wide variety of CAE tools and HDL cores in a complete and automated desktop design environment on popular personal computer and workstation platforms, with the objective of giving logic designers the capability and confidence to successfully move up to higher level designs. The research and development projects that the Company publicly discussed in 1997 included the following: SX Family In the fourth calendar quarter of 1997, Actel won a number of significant design wins with pre-production silicon and software of its new SX family of FPGAs. It is currently anticipated that the SX family will be formally introduced in April 1998. The SX family will be significantly faster than the recently-launched MX family, which was believed to be the world's fastest FPGA family at its introduction. This high level of performance in the SX family is achieved through a combination of architectural features and a new, very low impedance "metal to metal" antifuse structure. This new antifuse is the culmination of more than six years of research and development activities to produce a reliable, manufacturable, high-performance metal to metal antifuse. ES Architecture and ES Reprogrammable Products In 1996, Actel announced its intention to enter the reprogrammable FPGA market. The Company's first reprogrammable FPGA offering will be an SRAM-based "ES" product family utilizing Actel's new ES reprogrammable architecture. The ES architecture combines a new, 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 it possible that future variants of the ES architecture will employ antifuse, flash, or other basic programming elements. The Company has experienced significant delays in matching the capabilities of its software and the resources of its silicon. Actel currently is making a set of changes to both the silicon and the software. While the result should be a product as good as or better than the one originally planned, the Company does not believe the product will be available until at least the second half of 1998. With the additional time required for ES development, the Company now anticipates that the initial production ES devices will use a 0.25 micron, five-layer metal process. Competition The FPGA market is highly competitive, and the Company expects that competition will continue to increase as the market grows. Actel's competitors include suppliers of TTLs and ASICs, including conventional gate arrays, PLDs, and FPGAs. Of these, the Company competes principally with suppliers of conventional gate arrays, CPLDs, and FPGAs. The primary advantages of conventional gate arrays are high capacity, high speed, and low production cost in high volume. Actel competes with conventional gate array 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 to achieve lower costs for volume production. For this reason, Actel faces competition from companies that specialize in converting CPLDs and FPGAs, including the Company's products, into conventional gate arrays. The Company also competes with suppliers of CPLDs. Suppliers of these devices include Altera Corporation ("Altera"), Advanced Micro Devices' Vantis subsidiary, and Lattice Semiconductor. The circuit architecture of CPLDs gives them a performance advantage in certain lower capacity applications, but Actel believes that its products are better suited for higher capacity designs. Altera, however, has a larger installed base 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 Actel will be able to overcome these competitive disadvantages. The Company competes most directly with established FPGA suppliers, such as Xilinx, Inc. ("Xilinx") and Lucent Technologies (which is a licensed second source of some Xilinx products). While Actel 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 the Company, has a larger installed base of development systems, and its SRAM-based products are reprogrammable. No assurance can be given that Actel 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. See "Legal." On March 31, 1995, the Company completed its acquisition of the antifuse FPGA business of TI, which was the only second-source supplier of the Company's products. Xilinx, which is a licensee of certain of the Company's patents, introduced antifuse-based FPGAs in 1995 and terminated 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 the first quarter of 1997. Actel expects significant additional competition from major domestic and international semiconductor suppliers, such as Motorola, which has declared that it is a participant in the FPGA market. 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 Actel'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. For example, there are other known techniques for manufacturing programmable switch elements that might offer certain advantages over Actel's antifuse technologies. The Company seeks to monitor developments in existing and emerging technologies. No assurance can be given that Actel will be able to compete successfully with suppliers offering products based on new or emerging technologies. Patents and Licenses As of December 31, 1997, the Company had 117 United States patents and applications pending for an additional 35 United States patents. Actel has ten European patent and has applications pending for an additional 42 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 when appropriate to protect its proprietary technologies. Actel 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 Actel will be adequate to protect its proprietary rights. In 1995, Actel and BTR, Inc. 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 is paying to BTR non-refundable advance royalties. Actel has also employed the principals of BTR to assist the Company in its development and implementation of the licensed technology. As is typical in the semiconductor industry, the Company has been notified of claims that it may be infringing patents owned by others. If it is necessary or appropriate, Actel may seek to obtain licenses under patents that it is alleged to infringe. Although the Company is unable to estimate with any degree of confidence the cost of such licenses, no assurance can be given that they would not, individually or in the aggregate, have a materially adverse effect on Actel's financial condition or results of operations. In addition, there can be no assurance that licenses will be available or that the terms of any offered license will be acceptable to the Company. Failure to obtain a license for technology used by Actel could result in litigation. In the event of an adverse result in any litigation, the Company may be required to pay substantial damages; discontinue the use of infringing processes; cease the manufacture, use, and sale of infringing products; and/or expend significant resources to develop non-infringing technology. All litigation, whether or not determined in favor of Actel, can result in significant expense and divert the efforts of technical and management personnel from the Company's operations. In addition, the Company has agreed to defend its customers from and against any claims that Actel products infringe the patent or other intellectual rights of any third party, and to indemnify its customers up to the dollar amount of their purchases of any Actel products found to infringe. Any successful third party claim against the Company or its customers for patent or other intellectual property infringement may have a materially adverse effect on Actel's business, financial condition, or results of operations. Employees At the end of 1997, the Company had 380 full-time employees, including 117 in marketing, sales, and customer support; 137 in research and development; 94 in operations; and 32 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 and prospective shareholders of Actel 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 Actel 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 the Company's business, financial condition, or results of operations. "Blank Check" Preferred Stock; Change in Control Arrangements Actel'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 the Preferred Stock could be used as a method of discouraging, delaying, or preventing a change in control of Actel. 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 Actel will not do so in the future. The Company has adopted an Employee Retention Plan that provides for payment of stock 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 Actel 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 unvested stock options in the event an executive officer's employment is actually or constructively terminated other than for cause following a change of control. Competition The semiconductor industry is intensely competitive and is characterized by rapid rates of technological change, product obsolescence, and price erosion. Actel's existing competitors include suppliers of conventional gate arrays, CPLDs, and FPGAs. The Company's two principle competitors are Xilinx, a supplier of FPGAs based on SRAM technology, and Altera, a supplier principally of CPLDs. In connection with the settlement of patent litigation in 1993, Actel granted Xilinx a license under certain of Actel's patents that permits Xilinx to manufacture and market antifuse-based products. Xilinx announced in 1996 that it had discontinued its antifuse-based FPGA product line. The Company also faces competition from companies that specialize in converting FPGAs, including Actel's products, into conventional gate arrays. In addition, the Company expects significant competition in the future from major domestic and international semiconductor suppliers, and Actel's patents may not bar competitors to which it has not granted a license from manufacturing other antifuse-based products. The Company may also face competition from suppliers of logic products based on new or emerging technologies. Given the intensity of the competition and the research and development being done, no assurance can be given that Actel's antifuse and architecture technology will remain competitive. The Company believes that important competitive factors in its market are price, performance, 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 Actel 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. 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 that have broader product lines and longer standing customer relationships may be in a stronger competitive position than Actel. Many of the Company's current and potential competitors offer broader product lines and have significantly greater financial, technical, manufacturing, and marketing resources than Actel. Dependence on Customized Manufacturing Process Actel's antifuse based FPGAs are manufactured using customized steps that are added to otherwise standard manufacturing processes of its independent wafer suppliers. There is considerably less operating history for the Company's 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. These risks are particularly pronounced with respect to wafers intended for use in military and aerospace applications. Any of the above factors could be a material disadvantage against the competing non-antifuse products of Actel's competitors, which 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 on competing products. As a consequence, Actel to date has not fully realized the price and performance 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. Actel 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 sometimes a year or more) the generation of volume FPGA sales, if any, by Actel. 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 Actel 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. Actel 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 Actel's business, financial condition, or results of operations. Dependence on Independent Software Developers Actel is dependent upon independent software developers for the development, maintenance, and support of certain elements of its Designer Series Development Systems software. The Company's reliance on independent software developers involves certain risks, including lack of control over development and delivery schedules and the availability of customer support. No assurance can be given that the Company's independent developers will be able to complete software currently under development, or provide updates, or customer support in a timely manner, which could delay future releases and disrupt Actel's ability to provide customer support services. Any significant delays in the availability of the Company's software would be detrimental to the capability of the Company's new families of products to win designs, which could have a materially adverse effect on Actel's business, financial condition, or results of operations. Dependence on Independent Wafer Manufacturers Actel does not manufacture any of the wafers used in the production of its FPGAs. Currently, such wafers are manufactured by Chartered Semiconductor in Singapore, Lockheed-Martin FSC in the United States, Matsushita in Japan, 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 potential lack of adequate capacity. These risks are particularly pronounced with respect to wafers intended for use in military and aerospace applications. Actel has from time to time experienced delays in obtaining wafers from its foundries, and there can be no assurance that the Company will not experience similar or more severe delays in the future. In addition, although Actel has supply agreements with most 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. These risks are particularly pronounced with respect to wafers intended for use in military and aerospace applications. Any inability or unwillingness of Actel's wafer suppliers to provide adequate quantities of finished wafers to satisfy the Company's needs in a timely manner would delay production and product shipments and could have a materially adverse effect on Actel'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 Actel'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 (such as Actel's investment in Chartered Semiconductor) 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 Actel buys a majority of its wafers from foreign foundries and has most 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 Actel'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 Actel's current key employees, or the inability of the Company to attract other qualified personnel, could have a materially adverse effect on Actel. The Company does not have employment agreements with any of its key employees. Dependence on Military and Aerospace Customers Although Actel is unable to determine with certainty the ultimate uses of its products, the Company 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 commercial customers, accounted for approximately one-quarter of revenues in 1997. The Company believes that the military and aerospace industries accounted for a significantly greater percentage of the Company's net revenues following 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. Orders from the military and aerospace customers tend to be large and irregular, which creates operational challenges and contributes to fluctuations in Actel'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, each of which makes it difficult to accurately estimate quarterly revenues and could have a materially adverse effect on Actel's business, financial condition, or results of operations. Dividend Policy Actel has never declared or paid any cash dividends on its capital stock. The Company currently 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. Booking and Shipment Uncertainties Actel 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 could 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 (or non-programmable) gate arrays, or the loss of business to other competitors for price or other reasons. Historically, Actel 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, therefore, could have a materially adverse effect on revenues for such quarter. Since Actel generally does not recognize revenue on the sale of a product to a distributor until the distributor resells the product, the Company's quarterly revenues are also dependent on, and subject to fluctuations in, shipments by Actel'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 conditions, any of which could have a materially adverse effect on Actel's business, financial condition, or results of operations. As is common in the semiconductor industry, Actel'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, most 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. In addition, Actel typically experiences difficulties and delays in achieving satisfactory, sustainable yields on new processes or at new foundries. 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 its current or future new processes and/or new foundries. Nor can any assurance be given that the Company will not experience wafer supply problems in the future, or that any such problem would not have a materially adverse effect on Actel's business, financial condition, or results of operations. Price Erosion The semiconductor industry is characterized by intense competition. Historically, average selling prices in the semiconductor industry generally, and for the Company's products in particular, have declined significantly over the life of each product. While Actel expects to reduce the average selling prices of its products over time as the Company 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. If not offset by reductions in manufacturing costs or by a shift in the mix of products sold toward higher-margin products, declines in the average selling prices of Actel's products will reduce gross margins and could have a materially adverse effect on the Company's business, financial condition, or results of operations. 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 relating to trends in markets, revenues, average selling prices, gross margin, wafer yields, research and development expenditures, selling, general, and administrative expenditures, 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. Actel 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. Actel'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 Actel 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 Actel 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 logic device and make it easier to convert from one programmable logic device to another. These competitive pressures may cause Actel 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 manufacturing process requirements, Actel almost invariably experiences difficulties and delays in achieving satisfactory, sustainable yields on new processes or at new foundries. The Company introduced the first members of the MX family in the fourth quarter of 1997 and is currently scheduled to introduce new members of the MX family and the first members of the SX family in 1998. Until satisfactory yields are achieved on these new product families, they generally will be sold at lower gross margins than Actel's mature product families. Depending upon the rate at which sales of these new products ramp (and the MX family is directed at high-volume users) 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 Actel has recently experienced and expects to continue to experience growth in the number of its employees and the scope of its operations, resulting in increased responsibilities for management personnel. To manage recent and potential future growth effectively, the Company will need to continue to hire, train, motivate, and manage a growing number of employees. The future success of Actel 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. The Company has been attempting to hire a number of engineering personnel and has experienced delays in filling such positions. During strong business cycles, Actel expects to experience continued 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 Actel 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 Actel'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 Actel's new MX and SX families will be achieved in the near term or at all. The manufacture of high-performance antifuse 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 from time to time experienced in the past, and expects that it will experience in the future, production yield problems and delivery delays. Any prolonged inability to obtain adequate yields or deliveries could adversely affect the Actel's business and operating results. One-Time Programmability While the nonvolatility of Actel'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 has decided to enter the reprogrammable FPGA market. Patent Infringement As is typical in the semiconductor industry, the Company has been and expects to be from time to time notified of claims that it may be infringing patents owned by others. No assurance can be given that such claims against Actel will not result in litigation. In January 1994, the Company brought a patent infringement lawsuit against QuickLogic, which in turn brought a patent infringement counterclaim against Actel in May 1995. In January 1998, the Company brought a second patent infringement lawsuit against QuickLogic. Management of the Company believes that Actel has meritorious claims and defenses in these matters, and that their resolution will not have a materially adverse effect on the Company's business, financial condition, or results of operations, but no assurance can be given to that effect. All litigation, whether or not determined in favor of Actel, can result in significant expense to the Company and can divert the efforts of Actel's technical and management personnel from productive tasks. Although the Company has obtained patents covering aspects of its FPGA architecture, logic modules, and certain techniques for manufacturing its antifuse, no assurance can be given that Actel's patents will be determined to be valid or that the claims of QuickLogic or any assertions of infringement or invalidity by other parties (or claims for indemnity from customers resulting from any infringement claims) will not be successful. In the event of an adverse ruling in the QuickLogic cases or any other litigation involving intellectual property, the Company could suffer significant (and possibly treble) monetary damages, which might 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. 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 Actel. In the event of a successful claim against the Company, Actel's failure to develop or license a substitute technology on commercially reasonable terms would have a materially adverse effect on the Company's business, financial condition, and results of operations. Potential Acquisitions In pursuing its business strategy, Actel 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 Actel to incur or assume debt obligations, and/or involve the issuance of additional equity securities of the Company. The issuance of additional equity securities may dilute, and could represent an interest senior to the rights of, the holders of Actel's Common Stock. An acquisition accounted for as a purchase, such as the Company's acquisition of TI's antifuse FPGA business in 1995, 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 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 Actel 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 the Company's business. Actel 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 Actel's products are or may be developed, manufactured, or sold, including Asia and Europe, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. Failure of Actel to enforce its patents or copyrights or to protect its trade secrets could have a materially adverse effect on the Company's business, financial condition, or results of operations. Reliance on Distributors In 1997, more than half of Actel's sales in the United States and virtually all of the Company's sales outside the United States were made through distributors. Three of Actel's distributors, Wyle, Arrow, and Pioneer, accounted for approximately 17%, 17%, and 12%, respectively, of the Company's net revenues in 1997. 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, Actel'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. Actel generally 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 decreased 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 located outside the United States accounted for approximately 31%, 33%, and 38% of net revenues for 1997, 1996, and 1995, respectively. Actel 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 virtually all 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. Software Development Challenges The computational complexities are not yet well understood for the software tools required to support the largest members of the ES family of products. It is anticipated that both the computational memory capacities and tool runtimes will be several times greater than those presently required for Actel's current antifuse products, which are significantly smaller. It is expected that the Company will need to develop and deploy tools incorporating significantly more compact, memory-resident data structures, which must be combined with algorithms capable of dealing very efficiently with the large circuit sizes. Technological Change and Dependence on New Product Development The market for Actel'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 the Company. Actel'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, Actel 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, and failure to coordinate the design and development of silicon and associated software products each could have a materially adverse effect on Actel's business, financial condition, or results of operation. 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. Actel is currently scheduled to introduce new members of the MX, SX, and ES families in 1998. No assurance can be given that the Company's design and introduction schedules for such 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 other 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 Actel 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. The Company must also continue to make significant investments in research and development to develop new products and achieve market acceptance for such products. Actel currently conducts most of its research and development activities at facilities operated by Matsushita in Japan and Extel Semiconductor, Inc. in the United States. Although the Company has not to date experienced any significant difficulty in obtaining access to its current 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 factors such 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 recently experienced extreme price and volume volatility. 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 The Year 2000 issue arises because most computer hardware and software were developed without considering the impact of the upcoming change in the century. The hardware and software were originally designed to accept two-digit entries rather than four-digit entries in the date code field. As a result, certain computer systems and software packages will not be able to interpret dates beyond December 31, 1999; they will, for example, interpret January 1, 2000, as January 1, 1900. This could potentially result in computer failure or miscalculations, causing operating disruptions, including among other things an inability to process transactions, send invoices, or engage in other ordinary activities. The Company has initiated a comprehensive project to prepare its computer systems for the Year 2000 and plans to have changes to critical systems completed by the first quarter of 1999 to permit time for testing. A task force is identifying all areas of application software, operating system software, hardware, and external interfaces that require Year 2000 compliance. While the Company currently expects that the Year 2000 will not pose significant internal operational problems, delays in the implementation of new information systems, or a failure to fully identify all Year 2000 dependencies in the Company's systems, could have a materially adverse effect on the Company's operating results. The Company is also assessing the capability of its products sold to customers over a period of years to handle the Year 2000. The ongoing assessment has not revealed any significant compliance issues. However, the inability of these products to properly manage and manipulate data in the Year 2000 could result in a material adverse impact on the Company, including increased warranty costs, customer satisfaction issues, and potential lawsuits. Based on its current understanding, the Company believes that the likelihood of a material adverse impact due to problems with internal systems or products sold to customers is remote and expects that the cost of its Year 2000 compliance program over the next two years will not have a material effect on the Company's financial position or overall trends in results of operations. The cost of the program and the date on which the Company believes it will become Year 2000 compliant are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, cooperation of vendors, and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. If Year 2000 modifications and conversions are not properly made, or are not completed in timely manner, the Year 2000 issue could have a materially adverse impact on the Company's future business operations and, in turn, on its financial position and results of operations. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in the area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Ultimately, the potential impact of the Year 2000 issue will depend not only on the corrective measures the Company undertakes, but also on the way in which the Year 2000 issue is addressed by businesses and other entities who provide data to, or receive data from the Company, or whose financial condition or operational capability is important to the Company as suppliers or customers. Therefore, the Company is also developing a plan to contact critical suppliers of products and services to determine that the suppliers' operations and the products and services they provide are Year 2000 capable or to monitor their progress toward Year 2000 capability. The Company's suppliers and customers are generally much larger organizations than the Company with a greater number of suppliers and customers of their own. The Company believes that many of its suppliers and customers have not completed their own systems modification to be Year 2000 compliant. The failure of significant suppliers or customers of the Company to become Year 2000 compliant could have materially adverse consequences to the Company. Those consequences could include the inability to receive product in a timely manner or lost sales opportunities, either of which could result in a material decline in the Company's revenues and profits. In addition, there can be no guarantee that a conversion by a third party's system on which the Company's systems rely would be compatible with the Company's systems. It is not possible at this time to quantify the potential impact of such situations, but no assurance can be given that another company's failure to ensure Year 2000 capability will not have an adverse effect on the Company. Executive Officers of the Registrant The following table identifies each executive officer of Actel as of March 27, 1998:
Name Age Position - ---------------------------------------- ------- --------------------------------------------------------- John C. East......................... 53 President and Chief Executive Officer Henry L. Perret...................... 52 Vice President of Finance and Chief Financial Officer Esmat Z. Hamdy....................... 48 Senior Vice President of Technology & Operations Jeffrey M. Schlageter................ 54 Senior Vice President of Engineering & Corporate Programs Michelle A. Begun.................... 41 Vice President of Human Resources Carl N. Burrow....................... 37 Vice President of Marketing Douglas D. Goodyear.................. 43 Vice President of Worldwide Sales Fares N. Mubarak..................... 36 Vice President of Engineering Dennis F. Nye........................ 45 Vice President of Strategic Accounts Robert J. Smith, II.................. 53 Vice President of Software David L. Van De Hey.................. 42 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 Actel, 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, he served in various marketing, manufacturing, and engineering positions for Fairchild Camera and Instrument Corporation, a semiconductor manufacturer. Mr. Perret joined Actel 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, including divisional controllerships 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. Schlageter joined the Company in February 1989 as Vice President of Engineering, was Senior Vice President of Engineering from November 1992 to October 1997, and has been Senior Vice President of Engineering and Corporate Programs since October 1997. From July 1985 to January 1989, he held various positions at Advanced Micro Devices, a semiconductor manufacturer, where he last served as Managing Director of Peripheral Products. From February 1981 to July 1985, Mr. Schlageter was Vice President of Semicustom Products at Mostek Corporation, a semiconductor manufacturer. Ms. Begun joined Actel in May 1989 as Director of Human Resources, and has been Vice President of Human Resources since August 1991. From May 1984 to May 1989, she held various human resources management positions at Intel Corporation, a semiconductor manufacturer, her last position being Human Resources Manager. From October 1977 to May 1984, she held various human resources management positions at Synertek, Inc., a subsidiary of Honeywell, a semiconductor manufacturer. 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. Goodyear joined the Company in February 1996 as Vice President of Worldwide Sales. From November 1991 until joining the Company, he served as Vice President of Sales for the components division of Sharp Electronics Corporation, a semiconductor manufacturer. From January 1987 to November 1991, Mr. Goodyear held various sales management positions at Hitachi America, a semiconductor manufacturer, lastly as Western Area Sales Manager. From June 1983 to January 1987, he held various sales and sales management. positions at Advanced Micro Devices, 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 Actel, he held various engineering and engineering management positions with Samsung Semiconductor Inc., a semiconductor manufacturer, and its spin-off, Integrated Circuit 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. Nye joined Actel in October 1990 as European Business Manager with Actel Europe Ltd., the Company's United Kingdom subsidiary, was Vice President of Marketing from January 1994 until October 1997, and has been Vice President of Strategic Accounts since October 1997. From January 1990 to October 1990, Mr. Nye served as Director of Sales of Genrad Corporation, a software company. From November 1986 to January 1990, he served as European Sales Manager of Viewlogic Corporation, a software company. Dr. Smith joined Actel in March 1997 as Vice President of Software. Prior to joining the Company, he was an independent consultant specializing in product development and positioning, software team building, pragmatic software engineering practices, and small company trouble shooting. From September 1985 to March 1995, Dr Smith held various positions with Microelectronics and Computer Technology Corporation (MCC), a consortial systems and software R&D company, where he last served as Vice President of Advanced Systems and Networks. Mr. Van De Hey joined Actel 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, Baltimore, Basingstoke (England), Boston, Chicago, Dallas, Denver, Destin (Florida), Los Angeles, Milano (Italy), Minneapolis, Munich (Germany), Ottawa (Canada), and Paris (France), Philadelphia, Raleigh, Seoul (Korea), and Tokyo (Japan). The Company believes its facilities will be adequate for its needs in 1998, but is investigating options for continued expansion beyond that time. ITEM 3. LEGAL Except as described below, there are no pending legal proceedings of a material nature to which Actel 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. Actel v. QuickLogic (CV C-94 20050 JW (PVT)) Claims Asserted Actel commenced the above-referenced action against QuickLogic in the United States District Court for the Northern District of California (the "Court") on January 20, 1994. The Complaint asserted claims for infringement of U. S. Patents Nos. 4,758,745, 4,873,459, 5,055,718, and 5,198,705, respectively, each relating to field programmable gate array technology. The Complaint sought injunctive relief, treble damages in an unspecified amount, and attorneys' fees. On February 10, 1994, QuickLogic filed an Answer and Counterclaim, denying infringement, asserting invalidity defenses, and seeking declaratory relief. On March 15, 1995, Actel filed an Amended and Supplemental Complaint against QuickLogic asserting, in addition to claims previously asserted, a claim for infringement of U.S. Patent No. 5,367,208. Actel's Supplemental Complaint sought injunctive relief, treble damages in an unspecified amount, and attorneys' fees. On April 14, 1995, QuickLogic filed an Answer and Counterclaim denying infringement, asserting invalidity defenses, and asserting two claims against Actel for alleged infringement of U.S. Patents Nos. 5,220,213 and 5,396,127 relating to logic modules. QuickLogic's Counterclaim sought declaratory and injunctive relief, and treble damages in an unspecified amount. On May 25, 1995, QuickLogic filed an Amended Answer and Counterclaim, adding allegations of inequitable conduct. In response to QuickLogic's counterclaims, on June 11, 1995, Actel filed a Reply and Counterclaim, denying infringement, asserting invalidity defenses, naming John Birkner as an individual defendant, and asserting causes of action for trade secret misappropriation, breach of contract, breach of confidential business relationship, and unfair competition. Actel's Counterclaim sought declaratory and injunctive relief, damages in an unspecified amount, and an assignment to Actel of QuickLogic's two patents-in-suit. In response, both QuickLogic and Mr. Birkner denied all allegations. On March 7, 1996, Actel filed a Second Supplemental Complaint, adding a claim against QuickLogic for infringement of U.S. Patent No. 5,479,113. As of June 13, 1997, QuickLogic amended its complaint to assert that Actel's ACT 3 products infringe U.S. Patent No. 5,594,364. On August 1, 1997, Actel answered QuickLogic's amended complaint denying liability and restating Actel's trade secret and related counterclaims. On August 15, 1997, Actel filed an amended and supplemental complaint. This complaint reasserted the patent claims described above and added a claim under U.S. Patent No. 5,610,534, issued March 11, 1997. On September 3, 1997, QuickLogic and Birkner filed an answer to Actel's Second Amended and Supplemental Complaint, and alleged amended counterclaims asserting invalidity and other customary affirmative defenses in patent cases and demanding jury. On September 9, 1997, QuickLogic and Birkner filed an answer to Actel's Amended Counterclaims. On March 3, 1998, QuickLogic advised that it will seek leave to amend its answer to assert additional defenses of invalidity and unenforceability. In summary, Actel has asserted claims of patent infringement as against all QuickLogic products under U.S. Patents Nos. 4,758,745, 4,873,459, 5,055,718, 5,198,705, 5,357,208, 5,479,113 and 5,610,534. Actel has also asserted various counterclaims against QuickLogic and Mr. Birkner based on misappropriation of Actel trade secrets. QuickLogic denies infringement and asserts invalidity and unenforceability of all Actel patents-in-suit. As explained below, the Court has granted a summary judgment finding that QuickLogic's products infringe the `705 patent. QuickLogic has asserted claims of patent infringement against Actel's ACT 2 and ACT 3 product lines under U.S. Patents Nos. 5,220,213 and 5,396,127 and against ACT 3 products under U.S. Patent No. 5,594,364. Actel denies infringement and asserts invalidity and unenforceability of the QuickLogic patents. Actel further asserts that it is entitled to impose a constructive trust on the QuickLogic patents because those patents were obtained using Actel trade secrets. Motions On November 15, 1994 Actel moved for summary judgment of infringement of its `705 patent. On October 4, 1996, after extensive discovery and briefing, the Special Master, to whom all pretrial matters have been referred, filed a recommendation with the Court that Actel's motion be granted. After further hearings, on August 8, 1997, the Court adopted the Special Master's recommendation. On January 18, 1996, Actel filed a motion seeking summary judgment of invalidity of the two QuickLogic patents-in-suit based on the sale of Actel's ACT 2 product line more than one year prior to the filing of the application which is the parent of the applications from which QuickLogic obtained Patents Nos. 5,220,213 and 5,396,127. This motion was argued to the Special Master on December 12, 1997, and is awaiting his action. On February 5, 1996, QuickLogic filed a motion for summary judgment of infringement of QuickLogic patent no. 5,520,213. This motion has been withdrawn without prejudice to refiling of a similar motion. On February 26, 1996, QuickLogic filed a motion to disqualify Actel counsel, the law firm of Lyon & Lyon, on the ground that a Lyon & Lyon attorney, in previous employment with QuickLogic counsel, Skjerven, Morrill, MacPherson, Franklin & Friel, had access to confidential QuickLogic information and attorney work product. The Special Master issued a recommendation in favor of QuickLogic's motion and, on May 29, 1996, the Court entered an Order disqualifying Lyon & Lyon. On June 19, 1996, O'Melveny & Myers was substituted as counsel of record on behalf of Actel. On November 25, 1996, QuickLogic moved for Summary Judgment of invalidity with respect to Claim 1 of Actel patent no. 5,198,705. This motion is being held in abeyance pending further pretrial planning. On June 27, 1997, Actel moved for a summary judgment that QuickLogic's products infringe Claim 11 of U.S. Patent No. 4,873,459. This motion is being held in abeyance pending further pretrial planning. On July 3, 1997, QuickLogic and Mr. Birkner moved for summary judgment that all of the Actel counterclaims based on misappropriation of trade secrets are barred by applicable statutes of limitation. This motion was argued to the Special Master on December 12, 1997. In Recommendations dated February 13, 1998 and March 3, 1998, the Special Master recommended that this motion be granted in its entirety. Actel has filed objections to the Special Master's recommendations. This matter awaits further briefing and argument before the district judge. On September 9, 1997, Actel moved for leave to file an amended and supplemental complaint joining two individuals as additional defendants on Actel's counterclaims. One objective of this motion was to establish that Actel's trade secret counterclaims against QuickLogic relate back to the date of Actel's original complaint. If the relation-back doctrine applies, this would obviate QuickLogic's summary judgment defense. On December 5, 1997, pursuant to recommendation of the Special Master, the district court denied Actel's motion to join the two additional defendants. On March 13, 1998, the Special Master recommended that the district judge hold that Actel's counterclaims do not relate back. Actel has filed objections to this recommendation, and the matter awaits further proceedings before the district judge. Each side has advised the Special Master that additional motions for summary judgment will be made after completion of discovery. Trial Schedule By order of the Court entered March 19, 1997, the Court established a deadline for completion of fact discovery of January 31, 1998. This deadline has passed, but limited specific fact discovery that could not be completed by the deadline remains to be conducted. Expert disclosures will be required in advance of trial, but no specific date for such disclosures is currently in effect. The parties are discussing a process for simplification of the issues to be tried and expect to enter into a stipulation to bifurcate damage issues from liability and infringement issues and to try a limited subset of issues in phases. A process for selecting claims has commenced, but it is too early to predict what claims will be selected for trial. No trial date has been set. The parties have stipulated that purely equitable will be tried to the judge prior to jury trial of selected claims. Trial of the equitable issues is currently expected to take place in the fourth quarter of 1998. Actel v. QuickLogic (CV C-97 21107 JW (EAI)) Claims Asserted On December 15, 1997, Actel commenced the above-referenced action against QuickLogic in the Court. The Complaint asserts claims for infringement of U. S. Patents Nos. 5,132,571 and 5,191,214, respectively, each relating to field programmable gate array technology. The Complaint seeks injunctive relief, treble damages in an unspecified amount, and attorneys' fees. On January 13, 1998, QuickLogic filed an Answer and Counterclaim, denying infringement, asserting invalidity defenses and seeking declaratory relief. Motions No motions have been filed in this action. Trial The parties have begun to disclose relevant information as required under the Local Rules of the United States District Court for the Northern District of California. There have been no communications from the Court concerning a trial date. After considering the facts currently known, management does not believe that the ultimate outcome of the either case will have a materially adverse effect on the Company's business, financial condition, or operating results, although no assurance can be given to that effect. 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 December 28, 1997 (the "1997 Annual Report"), is incorporated herein by this reference. ITEM 6. SELECTED FINANCIAL DATA The information appearing under the caption "Selected Consolidated Financial Data" in the 1997 Annual Report is incorporated herein by this reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information appearing under the caption "Management's Discussion and Analysis of Financial Conditions and Results of Operations" of the 1997 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 Operations," "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 1997 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 22, 1998, as filed on or about April 7, 1998, with the Securities and Exchange Commission (the "1997 Proxy Statement") in Part III of this Annual Report on Form 10-K, the 1997 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 1997 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 1997 Proxy Statement and the information under the main caption "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934" in the 1997 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 1997 Proxy Statement and the information under the caption "Executive Compensation" under the main caption "OTHER INFORMATION" in the 1997 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 1997 Proxy Statement and the information under the caption "Security Ownership of Management" under the main caption "OTHER INFORMATION" in the 1997 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 1997 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 1997 Annual Report are incorporated by reference in Item 8 of this Annual Report on Form 10-K: Consolidated balance sheets at December 31, 1997 and 1996 Consolidated statements of operations for each of the three years in the period ended December 31, 1997 Consolidated statements of shareholders' equity for each of the three years in the period ended December 31, 1997 Consolidated statements of cash flows for each of the three years in the period ended December 31, 1997 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. No reports on Form 8-K were filed by Actel during the quarter ended December 28, 1997. (c) Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this Report on Form 10-K: Exhibit Number Description - ------------------------ ------------------------------------------------------- 2.1 (1) Asset Purchase Agreement dated as of February 12, 1995, between the Registrant and Texas Instruments Incorporated (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K (File No. 0-21970) filed with the Securities and Exchange Commission on April 17, 1995). 2.2 Amendment No. 1 to the Asset Purchase Agreement dated as of March 31, 1995, between the Registrant and Texas Instruments Incorporated (filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K (File No. 0-21970) filed with the Securities and Exchange Commission on April 17, 1995). 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). 3.3 Certificate of Determination of Rights, Preferences and Privileges of Series A Preferred Stock of the Registrant (filed as Exhibit 3.3 to the Registrant's Current Report on Form 8-K (File No. 0-21970) filed with the Securities and Exchange Commission on April 17, 1995). 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 (filed as Exhibit 10.2 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 28, 1997). 10.3 (2) 1993 Directors' Stock Option Plan, as amended and restated. 10.4 (2) 1993 Employee Stock Purchase Plan, as amended and restated. 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 28, 1997). 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) M2M Joint Development and Marketing Agreement dated August 1, 1994, between the Registrant and Loral Federal Systems Company (filed as Exhibit 10.20 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21970) for the quarterly period ended October 2, 1994). 10.13 (1) License Agreement dated as of April 1, 1995, between the Registrant and Texas Instruments Incorporated (filed as Exhibit 10.22 to the Registrant's Current Report on Form 8-K (File No. 0-21970) filed with the Securities and Exchange Commission on April 17, 1995). 10.14 (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). 10.15 (1) Distribution Agreement dated as of June 29, 1995, between the Registrant and Matsushita Electric Industrial Co., Ltd and Matsushita Electronics Corporation (filed as Exhibit 10.26 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21970) for the quarterly period ended July 2, 1995). 10.16 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). 10.17 (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 28, 1997). 13 Portions of Registrant's Annual Report to Shareholders for the fiscal year ended December 28, 1997, incorporated by reference into this Report on Form 10-K. 21 Subsidiaries of Registrant (see page 47). 23 Consent of Ernst & Young LLP, Independent Auditors (see page 45). 24 Power of Attorney (see page 44). 27.1 Financial Data Schedule - 1997. 27.2 Financial Data Schedule - 1996. - --------------------------------------- (1) Confidential treatment requested as to a portion of this Exhibit. (2) This Exhibit is a management contract or compensatory plan or arrangement. Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to Exhibit 2.1 have been omitted. The Registrant hereby agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request. The omitted schedules are listed below: Schedule 1.1(a) Capital Equipment Schedule 1.1(b) Expensed Assets Schedule 1.1(d) Contracts Schedule 1.1(f) Software Schedule 1.1(h) Testing Hardware and Software Schedule 1.1(i) Research and Development Projects Schedule 2.2 Calculation of Net Revenues of the Business Schedule 2.5 Inventory Transfer Pricing Schedule 5.2(a) Seller Consents Schedule 5.16 Seller's Knowledge Schedule 6.2(a) Buyer Consents Schedule 6.2(b) Buyer Violations Schedule 6.4 Capitalization of Buyer Schedule 6.7 Registration Rights Schedule 12.3(d) Buyer's Knowledge (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 46 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 27, 1998 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, 1995........................... $ 597 $ -- $ 30 $ 567 Year ended December 31, 1996........................... 567 81 15 633 Year ended December 31, 1997........................... 633 1,611 612 1,632
EX-10.3 2 1993 DIRECTORS' STOCK OPTION PLAN ACTEL CORPORATION 1993 DIRECTORS' STOCK OPTION PLAN Amended and Restated as of January 23, 1998 1. Purposes of the Plan. The purposes of this Directors' Stock Option Plan are to attract and retain the best available personnel for service as Directors of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be "nonstatutory stock options". 2. Definitions. As used herein, the following definitions shall apply: (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the Common Stock of the Company. (d) "Company" shall mean Actel Corporation, a California corporation. (e) "Continuous Status as a Director" shall mean the absence of any interruption or termination of service as a Director. (f) "Director" shall mean a member of the Board. (g) "Effective Date" shall have the meaning as set forth in Section 6 below. (h) "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 in and of itself to constitute "employment" by the Company. (i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (j) "First Option" shall have the meaning as set forth in Section 4(b)(ii) below. (k) "Option" shall mean a stock option granted pursuant to the Plan. (l) "Optioned Stock" shall mean the Common Stock subject to an Option. (m) "Optionee" shall mean an Outside Director who receives an Option. (n) "Outside Director" shall mean a Director who is not an Employee. (o) "Parent" shall mean a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code. (p) "Plan" shall mean this 1993 Directors' Stock Option Plan. (q) "Share" shall mean a share of the Common Stock, as adjusted in accordance with Section 11 of the Plan. (r) "Subsequent Option" shall have the meaning as set forth in Section 4(b)(iii) below. (s) "Subsidiary" shall mean a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 11 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 230,000 Shares (the "Pool") of Common Stock, increased annually (subsequent to the January 23, 1998, amendment and restatement of the Plan) on the first day of each fiscal year by (x) 100,000 less (y) the number of shares available for issuance under the Director Plan on the last day of the immediately preceding fiscal year. The Shares 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. If Shares which were acquired upon exercise of an Option are subsequently repurchased by the Company, such Shares shall not in any event be returned to the Plan and shall not become available for future grant under the Plan. 4. Administration of and Grants of Options under the Plan. (a) Administrator. Except as otherwise required herein, the Plan shall be administered by the Board. (b) Procedure for Grants. The Board may grant Options to Outside Directors hereunder, and on such terms, as are decided in its discretion. Additionally, Options shall automatically be granted hereunder in accordance with the following provisions: (i) After August 1, 1997, each person who first becomes an Outside Director shall be automatically granted an Option to purchase 15,000 Shares (the "First Option") on the date on which such person first becomes an Outside Director, whether through election by the shareholders of the Company or appointment by the Board of Directors to fill a vacancy. (ii) Beginning on August 1, 1997, each Outside Director shall be automatically granted an Option to purchase 5,000 Shares (a "Subsequent Option") on August 1 of each year if, on such date, he or she shall have served on the Board for at least six (6) months. (iii) Notwithstanding the provisions of subsections (i) and (ii) hereof, in the event that a grant would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased upon exercise of Options to exceed the Pool, then each such automatic grant shall be for that number of Shares determined by dividing the total number of Shares remaining available for grant by the number of Outside Directors on the automatic grant date. Any further grants shall then be deferred until such time, if any, as additional Shares become available for grant under the Plan through action of the shareholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. (iv) Notwithstanding the provisions of subsections (i) and (ii) hereof, any grant of an Option made before the Company has obtained shareholder approval of the Plan in accordance with Section 17 hereof shall be conditioned upon obtaining such shareholder approval of the Plan in accordance with Section 17 hereof. (v) The terms of a First Option granted hereunder shall be as follows: (A) the First Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 9 hereof. (B) the exercise price per Share shall be 100% of the fair market value (as defined in Section 8(b) hereunder) per Share on the date of grant of the First Option. (C) the First Option shall vest and become exercisable as to 25% of the Shares subject to the First Option on the first anniversary of the date of the Company's annual shareholder meeting occurring in each of the first, second, third, and fourth calendar year following the calendar year in which the date of grant occurred, subject to the provisions set forth in Section 9 below. (vi) The terms of a Subsequent Option granted hereunder shall be as follows: (A) the Subsequent Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 9 hereof. (B) the exercise price per Share shall be 100% of the fair market value per Share on the date of grant of the Subsequent Option. (C) the Subsequent Option shall become exercisable as to one hundred percent (100%) of the Shares subject to the Subsequent Option on the date of the Company's annual shareholder meeting occurring in the fourth calendar year following the calendar year in which the date of grant occurred, subject to the provisions set forth in Section 9 below. (c) Powers of the Board. Subject to the provisions and restrictions of the Plan, the Board shall have the authority, in its discretion: (i) to grant discretionary stock options to Outside Directors, upon such terms as are determined by the Board in its discretion, (ii) to determine, upon review of relevant information and in accordance with Section 8(b) of the Plan, the fair market value of the Common Stock; (iii) to determine the exercise price per share of Options to be granted, which exercise price shall be determined in accordance with Section 8(a) of the Plan; (iv) to interpret the Plan and to prescribe, amend and rescind rules and regulations relating to the Plan; (v) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted hereunder; and (vi) to make all other determinations deemed necessary or advisable for the administration of the Plan. (d) Effect of Board's Decision. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan. (e) Suspension or Termination of Option. If the President or his or her designee reasonably believes that an Optionee has committed an act of misconduct, the President may suspend the Optionee's right to exercise any option pending a determination by the Board of Directors (excluding the Outside Director accused of such misconduct). If the Board of Directors (excluding the Outside Director accused of such misconduct) determines an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Optionee nor his or her estate shall be entitled to exercise any option whatsoever. In making such determination, the Board of Directors (excluding the Outside Director accused of such misconduct) shall act fairly and shall give the Optionee an opportunity to appear and present evidence on Optionee's behalf at a hearing before the Board or a committee of the Board. 5. Eligibility. Options may be granted only to Outside Directors. An Outside Director who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate his or her directorship at any time. 6. Term of Plan; Effective Date. The Plan shall become effective on the date on which the Company's registration statement on Form S-1 (or any successor form thereof) is declared effective by the Securities and Exchange Commission (the "Effective Date"). It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 13 of the Plan, subject to the limitations set forth in this Plan. 7. Term of Option. The term of each Option shall be ten (10) years from the date of grant thereof. 8. Exercise Price and Consideration. (a) Exercise Price. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be 100% of the fair market value per Share on the date of grant of the Option. (b) Fair Market Value. The fair market value per Share shall be the mean of the bid and asked prices of the Common Stock in the over-the-counter market 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 that the Common Stock is traded on the NASDAQ National Market System or listed on a stock exchange, the fair market value per Share shall be the closing price on such system or exchange on the date of grant of the Option, as reported in The Wall Street Journal, provided, however, that if such market or exchange is closed on the date of the grant of the Option then the fair market value per Share shall be based on the most recent date on which such trading occurred immediately prior to the date of the grant of the Option; provided, further, that for purposes of First Options granted on the Effective Date, the fair market value per share shall be the initial public offering price as set forth in the final prospectus filed with the Securities and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as amended. (c) Form of Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option shall consist entirely of cash, check, other Shares having 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 (which, if acquired from the Company, shall have been held for at least six months), delivery of a properly executed exercise notice together with instructions to a broker to deliver promptly to the Company the amount of sale proceeds required to pay the exercise price, or any combination of such methods of payment and/or any other consideration or method of payment as shall be permitted under applicable corporate law. 9. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4(b) hereof or, with respect to a discretionary grant, as decided by the Board in its discretion; provided, however, that no Options shall be exercisable until shareholder approval of the Plan in accordance with Section 17 hereof has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 8(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. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment 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 11 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 a Director. If an Outside Director ceases to serve as a Director, he or she may, but only within three (3) months (or such other period of time not exceeding six (6) months as is determined by the Board) after the date he or she ceases to be a Director 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. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. To the extent that such Outside Director was not entitled to exercise an Option at the date of such termination, or 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 9(b) above, in the event a Director is unable to continue his or her service as a Director 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 twelve (12) months as is determined by the Board) from the date of such termination, exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. 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: (i) during the term of the Option who is, at the time of his or her death, a Director of the Company and who shall have been in Continuous Status as a Director since the date of grant of the Option, the Option may be exercised in full, at any time within six (6) months (or such lesser period of time as is determined by the Board) following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, whether or not the right to exercise that would have accrued had the Optionee continued living. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. (ii) within three (3) months (or such lesser period of time as is determined by the Board) after the termination of Continuous Status as a Director, the Option may be exercised, at any time within six (6) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. Notwithstanding the foregoing, in no event may the option be exercised after its term set forth in Section 7 has expired. 10. Nontransferability 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. The designation of a beneficiary by an Optionee does not constitute a transfer. An Option may be exercised during the lifetime of an Optionee only by the Optionee or a transferee permitted by this Section. 11. Adjustments Upon Changes in Capitalization or Merger. 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. In the event of the proposed dissolution or liquidation of the Company, the Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. 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. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, 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 Board shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option will terminate upon the expiration of such period. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4(b) hereof. Notice of the determination shall be given to each Outside Director to whom an Option is so granted within a reasonable time after the date of such grant. 13. Amendment and Termination of the Plan (a) Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or regulation), the Company shall obtain approval of the shareholders of the Company to Plan amendments to the extent and in the manner required by such law or regulation. (b) Effect of Amendment or Termination. Any such amendment or termination of the Plan that would impair the rights of any Optionee shall not affect Options already granted to such Optionee and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall 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. 15. 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. 16. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve. 17. Shareholder Approval. (a) Continuance of the Plan shall be subject to approval by the shareholders of the Company at or prior to the first annual meeting of shareholders held subsequent to the granting of an Option hereunder. If such shareholder approval is obtained at a duly held shareholders' meeting, it may be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company present or represented and entitled to vote thereon. If such shareholder approval is obtained by written consent, it may be obtained by the written consent of the holders of a majority of the outstanding shares of the Company. (b) Any required approval of the shareholders of the Company shall be solicited substantially in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder. 18. Information to Optionees. The Company shall provide to each Optionee, during the period for which such Optionee has one or more Options outstanding, copies of all annual reports to shareholders, proxy statements and other information provided to all shareholders of the Company. EX-10.4 3 1993 EMPLOYEE STOCK PURCHASE PLAN ACTEL CORPORATION 1993 EMPLOYEE STOCK PURCHASE PLAN Amended and Restated as of January 23, 1998 The following constitute the provisions of the 1993 Employee Stock Purchase Plan of Actel Corporation. 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the Common Stock of the Company. (d) "Company" shall mean Actel Corporation, a California corporation. (e) "Compensation" shall mean all base straight time gross earnings including commissions, overtime and shift premiums, and all incentive compensation, incentive payments, bonuses and other compensation. (f) "Designated Subsidiaries" shall mean the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an employee of the Company or any Designated Subsidiary for tax purposes whose employment with the Company or any Designated Subsidiary averages at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship will be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first day of each Offering Period. (i) "Exercise Date" shall mean the last day of each Purchase Period. (j) "Fair Market Value" shall mean, as of any date, the value of Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sale price for the Common Stock (or the mean of the closing bid and asked prices, if no sales were reported), as quoted on such exchange (or the exchange with the greatest volume of trading in Common Stock) or system on the date of such determination, as reported in the Wall Street Journal or such other source as the Board deems reliable, or; (2) If the Common Stock is quoted on the NASDAQ system (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in the Wall Street Journal or such other source as the Board deems reliable, or; (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (4) For purposes of the Enrollment Date under the first Offering Period under the Plan, the Fair Market Value of the Common Stock shall be the Price to Public as set forth in the final prospectus filed with the Securities and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as amended. (k) "Offering Period" shall mean the period of approximately twenty-four (24) months during which an option granted pursuant to the Plan may be exercised. The first offering period shall commence with the date on which the Company's registration statement on Form S-1 (or any successor form thereof) is declared effective by the Securities and Exchange Commission. This first offering period shall terminate on the last Trading Day in the period ending August 1 or February 1 approximately 24 months later. Subsequent offering periods shall commence on the first Trading Day on or after August 1 and February 1 of each year and terminate on the last Trading Day of the periods ending twenty-four months later. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean this Employee Stock Purchase Plan. (m) "Purchase Price" shall mean an amount equal to 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (n) "Purchase Period" shall mean the approximately six month period commencing after one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. However, the first Purchase Period of the first Offering Period under the Plan may be more or less than six months in duration. (o) "Reserves" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under options. (p) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (q) "Trading Day" shall mean a day on which national stock exchanges and the National Association of Securities Dealers Automated Quotation (NASDAQ) System are open for trading. 3. Eligibility. (a) Any Employee (as defined in Section 2(g)), who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) which permits his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of Fair Market Value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive, overlapping Offering Periods with the first Offering Period commencing with the date on which the Company's registration statement on Form S-1 (or any successor form thereof) is declared effective by the Securities and Exchange Commission. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without shareholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected. Absent action by the Board, each Offering Period shall be for a period of approximately twenty-four months (24) and new Offering Periods shall commence on the first Trading Day of February and August of each year. The first Offering Period under the Plan may be more or less than twenty-four (24) months in duration. 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions (in the form of Exhibit A to this Plan) and filing it with the Company's payroll office prior to the applicable Enrollment Date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. 6. Payroll Deductions. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding fifteen percent (15%) of the Compensation which he or she receives on each pay day during the Offering Period, and the aggregate of such payroll deductions during the Offering Period shall not exceed fifteen percent (15%) of the participant's Compensation during said Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and will be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to 0% if the following should occur: For the Purchase Periods that end during a single calendar year, the sum of all payroll deductions that have been used to purchase stock under the Plan plus all payroll deductions accumulated for the purchase of stock equals $21,250. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the subsequent calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but will not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on the Exercise Date of such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof; provided, further, that in no event shall any Employee purchase in excess of ten thousand shares in any Offering Period. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof, and the option shall expire on the last day of the Offering Period. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares will be exercised automatically on the Exercise Date, and the maximum number of full shares subject to the option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares will be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. 10. Withdrawal; Termination of Employment. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account will be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period will be automatically terminated, and no further payroll deductions for the purchase of shares will be made during the Offering Period. If a participant withdraws from an Offering Period, payroll deductions will not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) Upon a participant's ceasing to be an Employee (as defined in Section 2(g) hereof), for any reason, including by virtue of him or her having failed to remain an Employee of the Company for at least twenty (20) hours per week during a Purchase Period in which the Employee is a participant, he or she will be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option will be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 14 hereof, and such participant's option will be automatically terminated. 11. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 12. Stock. (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 3,019,680 shares, subject to adjustment upon changes in capitalization of the Company as provided in Section 18 hereof. If on a given Exercise Date the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) The participant will have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his or her spouse. 13. Administration. (a) Administrative Body. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. Members of the Board who are eligible Employees are permitted to participate in the Plan, provided that: (1) Members of the Board who are eligible to participate in the Plan may not vote on any matter affecting the administration of the Plan or the grant of any option pursuant to the Plan. (2) If a Committee is established to administer the Plan, no member of the Board who is eligible to participate in the Plan may be a member of the Committee. (b) Rule 16b-3 Limitations. Notwithstanding the provisions of Subsection (a) of this Section 13, in the event that Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision ("Rule 16b-3") provides specific requirements for the administrators of plans of this type, the Plan shall be only administered by such a body and in such a manner as shall comply with the applicable requirements of Rule 16b-3. Unless permitted by Rule 16b-3, no discretion concerning decisions regarding the Plan shall be afforded to any committee or person that is not "disinterested" as that term is used in Rule 16b-3. 14. Designation of Beneficiary. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 14 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 16. Use of Funds. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. Reports. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees at least annually, which statements will set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 18. Adjustments Upon Changes in Capitalization. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the Reserves as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised 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 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, the Offering Periods will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. (c) Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, to shorten the Offering Periods then in progress by setting a new Exercise Date (the "New Exercise Date") or to cancel each outstanding option to purchase and refund all sums collected from participants during the Offering Period then in progress. If the Board shortens the Offering Periods then in progress in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for his option has been changed to the New Exercise Date and that his option will be exercised automatically on the New Exercise Date, unless prior to such date he has withdrawn from the Offering Period as provided in Section 10 hereof. For purposes of this paragraph, an option granted under the Plan shall be deemed to be assumed if, following the sale of assets or merger, the option confers the right to purchase, for each share of stock subject to the option immediately prior to the sale of assets or merger, the consideration (whether stock, cash or other securities or property) received in the sale of assets or merger by holders of Common Stock for each share of Common Stock held on the effective date of the transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if such consideration received in the sale of assets or merger was not solely common stock of the successor corporation or its parent (as defined in Section 424(e) of the Code), the Board may, with the consent of the successor corporation and the participant, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Common Stock and the sale of assets or merger. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 19. Amendment or Termination. (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Sections 18 and 19 hereof, no such termination can affect options previously granted, provided that outstanding and/or future Offering Periods may be shortened and/or terminated by the Board of Directors at any time. Except as provided in Section 18 hereof and in the preceding sentence, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Rule 16b-3 or under Section 423 of the Code (or any successor rule or provision or any other applicable law or regulation), the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 20. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 22. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 19 hereof. 23. Additional Restrictions of Rule 16b-3. The terms and conditions of options granted hereunder to, and the purchase of shares by, persons subject to Section 16 of the Exchange Act shall comply with the applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, and such options shall contain, and the shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 24. Automatic Transfer to Low Price Offering Period. To the extent permitted by Rule 16b-3 of the Securities Exchange Act of 1934, as amended, if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their options on such Exercise Date and automatically re-enrolled in the immediately following Offering Period as of the first day thereof. EXHIBIT A ACTEL CORPORATION 1993 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT __________ Original Application Enrollment Date: ______________________ __________ Change in Payroll Deduction Rate __________ Change of Beneficiary(ies) 1. ____________________________________________________ hereby elects to participate in the Actel Corporation 1993 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of _________% of my Compensation on each payday (not to exceed 15%) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete "Actel Corporation 1993 Employee Stock Purchase Plan." I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that the grant of the option by the Company under this Subscription Agreement is subject to obtaining shareholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse Only): _______________________________________________________________________________. 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased over the price which I paid for the shares. I hereby agree to notify the Company in writing within 30 days after the date of any disposition of my shares and I will make adequate provision for Federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary to receive all payments and shares due me under the Employee Stock Purchase Plan (if you wish to designate more than one beneficiary, execute and deliver copies of this page): PLEASE PRINT! NAME:___________________________________________________________________________ (First) (Middle) (Last) _______________________________________ Relationship ________________________________________ ________________________________________ ________________________________________ (Address) I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated:_________________________________ ________________________________________ Signature of Employee ________________________________________ Spouse's Signature (If beneficiary other than spouse) EXHIBIT B ACTEL CORPORATION 1993 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the Actel Corporation 1993 Employee Stock Purchase Plan which began on __________________________, 19_____ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. ________________________________________ ________________________________________ ________________________________________ ________________________________________ (Name and Address of Participant) ________________________________________ (Signature) ________________________________________ (Date) EX-13 4 PORTIONS OF 1997 ANNUAL REPORT TO SHAREHOLDERS ACTEL CORPORATION SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share data)
Year Ended December 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ Statements of Operations Data: Net revenues................................ $ 155,858 $ 148,779 $ 108,516 $ 76,007 $ 59,598 Costs and expenses: Cost of revenues......................... 64,244 64,420 52,517 33,349 26,389 Research and development................. 26,465 23,934 20,560 14,406 10,953 Selling, general, and administrative..... 41,194 38,395 27,364 19,699 16,708 In-process R&D (1)....................... -- -- 16,600 -- -- ------------ ------------ ------------ ------------ ------------ Total costs and expenses........... 131,903 126,749 117,041 67,454 54,050 ------------ ------------ ------------ ------------ ------------ Income (loss) from operations............... 23,955 22,030 (8,525) 8,553 5,548 Interest expense............................ -- (13) (93) (232) (559) Interest income and other, net.............. 1,842 1,068 846 935 569 ------------ ------------ ------------ ------------ ------------ Income (loss) before taxes.................. 25,797 23,085 (7,772) 9,256 5,558 Tax provision (benefit)..................... 9,029 8,147 (6,640) 1,389 555 ------------ ------------ ------------ ------------ ------------ Net income (loss)........................... $ 16,768 $ 14,938 $ (1,132) $ 7,867 $ 5,003 ============ ============ ============ ============ ============ Net income (loss) per share: Basic (2)................................ $ 0.82 $ 0.84 $ (0.07) $ 0.46 $ 0.33 ============ ============ ============ ============ ============ Diluted (2).............................. $ 0.76 $ 0.70 $ (0.07) $ 0.45 $ 0.32 ============ ============ ============ ============ ============ Shares used in computing net income (loss) per share: Basic.................................... 20,370 17,826 17,367 16,995 15,086 ============ ============ ============ ============ ============ Diluted.................................. 21,968 21,485 17,367 17,579 15,811 ============ ============ ============ ============ ============
December 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ Consolidated Balance Sheet Data: Working capital............................ $ 76,279 $ 55,397 $ 39,867 $ 35,971 $ 32,330 Total assets............................... 159,994 136,712 107,119 67,855 61,130 Long-term obligations (3).................. -- -- -- 72 926 Convertible preferred stock (4)............ -- 18,147 18,147 -- -- Total shareholders' equity................. 109,010 69,357 50,920 49,311 40,223 - ----------------------------------------------------------- (1) 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"). (2) 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 Notes 1 and 13 of Notes to Consolidated Financial Statements for further discussion of earnings per share and the impact of Statement No. 128. (3) Includes long-term portion of notes payable, capital lease obligations, and settlement payable. (4) Represents redeemable, convertible preferred stock issued to TI in connection with the Company's 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 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. Results of Operations The following table sets forth certain financial data from the Consolidated Statements of Operations expressed as a percentage of net revenues:
Year Ended December 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Net revenues............................................................ 100.0% 100.0% 100.0% Cost of revenues........................................................ 41.2 43.3 48.4 ------------ ------------ ------------ Gross margin............................................................ 58.8 56.7 51.6 Research and development................................................ 17.0 16.1 19.0 Selling, general, and administrative.................................... 26.4 25.8 25.2 In-process research and development..................................... -- -- 15.3 ------------ ------------ ------------ Income (loss) from operations........................................... 15.4 14.8 (7.9) Interest and other income, net.......................................... 1.2 0.7 0.7 ------------ ------------ ------------ Income (loss) before taxes.............................................. 16.6 15.5 (7.2) Tax provision (benefit)................................................. 5.8 5.5 (6.2) ------------ ------------ ------------ Net income (loss)....................................................... 10.8% 10.0% (1.0)% ============ ============ ============
The Company's fiscal year ends on the Sunday closest to December 31. Fiscal 1997, 1996, and 1995 ended on December 28, 1997, December 29, 1996, and December 31, 1995, respectively. For ease of presentation, December 31 has been utilized as the fiscal year-end for all years. Acquisition of TI Antifuse FPGA Business On March 31, 1995, the Company completed its acquisition of the antifuse FPGA business of Texas Instruments Incorporated ("TI"), the only second-source supplier of the Company's products, in a transaction accounted for using the purchase method. As consideration for the business acquired, the Company paid $10.0 million in cash and issued 1,000,000 shares of Series A Preferred Stock. The Preferred Stock was valued for purposes of the transaction at $18.9 million and was converted on March 12, 1997, into 2,631,578 shares of Common Stock. The Company expensed the in-process research and development acquired in the transaction, taking a pretax charge of $16.6 million against income in the first quarter of 1995. The Company allocated $4.4 million of the purchase price to intangible assets (i.e., the customer base and goodwill acquired), which are being amortized over five years. Amortization expense was $877,000, $876,000, and $657,000 for the years ended December 31, 1997, 1996, and 1995, respectively. As a result of the acquisition, the revenues of the business acquired from TI are included (beginning with the second quarter of 1995) in the net revenues of the Company. The Company assumed and subsequently fulfilled TI's backlog, which consisted primarily of lower-margin ACT 1 and ACT 2 products with average selling prices generally lower than those charged by the Company for comparable products. These product mix and average selling price influences negatively affected the Company's gross margin for 1995 and the absence of these influences positively affected the Company's gross margin in subsequent quarters. In addition, the Company ceased receiving royalties (which had no associated costs) from TI on sales of FPGAs following the acquisition. See Note 3 of Notes to Consolidated Financial Statements. Net Revenues Net revenues for fiscal 1997 were $155.9 million, an increase of 5% over net revenues for fiscal 1996. This compares with an increase in net revenues of 37% for fiscal 1996 over fiscal 1995. The Company's acquisition of TI's antifuse FPGA business had a negative influence on net revenues for the first quarter of 1995 and a positive effect on net revenues for subsequent quarters. Accordingly, the year-over-year growth rates in net revenues are not necessarily indicative of future results. The Company derives its revenues primarily from the sale of FPGAs, which accounted for 98% of net revenues for 1997, compared with 97% for 1996 and 95% for 1995. The Company also derives revenues from the sale of development systems and receipt of royalties. Net revenues from the sale of FPGAs for 1997 increased 6% over net revenues from the sale of FPGAs for 1996. This compares with an increase of 41% in net revenues from the sale of FPGAs for 1996 over 1995. The growth in net revenues from the sale of FPGAs for 1997 over 1996 was due primarily to a 3% increase in unit sales coupled with a 2% increase in the overall average selling price of FPGAs. The growth in net revenues from the sale of FPGAs for 1996 over 1995 was due primarily to a 39% increase in unit sales coupled with a 7% increase in the overall average selling prices of FPGAs. The increase in unit sales of FPGAs for 1996 was due principally to the Company's acquisition of TI's antifuse FPGA business. The increases in the overall average selling price of FPGAs for 1997 and 1996 was due principally to proportionately greater unit sales of the Company's newer (ACT 3, XL, DX, and RH) product families, which generally command higher average selling prices than the Company's older (ACT 1 and ACT 2) product families. Net revenues from the sale of FPGAs for the second half of 1997 declined from the first half of 1997. This decline occurred in the Company's business for both commercial and high-reliability (or HiRel) FPGAs. Commercial FPGAs are processed using the Company's standard testing, screening, and packaging procedures. In 1997, the Company's HiRel business consisted of military and radiation-hardened (or RH) FPGAs. Military FPGAs undergo special or extended testing, screening, and packaging procedures. RH FPGAs are purchased by the Company from Lockheed Martin Federal Systems, which has a proprietary process that makes RH products radiation-hardened without special testing, screening, or packaging. Orders for military and RH products tend to be large but irregular, and hence difficult to predict. While the Company believes that the demand for HiRel FPGAs should rebound eventually, no assurance to that effect can be given. The Company further believes that its commercial business will resume a pattern of growth as new products are introduced and designed into systems and those systems come into production. The Company introduced a new family of products (MX) in the second half of 1997 and currently expects to introduce another new family (SX) in the first half of 1998. Since design wins take time and design cycles are lengthy, the Company views the introduction of new products and technologies as having an impact on revenues in the medium- to long-term. 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. Over the last three fiscal years, sales to the Company's principal distributors have increased as a percentage of the Company's net revenues. The Company's principal distributors are Wyle Electronics Marketing Group ("Wyle") and Pioneer-Standard Electronics, Inc. ("Pioneer") in North America and Arrow Electronics, Inc. and Zeus Electronics (collectively, "Arrow") worldwide. 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:
1997 1996 1995 ------------ ------------ ------------ Wyle.................................................................... 17% 14% 14% Arrow................................................................... 17 14 12 Pioneer................................................................. 12 11 11
The Company generally does not recognize revenue on a product shipped to a distributor until the distributor resells the product to its customer. Sales to customers outside the United States for 1997, 1996, and 1995 accounted for 31%, 33%, and 38% of net revenues, respectively. Of these export sales, the largest portion was derived from European customers. Export sales have declined as a percentage of net revenues principally because the Company's radiation-hardened (RH) product family, which was introduced in 1996, is sold almost exclusively to customers within the United States. Gross Margin Gross margin for 1997 was 59% of net revenues, compared with 57% of net revenues for 1996 and 52% of net revenues for 1995. The improvement in gross margin for 1997 over 1996 resulted primarily from improved manufacturing yields; wafer price reductions; the generation of an increased percentage of net revenues from sales of the company's newer product families, which generally command higher margins; and 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 improvement in gross margin for 1996 over 1995 resulted primarily from the Company's acquisition of TI's FPGA business, which positively influenced the Company's net revenues and overall average selling price. The Company's gross margin for 1996 also benefited from many of the same factors indicated above that contributed to gross margin improvement for 1997. As is typical in the semiconductor industry, margins on the Company's products generally decline as the average selling prices of such products decline. The Company seeks to offset margin erosion by selling a higher percentage of new products, which tend to have higher margins than more mature products, and by reducing costs. 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 1997 were $26.5 million, or 17% of net revenues, compared with $23.9 million, or 16% of net revenues, for 1996 and $20.6 million, or 19% of net revenues, for 1995. Research and development expenditures for 1997 increased by 11% compared with 1996, and increased as a percentage of net revenues principally because net revenues for the second half of 1997 declined from the first half of 1997. Research and development expenditures for 1996 increased by 16% compared with 1995, but declined as a percentage of net revenues due to economies of scale resulting from the expanded scope of the Company's operations. The Company currently intends to boost the level of its research and development expenditures to accelerate the introduction of new products. As a result, research and development expenditures may again increase as a percentage of net revenues. 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 and, therefore, expects to continue increasing its research and development expenditures. 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 1997 were $41.2 million, or 26% of net revenues, compared with $38.4 million, or 26% of net revenues, for 1996 and $27.4 million, or 25% of net revenues, for 1995. Selling, general, and administrative expenses for 1997 increased by 7% compared with 1996, while the Company's net revenues for 1997 increased by 5% compared with 1996. Selling, general, and administrative expenses for 1997 increased as a percentage of net revenues principally because net revenues for the second half of 1997 declined from the first half of 1997. Selling, general, and administrative expenses for 1996 increased by 40% compared with 1995, while the Company's net revenues for 1996 increased by 37% compared with 1995. Selling, general, and administrative expenses for 1996 increased as a percentage of net revenues principally because of an increased level of sales and marketing activities in support of new products. The Company currently intends to again increase its level of sales and marketing activity in support of new products. In addition, the Company believes that its legal expenses will increase as a percentage of net revenues, principally because of the Company's continuing litigation with QuickLogic Corporation. See Note 12 of Notes to Consolidated Financial Statements. As a result, selling, general, and administrative expenditures may again increase as a percentage of net revenues. In-Process Research and Development The $16.6 million pretax charge for in-process research and development for 1995 resulted from a write-off taken in the first quarter of 1995 in connection with the Company's acquisition of TI's antifuse FPGA business. The value of the in-process research and development was established by an independent valuation specialist. Tax Provision The Company's effective tax rate for 1997 and 1996 was 35%. Significant components affecting the effective tax rate include benefits of federal research and development credits, and the recognition of certain deferred tax assets subject to valuation allowances as of December 31, 1996, and December 31, 1995. The Company recorded a credit for income taxes for 1995 due to the realization of deferred tax assets previously subject to valuation allowances. The Company recorded additional deferred tax assets of approximately $3.0 million related to the 1995 charge for acquired in-process research and development, the realization of which is dependent upon the generation of future taxable income. Financial Condition, Liquidity, and Capital Resources The Company's total assets were $160.0 million at the end of 1997, compared with $136.7 million at the end of 1996. The increase in total assets was attributable principally to increased cash, cash equivalents, and short-term investments. The following table sets forth certain financial data from the Consolidated Balance Sheets expressed as the percentage change from the end of fiscal 1996 to the end of fiscal 1997:
Percentage Change From 1996 to 1997 -------------------------- Cash, cash equivalents, and short-term investments..................................... 102.4% Accounts receivable, net............................................................... (14.8) Inventories............................................................................ (23.7) Property and equipment, net............................................................ (5.6) Total assets........................................................................... 17.0 Total current liabilities.............................................................. 3.6 Shareholders' equity................................................................... 57.2
Cash, Cash Equivalents, and Short-Term Investments The Company's cash, cash equivalents, and short-term investments were $59.0 million at the end of 1997, compared with $29.2 million at the end of 1996. The amount of cash, cash equivalents, and short-term investments increased as a result of $34.0 million of cash provided by operations and $4.0 million of cash provided by financing activities, which were offset in part by $8.2 million of cash used in investing activities. The Company presently has no material financial obligations to its current wafer suppliers. However, 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 intends to monitor 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. Notwithstanding the foregoing, the Company believes that existing cash, cash equivalents, and short-term investments, together with cash from operations, will be sufficient to meet its cash requirements for 1998. A portion of available cash may be used for investment in or acquisition of complementary businesses, products, or technologies. Accounts Receivable The Company's net accounts receivable were $25.1 million at the end of 1997, compared with $29.5 million at the end of 1996. This decline of 15% in net accounts receivable compares favorably with the 5% increase in net revenues for 1997 compared with 1996. The Company believes that its net accounts receivable for 1997 declined through more focused collection efforts and process improvements. Inventories The Company's inventories were $20.5 million at the end of 1997, compared with $26.8 million at the end of 1996. With the decline of inventories in 1997, the Company is approaching its inventory model of 120 days. 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. Excess inventories increase the risk of obsolescence, represent a non-productive use of capital resources, increase handling costs, and delay realization of the price and performance benefits associated with more advanced manufacturing processes. Property and Equipment The Company's net property and equipment was $15.1 million at the end of 1997, compared with $16.0 million at the end of 1996. The Company invested $6.8 million in property and equipment in 1997, compared with $7.8 million in 1996. Depreciation and amortization of property and equipment were $7.5 million for 1997, compared with $5.9 million for 1996. Capital expenditures during the past two years have been primarily for leasehold improvements and for engineering, manufacturing, and office equipment. The Company anticipates that capital expenditures may increase in 1998. Current Liabilities The Company's total current liabilities were $51.0 million at the end of 1997, compared with $49.2 million at the end of 1996. Shareholders' Equity Shareholders' equity was $109.0 million at the end of 1997, compared with $69.4 million at the end of 1996. The increase included $18.1 million from the conversion of the Series A Preferred Stock into Common Stock, $16.8 million of net income, and proceeds of $4.0 million from the sale of Common Stock under employee stock plans. Employees At the end of 1997, the Company had 380 full-time employees, including 117 in marketing, sales, and customer support; 137 in research and development; 94 in operations; and 32 in administration and finance. This compares with 356 full-time employees at the end of 1996, an increase of 7%. Net revenues per employee was approximately $410,000 for 1997, compared with approximately $418,000 for 1996. Impact of Recently Issued Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS 128"), which is applicable to all financial statements issued for periods ending after December 15, 1997. Under SFAS 128, the Company is required to change the method it has used to compute earnings per share and to restate all prior periods. The new requirements include a calculation of basic earnings per share, from which the dilutive effect of stock options, warrants, and convertible debt are excluded; and a calculation of diluted earnings per share, which does not differ from previously reported net income (loss) per share. Accordingly, the Company adopted the provisions of SFAS 128 for the year ended December 31, 1997, and all share and per share data have been adjusted retroactively to comply with the new requirement. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose statements and is expected to be first reflected in the Company's first quarter of 1998 interim financial statements. The Company's management is currently evaluating the impact of SFAS 130 on operations. In June 1997, the Financial Accounting Standards Board also issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which established standards for the way pubic enterprises report information in annual statements and financial reports regarding operating segments, products, services, geographic areas, and major customers. SFAS 131 will be first reflected in the Company's 1998 Annual Report. The Company's management is currently evaluating the impact of SFAS 131 on operations. Quarterly Information The following table presents certain unaudited quarterly results for each of the eight quarters in the period ended December 28, 1997. 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. These quarterly operating results, however, are not necessarily indicative of the results for any future period.
Three Months Ended ------------------------------------------------------------------------------------------ Dec. 28, Sept. 28, June 29, Mar. 30, Dec. 29, Sept. 29, June 30, Mar. 31, 1997 1997 1997 1997 1996 1996 1996 1996 --------- -------- ---------- --------- ---------- --------- ---------- --------- (in thousands, except per share amounts) Statements of Operations Data: Net revenues.......................... $ 37,012 $ 38,220 $ 40,823 $ 39,803 $ 39,027 $ 38,014 $ 36,694 $ 35,043 Cost of revenues...................... 15,287 15,788 16,731 16,439 16,381 16,164 16,105 15,769 --------- -------- ---------- --------- ---------- --------- ---------- --------- Gross profit.......................... 21,725 22,432 24,092 23,364 22,646 21,850 20,589 19,274 Research and development.............. 6,816 6,641 6,461 6,547 5,855 6,417 5,650 6,011 Selling, general, and administrative.. 10,313 10,355 10,394 10,131 10,651 9,854 9,582 8,308 --------- -------- ---------- --------- ---------- --------- ---------- --------- Income from operations................ 4,596 5,436 7,237 6,686 6,140 5,579 5,357 4,955 Net income............................ $ 3,382 $ 3,921 $ 4,934 $ 4,531 $ 4,153 $ 3,905 $ 3,606 $ 3,277 Net income per share: Basic (1)........................... $ 0.16 $ 0.19 $ 0.24 $ 0.24 $ 0.23 $ 0.22 $ 0.20 $ 0.19 ========= ======== ========== ========= ========== ========= ========== ========= Diluted (1)......................... $ 0.16 $ 0.18 $ 0.23 $ 0.21 $ 0.19 $ 0.18 $ 0.17 $ 0.16 ========= ======== ========== ========= ========== ========= ========== ========= Shares used in computing net income per share: Basic............................... 21,032 20,956 20,834 18,636 17,971 17,890 17,761 17,667 ========= ======== ========== ========= ========== ========= ========== ========= Diluted............................. 21,623 22,172 21,890 22,082 21,893 21,475 21,467 21,068 ========= ======== ========== ========= ========== ========= ========== =========
Three Months Ended ------------------------------------------------------------------------------------------ Dec. 28, Sept. 28, June 29, Mar. 30, Dec. 29, Sept. 29, June 30, Mar. 31, 1997 1997 1997 1997 1996 1996 1996 1996 --------- -------- ---------- --------- ---------- --------- ---------- --------- As a Percentage of Net Revenues: Net revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues...................... 41.3 41.3 41.0 41.3 42.0 42.5 43.9 45.0 --------- -------- ---------- --------- ---------- --------- ---------- --------- Gross margin.......................... 58.7 58.7 59.0 58.7 58.0 57.5 56.1 55.0 Research and development.............. 18.4 17.4 15.8 16.4 15.0 16.9 15.4 17.2 Selling, general, and administrative.. 27.9 27.1 25.5 25.5 27.3 25.9 26.1 23.7 --------- -------- ---------- --------- ---------- --------- ---------- --------- Income from operations................ 12.4 14.2 17.7 16.8 15.7 14.7 14.6 14.1 Net income............................ 9.1 10.3 12.1 11.4 10.6 10.3 9.8 9.4 - ------------------------------------------------ (1) The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Year 2000 Compliance and Other Factors Affecting Future Operating Results Like most other companies, the year 2000 computer issue creates risk for the Company. If internal systems do not correctly recognize date information when the year changes to 2000, there could be an adverse impact on the Company's operations. The Company has initiated a comprehensive project to prepare its computer systems for the year 2000 and plans to have changes to critical systems completed by the first quarter of 1999 to allow time for testing. The Company is also assessing the capability of its products sold to customers over a period of years to handle the year 2000, but does not currently believe there are product issues. Management believes that the likelihood of a material adverse impact due to problems with internal systems or products sold to customers is remote and expects that the cost of these projects over the next two years will not have a material effect on the Company's financial position or overall trends in results of operations. The Company is also developing a plan to contact critical suppliers of products and services to determine that the suppliers' operations and the products and services they provide are year 2000 capable or to monitor their progress toward year 2000 capability. There can be no assurance that another company's failure to ensure year 2000 capability will not have an adverse effect on the Company. 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 1997, which is incorporated herein by this reference. ACTEL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
December 31, ------------------------ 1997 1996 ----------- ----------- ASSETS Current assets: Cash and cash equivalents........................................................... $ 7,763 $ 3,543 Short-term investments.............................................................. 51,272 25,626 Accounts receivable, net............................................................ 25,135 29,495 Inventories, net.................................................................... 20,472 26,848 Deferred income taxes............................................................... 20,782 16,677 Notes receivable from officers...................................................... 364 -- Other current assets................................................................ 1,475 2,416 ----------- ----------- Total current assets.......................................................... 127,263 104,605 Property and equipment, net............................................................ 15,081 15,973 Investment in Chartered Semiconductor.................................................. 10,680 10,680 Other assets, net...................................................................... 6,970 5,454 ----------- ----------- $ 159,994 $ 136,712 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................... $ 12,440 $ 9,933 Accrued salaries and employee benefits.............................................. 4,718 5,967 Other accrued liabilities........................................................... 2,898 5,922 Deferred income..................................................................... 30,928 27,386 ----------- ----------- Total current liabilities..................................................... 50,984 49,208 Commitments and contingencies Redeemable, convertible preferred stock (Series A), $.001 par value, $25.00 liquidation preference; 1,000,000 shares authorized; none and 1,000,000 shares issued and outstanding at December 31, 1997 and 1996, respectively............................. -- 18,147 Shareholders' equity: Preferred stock, $.001 par value; 4,000,000 shares authorized; none issued and outstanding....................................................................... -- -- Common stock, $.001 par value; 30,000,000 shares authorized; 21,046,894 and 17,991,503 shares issued and outstanding at December 31, 1997 and 1996, respectively...................................................................... 21 18 Additional paid-in capital.......................................................... 85,965 63,133 Retained earnings .................................................................. 23,024 6,206 ----------- ----------- Total shareholders' equity.................................................... 109,010 69,357 ----------- ----------- $ 159,994 $ 136,712 =========== ===========
ACTEL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Year Ended December 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Net revenues............................................................ $ 155,858 $ 148,779 $ 108,516 Costs and expenses: Cost of revenues..................................................... 64,244 64,420 52,517 Research and development............................................. 26,465 23,934 20,560 Selling, general, and administrative................................. 41,194 38,395 27,364 In-process research and development.................................. -- -- 16,600 ------------ ------------ ------------ Total costs and expenses....................................... 131,903 126,749 117,041 ------------ ------------ ------------ Income (loss) from operations........................................... 23,955 22,030 (8,525) Interest expense........................................................ -- (13) (93) Interest income and other, net.......................................... 1,842 1,068 846 ------------ ------------ ------------ Income (loss) before taxes.............................................. 25,797 23,085 (7,772) Tax provision (benefit)................................................. 9,029 8,147 (6,640) ------------ ------------ ------------ Net income (loss)....................................................... $ 16,768 $ 14,938 $ (1,132) ============ ============ ============ Net income (loss) per share: Basic................................................................ $ 0.82 $ 0.84 $ (0.07) ============ ============ ============ Diluted.............................................................. $ 0.76 $ 0.70 $ (0.07) ============ ============ ============ Shares used in computing net income (loss) per share: Basic................................................................ 20,370 17,826 17,367 ============ ============ ============ Diluted.............................................................. 21,968 21,485 17,367 ============ ============ ============
ACTEL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share amounts)
Retained Earnings/ Total Additional (Accumulated Shareholders' Common Stock Paid-In Capital Deficit) Equity --------------- ---------------- --------------- ----------------- Balance at December 31, 1994................ $ 17 $ 57,306 $ (8,012) $ 49,311 Issuance of 455,393 shares of common stock under employee stock plans............... 1 1,894 -- 1,895 Securities valuation adjustment............. -- -- 408 408 Tax benefit from exercise of stock options.. -- 438 -- 438 Net loss.................................... -- -- (1,132) (1,132) --------------- ---------------- --------------- ----------------- Balance at December 31, 1995................ $ 18 $ 59,638 $ (8,736) $ 50,920 =============== ================ =============== ================= Issuance of 429,745 shares of common stock under employee stock plans............... -- 2,955 -- 2,955 Securities valuation adjustment............. -- -- 4 4 Tax benefit from exercise of stock options.. -- 540 -- 540 Net income.................................. -- -- 14,938 14,938 --------------- ---------------- --------------- ----------------- Balance at December 31, 1996................ $ 18 $ 63,133 $ 6,206 $ 69,357 =============== ================ =============== ================= 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 Securities valuation adjustment............. -- -- 50 50 Tax benefit from exercise of stock options.. -- 718 -- 718 Net income.................................. -- -- 16,768 16,768 --------------- ---------------- --------------- ----------------- Balance at December 31, 1997................ $ 21 $ 85,965 $ 23,024 $ 109,010 =============== ================ =============== =================
ACTEL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Operating activities: Net income (loss).................................................... $ 16,768 $ 14,938 $ (1,132) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization...................................... 8,358 6,755 4,412 Loss on disposal of fixed assets................................... 175 -- -- In-process research and development................................ -- -- 16,600 Changes in operating assets and liabilities: Accounts receivable.............................................. 4,360 (11,690) (4,973) Inventories...................................................... 6,376 878 (9,095) Deferred income taxes............................................ (5,050) (6,373) (9,394) Other current assets............................................. 577 (319) 2,710 Accounts payable, accrued salaries and employee benefits, and other accrued liabilities...................................... (1,048) 5,140 8,058 Deferred income.................................................. 3,542 8,238 10,802 ------------ ------------ ------------ Net cash provided by operating activities............................ 34,058 17,567 17,988 Investing activities: Purchase of TI FPGA business......................................... -- -- (10,000) Purchases of property and equipment.................................. (6,764) (7,786) (10,111) Purchases of short-term investments.................................. (157,753) (49,429) -- Sales and maturities of short-term investments....................... 132,156 26,096 16,761 Investment in Chartered Semiconductor................................ -- (3,611) (3,033) Other assets......................................................... (1,447) 126 (2,629) ------------ ------------ ------------ Net cash used in investing activities................................ (33,808) (34,604) (9,012) Financing activities: Sale of common stock................................................. 3,970 2,955 1,895 Proceeds from line of credit......................................... -- -- 4,500 Payments on line of credit........................................... -- -- (4,500) Principal payments under notes payable and capital lease obligations. -- (66) (494) ------------ ------------ ------------ Net cash provided by financing activities............................ 3,970 2,889 1,401 Net increase (decrease) in cash and cash equivalents.................... 4,220 (14,148) 10,377 Cash and cash equivalents, beginning of year............................ 3,543 17,691 7,314 ------------ ------------ ------------ Cash and cash equivalents, end of year.................................. $ 7,763 $ 3,543 $ 17,691 ============ ============ ============ Supplemental disclosures of cash flows information and non-cash investing and financing activities: Cash paid during the year for interest............................... $ -- $ 2 $ 88 Cash paid during the year for taxes.................................. 15,398 12,370 4,593 Tax benefits from exercise of stock options............................. 718 540 438 Preferred stock issued to TI, net of estimated future issuance costs.... -- -- 18,147 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 (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. Net revenues from the sale of FPGAs accounted for 98% of the Company's net revenues for 1997, compared with 97% for 1996 and 95% for 1995. FPGAs are logic integrated circuits, which adapt the microprocessing and memory capabilities of electronic systems to specific applications. The Company's operating results are therefore subject to a variety of risks characteristic of the semiconductor industry, including booking and shipment uncertainties, wafer yield fluctuations, and price erosion, as well as general economic conditions. 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 11. 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 $4,050,000, $3,595,000, and $2,736,000 for 1997, 1996, and 1995, 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. The Company's fiscal year ends on the Sunday closest to December 31. Fiscal 1997, 1996, and 1995 ended on December 28, 1997, December 29, 1996, and December 31, 1995, respectively. For ease of presentation, December 31 has been utilized as the fiscal year-end 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 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, 1997, 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 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. The Company invests in securities of A, A1, or P1 grade. The Company manufactures and sells its products to customers in diversified industries. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. Three of the Company's distributors -- Wyle, Arrow, and Pioneer -- accounted for approximately 17%, 17%, and 12% of the Company's net revenues for 1997, respectively. The same three distributors accounted in the aggregate for approximately 39% of the Company's net revenues for 1996 and 37% for 1995. 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: 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 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. Impact of Recently Issued Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS 128"), which is applicable to all financial statements issued for periods ending after December 15, 1997. Under SFAS 128, the Company is required to change the method it has used to compute earnings per share and to restate all prior periods. The new requirements include a calculation of basic earnings per share, from which the dilutive effect of stock options, warrants, and convertible debt are excluded; and a calculation of diluted earnings per share, which does not differ from previously reported net income (loss) per share. Accordingly, the Company adopted the provisions of SFAS 128 for the year ended December 31, 1997, and all share and per share data have been adjusted retroactively to comply with the new requirement. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose statements and is expected to be first reflected in the Company's first quarter of 1998 interim financial statements. The Company's management is currently evaluating the impact of SFAS 130 on operations. In June 1997, the Financial Accounting Standards Board also issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which established standards for the way pubic enterprises report information in annual statements and financial reports regarding operating segments, products, services, geographic areas, and major customers. SFAS 131 will be first reflected in the Company's 1998 Annual Report. The Company's management is currently evaluating the impact of SFAS 131 on operations. 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 will inevitably differ from such backlog and forecast demand, and such differences may be material to the financial statements. Excess inventories increase the risk of obsolescence, represent a non-productive use of capital resources, increase handling costs, and delay realization of the price and performance benefits associated with more advanced manufacturing processes. Off-Balance-Sheet Risk The Company enters into foreign exchange contracts to hedge firm purchase commitments denominated in foreign currencies. 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 to the underlying transaction being hedged. Gains and losses on these contracts are recognized upon maturity of the contracts and are included in the cost of sales. At December 31, 1997, the Company had foreign exchange contracts maturing in January 1998 to purchase Japanese yen for approximately $830,000 at an average rate of 124 yen per dollar. In addition, the Company had approximately $775,000 outstanding under a standby letter of credit at December 31, 1997. 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 customers is generally recorded at the time of shipment. 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. 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 associated stock purchase plan. 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 estimated. 2. Balance Sheet Detail
December 31, -------------------------- 1997 1996 ------------ ------------ (in thousands) Accounts receivable: Trade accounts receivable.......................................................... $ 26,767 $ 30,128 Allowance for doubtful accounts.................................................... (1,632) (633) ------------ ------------ $ 25,135 $ 29,495 ============ ============ Inventories: Purchased parts and raw materials.................................................. $ 3,681 $ 1,792 Work-in-process.................................................................... 8,438 17,080 Finished goods..................................................................... 8,353 7,976 ------------ ------------ $ 20,472 $ 26,848 ============ ============ Property and equipment: Equipment.......................................................................... $ 33,664 $ 27,539 Furniture and fixtures............................................................. 2,171 2,088 Leasehold improvements............................................................. 4,476 4,210 ------------ ------------ 40,311 33,837 Accumulated depreciation and amortization.......................................... (25,230) (17,864) ------------ ------------ $ 15,081 $ 15,973 ============ ============
Depreciation and amortization expense was approximately $7,481,000, $5,879,000, and $3,755,000 for 1997, 1996, and 1995, respectively. 3. Purchase of TI FPGA Business On February 12, 1995, the Company entered into an Asset Purchase Agreement with Texas Instruments Incorporated ("TI") under which TI agreed to convey to the Company all tangible and intangible assets and intellectual property rights necessary to operate TI's antifuse FPGA business (the "TI FPGA Business"). The acquisition was completed on March 31, 1995, in a transaction accounted for as a purchase. The Company acquired approximately $9,100,000 of inventory, prepaid research and development, and other credits receivable. The Company also acquired certain fixed assets used in the TI FPGA Business. Beginning with the second quarter of 1995, the Company's net revenues included the revenues of the TI FPGA Business, but no longer included royalties from TI. As consideration for the TI FPGA Business, the Company assumed certain liabilities, paid $10,000,000 in cash, and issued 1,000,000 shares of Series A Preferred Stock (valued at approximately $18,947,000 for purposes of the transaction), which on March 12, 1997, were converted by TI into 2,631,578 shares of Common Stock. The total purchase price booked by the Company was approximately $28,947,000, of which approximately $16,600,000 of in-process research and development was charged against income in the first quarter of 1995. The amount was established by an independent valuation specialist. The remaining amount of consideration, approximately $4,400,000, represents the valuation of the customer base and goodwill acquired, was allocated to intangible assets, and is being amortized over a five-year period. Amortization expense was $877,000, $876,000, and $657,000 for the years ended December 31, 1997, 1996, and 1995, respectively. 4. Short-Term Investments The following is a summary of available-for-sale securities at December 31, 1997 and 1996:
Gross Gross Unrealized Unrealized Estimated Cost Gains Losses Fair Values ------------ ------------ ------------ ------------ (in thousands) December 31, 1997 Municipal obligations included in short-term investments $ 51,222 $ 50 $ -- $ 51,272 ============ ============ ============ ============ December 31, 1996 Municipal obligations included in short-term investments $ 25,618 $ 8 $ -- $ 25,626 ============ ============ ============ ============
There were no realized gains or losses in 1997 or 1996. Gross realized gains and (losses) were approximately $4,000 and ($8,000), respectively, for 1995. The adjustments to net unrealized gains and (losses) on investments included as a separate component of shareholders' equity totaled approximately $50,000 and $4,000 for 1997 and 1996, respectively. The expected maturities of the Company's investments at December 31, 1997, 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 (in thousands): Due in less than one year.................................... $ 19,061 Due in one year or more...................................... 32,211 ------------ $ 51,272 ============ 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. 5. Investment in Chartered Semiconductor In February 1994, the Company entered into an agreement to invest approximately $10,000,000 in Chartered Semiconductor Manufacturing Ltd ("Chartered Semiconductor"), a semiconductor company located in Singapore. Under the terms of the agreement, the Company has acquired an equity interest in Chartered Semiconductor of less than 2%. The investment was payable in Singapore dollars, with the initial installment of approximately $2,000,000 paid in March 1994, the second installment of approximately $2,000,000 paid in September 1994, the third installment of approximately $3,000,000 paid in March 1995, and the last installment of approximately $2,900,000 paid in January 1996. In 1996, the Company purchased an additional equity interest in Chartered Semiconductor, pursuant to a contractual right of first refusal, for approximately $698,000. The investment in Chartered Semiconductor is accounted for under the cost method; therefore, changes in the value of the investment are not recognized unless an impairment in the value of the investment is deemed by management to be "other than temporary." 6. Line of Credit The Company has a line of credit with a bank that provides for borrowings not to exceed $10,000,000. The agreement contains covenants that require the Company to maintain certain financial ratios and levels of net worth. At December 31, 1997, 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, 1997. The line of credit, which expires in May 1998, may be terminated by either party upon not less than thirty days' prior written notice. 7. Commitments The Company leases its facilities and certain equipment under non-cancellable lease agreements. The principal facility lease expires in June 1998, and provides for two consecutive five-year renewal options. 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, 1997, the Company had no capital lease obligations. Future minimum lease payments under all non-cancellable leases are as follows: Operating Leases ------------ 1998............................................................ $ 1,530 1999............................................................ 866 2000............................................................ 805 2001............................................................ 575 2002............................................................ 101 ------------ Total minimum lease payments.................................... $ 3,877 ============ Rental expense under operating leases was approximately $2,481,313, $1,615,000, and $1,193,000 for 1997, 1996, and 1995, respectively. 8. 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 first contributions to the plan by the Company were made in March 1998, based on net revenues and net income for the 1997 fiscal year. For 1997, the plan provided for a maximum contribution of 2.5% of an eligible employee's gross earnings or $1,500, whichever is less, if the Company achieved its net revenue and net income goals. To be eligible for the contribution, an employee must have been hired on or before July 15, 1997, and been an active, regular employee on December 31, 1997. Since the Company did not achieve its net revenue or net income goals in 1997 for purposes of the plan, the amount of the contribution was reduced to 1.7% of an eligible employee's gross earnings, up to a maximum of $1,500. The aggregate amount contributed to the plan was $340,750. 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, at its discretion, chooses to make a contribution again in the future, the amount could be higher or lower. 9. Shareholders' Equity Stock Option Plans The Company has adopted stock option plans under which officers and employees may be granted incentive stock options or nonqualified options to purchase shares of the Company's common stock. At December 31, 1997, 7,364,533 shares of common stock were reserved for issuance under these plans, of which 521,100 were available for grant. In January 1998, the Board of Directors authorized the Company to exchange stock options granted under these plans to all employees (except officers with more than one year seniority) and having an exercise price greater than $11.75 for options with an exercise price of $11.75 (the fair market value of the Company's stock on January 26, 1998, when the exchange was effected). Under the terms of this stock option repricing, no portion of any repriced option was exercisable until July 27, 1998. Options representing the right to purchase a maximum of 1,777,016 shares of common stock were repriced. 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, 1997, 200,000 shares of common stock were reserved for issuance under such plan, of which 70,000 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, 1997:
1997 1996 1995 -------------------------- -------------------------- -------------------------- 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...... 3,542,836 $ 12.38 2,506,331 $ 10.17 1,588,565 $ 6.42 Granted....................... 1,252,895 17.39 2,633,911 14.24 1,315,860 12.96 Exercised..................... (214,821) 8.29 (204,344) 6.60 (270,365) 2.25 Cancelled..................... (328,795) 13.40 (1,393,062) 12.79 (127,729) 8.99 ------------- -------------- -------------- Outstanding at December 31.... 4,252,115 13.98 3,542,836 12.38 2,506,331 10.17 ============= ============== ==============
The following table summarizes information about stock options outstanding at December 31, 1997:
December 31, 1997 -------------------------------------------------------------------- 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 - --------------------------------------------- ----------- ---------- ------------ ----------- ------------ $ 1.80 - $ 8.00.................... 588,679 5.69 years $ 6.77 406,441 $ 6.38 8.13 - 10.50.................... 241,275 7.13 9.35 82,619 9.40 10.63.................... 842,625 8.01 10.63 375,099 10.63 12.25 - 13.56.................... 222,850 8.37 13.24 52,624 13.21 14.88.................... 548,225 8.55 14.88 56,107 14.88 15.00 - 16.25.................... 121,625 8.54 15.30 31,416 15.16 16.38.................... 737,116 9.51 16.38 8,065 16.38 17.00 - 20.88.................... 557,670 8.62 19.06 51,643 18.34 21.00 - 22.50.................... 327,400 9.14 21.78 35,045 22.34 22.69.................... 64,650 9.69 22.69 0 0 ----------- ----------- 1.80 - 22.69.................... 4,252,115 8.19 13.98 1,099,059 10.21 =========== ===========
691,944 and 564,195 outstanding options were exercisable at December 31, 1996 and 1995, respectively. The weighted-average grant-date fair value of options granted during 1997, 1996, and 1995 were $7.38, $4.92, and $6.11, 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, 1997, 1,150,000 shares of common stock were reserved for issuance under the ESPP. The ESPP is administered over 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 208,992 and 225,401 shares issued under the ESPP in 1997 and 1996, respectively, and 387,292 remained available for issuance at December 31, 1997. Pro Forma Disclosures Pro forma information regarding net income/(loss) and net income/(loss) per share is required by SFAS 123, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method. The fair value for these options was estimated at the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions for 1997, 1996, and 1995: risk-free interest rates of 5.95%, 5.84%, and 6.55%, respectively; no dividend yield; volatility factor of the expected market price of the Company's common stock of 48%, 50%, and 50%, respectively; and a weighted average expected life of the options of four years. 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 employee stock options 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 employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
Year Ended December 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ (in thousands, except per share amounts) Pro forma net income (loss)............................................. $ 11,405 $ 10,452 $ (2,780) Pro forma earnings (loss) per share: Basic................................................................ 0.56 0.59 (0.16) Diluted.............................................................. 0.54 0.50 (0.16)
Since SFAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until subsequent years. 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. 10. Tax Provision (Benefit) The tax provision (benefit) consists of:
December 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ (in thousands) Federal - current....................................................... $ 11,585 $ 12,150 $ 4,113 Federal - deferred...................................................... (4,544) (5,571) (8,977) State - current......................................................... 2,304 2,460 1,149 State - deferred........................................................ (506) (1,089) (3,044) Foreign - current....................................................... 190 197 119 ------------ ------------ ------------ $ 9,029 $ 8,147 $ (6,640) ============ ============ ============
The tax provision (benefit) reconciles to the amount computed by multiplying income (loss) before tax by the U.S. statutory rate as follows:
December 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ (in thousands) Provision (benefit) at statutory rate................................... $ 9,029 $ 8,079 $ (2,719) Change in valuation allowance........................................... (440) (432) (2,396) Federal research credits................................................ (772) (425) (937) State taxes, net of federal benefit..................................... 1,169 891 (813) Other................................................................... 43 34 225 ------------ ------------ ------------ Tax provision (benefit)................................................. $ 9,029 $ 8,147 $ (6,640) ============ ============ ============
Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes are as follows:
December 31, -------------------------- 1997 1996 ------------ ------------ (in thousands) Deferred tax assets: Depreciation................................................................... $ 219 $ -- Distributor reserve............................................................ 12,350 11,033 Charge for in-process research expenses........................................ 5,450 5,962 Inventories.................................................................... 5,323 3,293 Other, net..................................................................... 3,905 2,453 ------------ ------------ 27,247 22,741 Valuation allowance............................................................ (2,606) (3,046) ------------ ------------ 24,641 19,695 ============ ============ Deferred tax liabilities: Depreciation................................................................... -- (104) ------------ ------------ -- (104) ------------ ------------ Net deferred tax assets................................................ $ 24,641 $ 19,591 ============ ============
The valuation allowance declined by approximately $432,000 during 1996. 11. Industry and Geographic Information The Company operates in a single industry segment. 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:
Year Ended December 31, ---------------------------------------------------------------------------------- 1997 1996 1995 -------------------------- -------------------------- -------------------------- (in thousands, except percentages) United States................. $ 107,308 69% $ 99,131 67% $ 67,156 62% Export: Europe................... 26,239 17 26,105 18 18,706 17 Japan.................... 13,328 8 15,340 10 13,238 12 Other international...... 8,983 6 8,203 5 9,416 9 ------------ ------------ ------------ ------------ ------------ ------------ $ 155,858 100% $ 148,779 100% $ 108,516 100% ============ ============ ============ ============ ============ ============
12. Patent Infringement In January 1994, the Company brought a patent infringement lawsuit against QuickLogic Corporation ("QuickLogic"), which in turn brought a patent infringement counterclaim against the Company in May 1995. The parties are currently engaged in discovery and motion proceedings. Although the Company believes that it has meritorious claims and defenses in this matter, and that its resolution will not have a materially adverse effect on the Company's business, financial position, or results of operations, no assurance can be given to that effect. As is typical in the semiconductor industry, the Company has been and expects to be from time to time notified of claims that it may be infringing patents owned by others. As it has in the past, the Company may obtain licenses under patents that it is alleged to infringe. Although the Company is unable to estimate with any degree of confidence the cost of such licenses, no assurance can be given that they would not, individually or in the aggregate, have a materially adverse effect on the Company's financial condition, and/or results of operations. In addition, no assurance can be given that such claims against the Company will not result in litigation. All litigation, whether or not determined in favor of the Company, can result in significant expense to the Company and can divert the efforts of the Company's technical and management personnel from productive tasks. Although the Company has obtained patents covering elements of its circuit architecture and certain techniques for manufacturing its antifuse, no assurance can be given that the Company's patents will be determined to be valid or that the claims of QuickLogic or any assertions of infringement by other parties (or claims for indemnity from customers resulting from any infringement claims) will not succeed. In the event of an adverse ruling in the QuickLogic case or any other litigation involving intellectual property, the Company could suffer significant (and possibly treble) monetary damages. The Company may also be required to discontinue the use of certain 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. Any of these outcomes could have a materially adverse effect on the Company's business, financial condition, and/or results of operations. 13. Earnings Per Share Under SFAS 128, the Company is required to change the method it has used to compute earnings per share and to restate all prior periods. The new requirements include a calculation of basic earning per share, from which the dilutive effect of stock options, warrants, and convertible debt are excluded; and a calculation of diluted earnings per share, which will not change the primary earnings per share previously reported. For the fiscal year ended December 31, 1995, the dilutive effect of stock options, warrants, and convertible preferred stock was excluded from the calculation of common shares used in the denominator for diluted earnings per share because it is anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share:
Year Ended December 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ (in thousands, except per share amounts) Basic: Average common shares outstanding....................................... 20,370 17,826 17,367 ------------ ------------ ------------ Shares used in computing net income (loss) per share.................... 20,370 17,836 17,367 ============ ============ ============ Net income (loss)....................................................... $ 16,768 $ 14,938 $ (1,132) ============ ============ ============ Net income (loss) per share............................................. $ 0.82 $ 0.84 $ (0.07) ============ ============ ============ Diluted: Average common shares outstanding....................................... 20,370 17,826 17,367 Net effect of dilutive stock options, warrants, and convertible preferred stock - based on the treasury stock method........................... 1,598 3,659 -- ------------ ------------ ------------ Shares used in computing net income (loss) per share.................... 21,968 21,485 17,367 ============ ============ ============ Net income (loss)....................................................... $ 16,768 $ 14,938 $ (1,132) ============ ============ ============ Net income (loss) per share............................................. $ 0.76 $ 0.70 $ (0.07) ============ ============ ============
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, 1997 and 1996, and the related consolidated statements of operations, cash flows, and shareholders' equity for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards. 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, 1997 and 1996 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP San Jose, California January 21, 1998 STOCK LISTING Actel's common stock has been traded on the over-the-counter market since the Company's initial public offering (IPO) on August 2, 1993, and is quoted on the NASDAQ National Market System under the symbol "ACTL." The Company has never paid cash dividends on its common stock and has no present plans to do so. On March 25, 1998, there were 304 shareholders of record. Since many shareholders have their shares held of record in the name of their brokerage firm, the actual number of shareholders is estimated by the Company to be about 5,000. During the last two years, the quarterly high and low sale prices for the common stock were: 1997 High Low - --------------------------------------------------- ------------ ------------ First Quarter...................................... $ 29.125 $ 17.875 Second Quarter..................................... 22.125 15.375 Third Quarter...................................... 24.125 15.75 Fourth Quarter..................................... 19.25 11.25 1996 High Low - --------------------------------------------------- ------------ ------------ First Quarter...................................... $ 17.125 $ 9.00 Second Quarter..................................... 21.875 14.50 Third Quarter...................................... 20.25 12.375 Fourth Quarter..................................... 24.625 16.25 EX-21 5 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 EX-23 6 CONSENT OF ERNST & YOUNG LLP EXHIBIT 21 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, 1998, included in the 1997 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 Statement (Form S-8 No. 33-74492) pertaining to the 1986 Incentive Stock Option Plan, the 1993 Employee Stock Purchase Plan, and the 1993 Directors' Stock Option Plan, and in the Registration Statement (Form S-8 No. 333-3398) pertaining to the 1986 Incentive Stock Option Plan, the 1993 Employee Stock Purchase Plan, and the 1995 Consultant Stock Plan, of our report dated January 21, 1998, 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, 1997, 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 27, 1998 EX-24 7 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 27, 1998 (John C. East) Executive Officer) and Director /s/ Henry L. Perret Vice President of Finance and Chief Financial March 27, 1998 (Henry L. Perret) Officer (Principal Financial and Accounting Officer) Director (Keith B. Geeslin) /s/ Jos C. Henkens Director March 27, 1998 (Jos C. Henkens) /s/ Frederic N. Schwettmann Director March 27, 1998 (Frederic N. Schwettmann) /s/ Robert G. Spencer Director March 27, 1998 (Robert G. Spencer)
EX-27.1 8 FDS -- 1997
5 1,000 YEAR DEC-28-1997 DEC-30-1997 DEC-28-1997 7,763 51,272 26,767 1,632 20,472 127,263 40,311 25,230 159,994 50,984 0 85,965 0 0 23,024 159,994 155,858 155,858 64,244 131,903 0 0 0 25,797 9,029 16,768 0 0 0 16,768 .82 .76
EX-27 9 FDS -- 1996
5 1,000 YEAR DEC-29-1996 JAN-1-1996 DEC-29-1996 3,543 25,626 30,917 1,422 26,848 104,605 33,837 17,864 136,712 49,208 0 63,151 0 18,147 6,206 136,712 148,779 148,779 64,420 126,749 0 0 1,055 23,085 8,147 14,938 0 0 0 14,938 .84 .70
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