-----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, VEpPZdSp7I+R14CeD5qY1Q62YlNS73pnnhIn7jIymknA3z6INjli6gRL5nKf59bm 5PbDMTU/wXDSzLq08OwEAA== 0000907687-99-000018.txt : 19990406 0000907687-99-000018.hdr.sgml : 19990406 ACCESSION NUMBER: 0000907687-99-000018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990103 FILED AS OF DATE: 19990405 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACTEL CORP CENTRAL INDEX KEY: 0000907687 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770097724 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21970 FILM NUMBER: 99587389 BUSINESS ADDRESS: STREET 1: 955 EAST ARQUES AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087391010 MAIL ADDRESS: STREET 1: 955 EAST ARQUES AVE STREET 2: 955 EAST ARQUES AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-K 1 ANNUAL REPORT ON FORM 10-K FOR 1998 FISCAL YEAR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------- FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 3, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-21970 -------------------------------------- ACTEL CORPORATION (Exact name of Registrant as specified in its charter) California 77-0097724 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 955 East Arques Avenue Sunnyvale, California 94086-4533 (Address of principal executive offices) (Zip Code) (408) 739-1010 (Registrant's telephone number, including area code) -------------------------------------- Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of class) -------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing price for shares of the Registrant's Common Stock on March 31, 1999, as reported by the National Market System of the National Association of Securities Dealers Automated Quotation System, was approximately $244,204,048. In calculating such aggregate market value, shares of Common Stock owned of record or beneficially by all officers, directors, and persons known to the Registrant to own more than five percent of any class of the Registrant's voting securities were excluded because such persons may be deemed to be affiliates. The Registrant disclaims the existence of control or any admission thereof for any other purpose. Number of shares of Common Stock outstanding as of March 31, 1999: 21,460,317. ------------------------------- DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference in Parts II, III, and IV of this Annual Report on Form 10-K: (i) portions of Registrant's annual report to security holders for the fiscal year ended January 3, 1999 (Parts II and IV), and (ii) portions of Registrant's proxy statement for its annual meeting of shareholders to be held on May 28, 1999 (Part III). All information contained or incorporated by reference in this Annual Report on Form 10-K should be read in conjunction with and in the context of the Risk Factors set forth in Part I. Unless otherwise indicated, the statements contained in this Annual Report on Form 10-K are made as of March 31, 1999, and Actel undertakes no obligation to update such statements, including any forward-looking statement. 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 antifuses, and anticipates introducing FPGAs based on static random access memory ("SRAM") and flash technologies during 1999. Actel's strategy is to provide logic designers with the broadest range of programmable technology choices. 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 ("Matsushita") in Japan, UMC Corp. ("UMC") in Taiwan, and Winbond Electronics Corp. ("Winbond") in Taiwan, permitting Actel to focus its resources on its core strengths of designing, developing, and marketing FPGAs. Actel's product line consists of ten families of antifuse-based FPGAs; Designer Series Development System, DeskTOP, and CoreHDL software; Silicon Explorer debugging and diagnostic tools; Activator and Silicon Sculptor device programmers; and sockets. To meet the diverse customer requirements in the broad FPGA market, each member of a product family generally is offered in a variety of speed grades, package types, reliability screenings, and ambient temperature tolerances. Designers can use Actel's integrated suite of design tools (DeskTOP) or third-party software for circuit design and then translate the design into a programmed FPGA using Actel's proprietary, highly automated software (Designer Series Development System) and device programmers (Activator and Silicon Sculptor). 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." Sockets permit designers to replace a chip without damaging the board. In a strategic move to position Actel as a complete solution provider for reprogrammable application specific integrated circuit ("ASIC") systems, the Company and GateField Corporation ("GateField") entered into a multi-year strategic alliance in August 1998. In establishing the alliance, Actel purchased marketing and license rights, the assets of GateField's Design Services Business Unit, and preferred stock. Pursuant to a Product Marketing Agreement, Actel acquired the exclusive right to market and sell GateField's standard ProASIC products in process geometries of 0.35-micron and smaller, as well as GateField's ASICmaster design tool software, as part of Actel's programmable logic device ("PLD") and design suite product families. Under the terms of the Agreement, GateField is to provide Actel with a 0.25-micron ProASIC product family that is expected to support densities of up to half a million programmable logic gates. The Agreement further provides for migration to smaller process technologies, with the potential to produce multi-million gate devices. The non-volatile, single-device, reprogrammable standard ProASIC products are being developed from GateField's patented, flash-based reprogrammable ASIC technology and architecture. ProASIC devices exhibit a high level of portability between PLD and ASIC design flows. The Company also offers design, prototyping, and consulting services through its new Design Services Group. Actel markets its products through a worldwide, multi-tiered sales and distribution network. The North American network includes 21 sales management and/or technical sales offices, 19 manufacturers' representative firms, and three major industrial distributors. The European network includes four sales management offices and 26 distributors. The Pan-Asia network includes four sales management offices and 12 distributors. Two additional distributors serve the remaining international markets in which Actel offers its products. The Company was incorporated in California in 1985, and intends to reincorporate as a Nevada corporation during the second quarter of 1999. 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. Unless otherwise indicated, "gate" or "gates" means "ASIC equivalent gates." "Actel" and the Actel logo are registered trademarks of the Company; "ProASIC" and "ASICmaster" are registered trademarks of GateField; and "RAD-PAK" is a registered trademark of . Space Electronics, Inc. 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, standard cells, and programmable logic circuits. Conventional gate arrays and standard cell circuits 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 and standard cells are subject to the time and expense risks associated with any development cycle involving a foundry. Typically, conventional gate arrays and standard cells are first delivered in production volumes months after the successful production of acceptable prototypes. In addition, conventional gate arrays and standard cells 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 and standard cell designs are generally more complex than programmable logic circuit designs, the average capacity (or "gates" per circuit) of conventional gate arrays, standard cells, and programmable logic circuits have all 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 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 and standard cells. 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 or standard cells 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 are programmed with erasable programmable read only memories ("EPROM") or other "floating gate" technologies. Many FPGAs 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 programming elements controlled by floating gates or SRAMs are reprogrammable. 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. 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 be the complete provider of high-density programmable logic by giving designers the capability to make the best technology choice. The Company is implementing this strategy by enhancing the functionality, usability, and accessibility of high-level design tools for its antifuse-based architecture; and by developing new products based on SRAM and flash technologies using a variety of architectures that Actel believes will be better suited for this market than existing reprogrammable architectures. Products and Services Actel's product line consists of ten families of antifuse-based FPGAs; Designer Series Development System, DeskTOP, and CoreHDL software; Silicon Explorer debugging and diagnostic tools; Activator and Silicon Sculptor device programmers; and sockets. In 1998, the first members of the SX family of FPGAs were shipped for revenue and the Company continued to implement its strategy of offering a series of integrated, high-level design FPGA development tools suites at aggressive pricing, including a free entry-level suite. In 1998, Actel also acquired its Design Services Group, which offers system-level design, prototyping, and consulting services. FPGAs To meet the diverse customer requirements in the broad high-capacity programmable logic market, each of the Company's FPGAs (except members of the RadHard family) is offered in a variety of speed grades, package types, reliability screenings, and ambient temperature tolerances. The five members of the ACT 1 and ACT 2 families, for example, can be ordered in more than 100 speed, packaging, screening, and tolerance variations. ACT 1 The ACT 1 family of FPGAs consists of two products: the 1,200-gate A1010, which was first shipped for revenue in 1988; and the 2,000-gate A1020, which was first shipped for revenue in 1989. This family of circuits was introduced at 2.0 micron and is manufactured using 1.0 micron design rules. The Company offers 5.0- and 3.3-volt versions of both ACT 1 products. ACT 2 The ACT 2 family of FPGAs consists of three products: the 4,000-gate A1240 and the 8,000-gate A1280, which were first shipped for revenue in 1991; and the 2,500-gate A1225, which was first shipped for revenue in 1992. This family of circuits was introduced at 1.2 micron and is manufactured using 1.0 micron design rules. ACT 3 The ACT 3 family of FPGAs consists of five products: the 2,500-gate A1425 and the 6,000-gate A1460, which were first shipped for revenue in 1993; and the 1,500-gate A1415, the 4,000-gate A1440, and the 10,000-gate A14100, which were first shipped for revenue in 1994. The ACT 3 family was designed for applications requiring high speed and a high number of inputs and outputs ("I/Os"). The five members of the ACT 3 family can be ordered in approximately 150 speed, packaging, screening, and tolerance variations. The Company offers 5.0- and 3.3-volt versions of all five ACT 3 products, as well as versions (A1460BP and A14100BP) that are compliant with the peripheral component interconnect (PCI) standard. The ACT 3 family was introduced at 0.8 micron and is manufactured using 0.6 micron design rules. XL The 1200XL family of FPGAs, which was first shipped for revenue in 1995, consists of three products: the 2,500-gate A1225XL, the 4,000-gate A1240XL, and the 8,000-gate A1280XL. Taking advantage of 0.6 micron design rules and redesigned I/O modules and clock distribution networks, 1200XL products offer system performance significantly in excess of that offered by pin-compatible ACT 2 devices. The Company offers 5.0- and 3.3-volt versions of all three members of the 1200XL family, which can be ordered in approximately 100 speed, packaging, screening, and tolerance variations. DX The 3200DX family of FPGAs consists of five products: the 6,500-gate A3265DX, which was first shipped for revenue in 1995; the 14,000-gate A32140DX and the 20,000-gate A32200DX, which were first shipped for revenue in 1996; and the 10,000-gate A32100DX and the 30,000-gate A32300DX, which were first shipped for revenue in 1997. The 3200DX family permits designers to integrate the register-intensive datapath functions of FPGAs, the control and decode modules commonly implemented in CPLDs, and the fast dual-port SRAM typically used for high-speed buffering. Supported by the Company's extensive selection of automated design tools, the 3200DX family is optimized for synthesis design methodologies to yield predictable performance for system logic integration. To further assist designers, most members of the family offer JTAG boundary scan logic, which permits testing of the design during manufacture. The Company offers 5.0- and 3.3-volt versions of all five members of the 3200DX family, which is manufactured using 0.6 micron design rules and can be ordered in approximately 150 speed, packaging, screening, and tolerance variations. MX The MX family of FPGAs consists of six products: the 4,000-gate A40MX04 and the 16,000-gate A42MX16, which were first shipped for revenue in 1997; and the 2,000-gate A40MX02, the 9,000-gate A42MX09, the 24,000-gate A42MX24, and the 36,000-gate A42MX36, which were first shipped for revenue in 1998. The MX family includes the best features from Actel's earlier ACT 1, ACT2, 1200XL, and 3200DX families and is manufactured using 0.45 micron design rules, which permits the MX family to work in pure 5.0-volt, pure 3.3-volt, and mixed 5.0- and 3.3-volt systems. Actel believes that, at the time of its introduction in January 1998, the A42MX09 was the world's fastest FPGA. In May 1998, the Company announced the availability of the A42MX09 and the A42MX16 in the popular VQFP-100 pin package, which provides a very small footprint and is particularly useful in handheld and portable computing applications that require high speed, low power consumption, and design flexibility on limited in board space. Designers can achieve 5.0- or 3.3-volt 33MHz PCI-compliant output drives on the A42MX24 and A42MX36, which were introduced in June 1998, by programming a PCI-enable fuse. 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 believed, in combination with its performance and functionality, should make it attractive as a single-chip ASIC alternative. In October 1998, Actel announced list price reductions of up to 50 percent for its MX FPGAs, enhancing the MX family's appeal as an ASIC alternative. In March 1999, the Company announced that it had shipped the two-millionth MX FPGA. This milestone was achieved just thirteen months after the availability of production devices and only eighteen months after the introduction of the first member of the family. This means the MX family ramped to volume faster than any family in Actel's history. Over time, the MX family, which can be ordered in more than 200 speed, packaging, screening, and tolerance variations, and the new SX family (discussed below) should replace all of Actel's earlier FPGA families in new commercial designs. SX The SX family of FPGAs consists of four products, all of which were first shipped for revenue in 1998: the 8,000-gate A54SX08, the 16,000-gate A54SX16 and A54SX16P, and the 32,000-gate A54SX32. The SX family is manufactured using three layers of metal and 0.35 micron design rules, and is scheduled to migrate to 0.25-micron process technology by the end of 1999. SX is the first family to be built on Actel's new triple layer metal, sea of modules architecture that will serve as the foundation for the Company's future antifuse product releases. In Actel's new metal-to-metal antifuse technology, interconnect resources have been moved from the area between logic modules to the Metal 2 and Metal 3 layers. The result is dramatically decreased die size (regardless of density) that increases device performance and reduces cost. The new architecture has been developed for high device performance and features new logic module and interconnect construction. The foundation for the new architecture is a "sea" of logic modules, laid out as a grid across the entire silicon floor. The sea of modules design maximizes the chip area by covering almost the entire silicon substrate with logic resources. To further increase design efficiency and device performance, these modules have been organized into "superclusters." Two different levels of local routing resources within superclusters give designers the ability to achieve very fast performance. SX debuted in April 1998 as the industry's fastest family of FPGAs with the introduction of the A54SX16. The A54SX32, which was introduced in August 1998, is well suited for use in networking, telecommunications, data acquisition, instrumentation, medical electronics and high-speed computer peripheral applications. The A54SX08, which was introduced in October 1998, is optimally compatible with leading-edge applications such as 8b/10b encoding for gigabit Ethernet routers and high-speed interface for DS3 networks. The A54SX16P, which was also introduced in October 1998, meets the PCI AC/DC drive specifications, making it suitable for high-speed applications such as graphic controllers, multimedia and networking cards, communications equipment, and other fully compliant 66MHz PCI designs. All SX devices have full pin compatibility within the family and provide mixed 5/3.3-volt support with 3.3-volt output drive and 5-volt tolerant inputs. The SX family can be ordered in more than 50 speed, packaging, screening, and tolerance variations, and approximately 50 more variations are planned. As discussed above, the SX family achieves high performance by means of the new low-impedance, metal-to-metal antifuse and several innovative architectural features, including a hard-wired clock (320MHz maximum clock frequency), fast I/Os (4ns clock-to-out), and rapid local interconnects (direct connect 0.1ns, fast connect 0.4ns). This combination permits the SX family to often exceed the performance of CPLDs. The SX family's combination of performance and capacity enables designers to combine multiple high performance CPLDs into a single FPGA, thereby cutting power consumption, saving board space, and reducing costs. In November 1998, Actel announced that list prices for SX FPGAs will be reduced by up to 63 percent in the second half of 1999, based on migration to 0.25-micron process technology, backend cost reductions, and increased market demand. These significant SX price reductions should permit customers to use the fastest FPGA on the market and get ASIC-like pricing for volume production. HiRel/Military HiRel and military devices are designed for use in military and extreme temperature environments. All Actel devices offered in plastic packages are certified for commercial (0 to +70(0)C), industrial (-40 to +850(0)C), or military (-55 to +125(0)C) temperature ranges. The Company's HiRel devices offered in ceramic packages are certified for commercial or military temperature ranges or with Class B (MIL-STD-883) qualification. The HiRel family of plastic FPGAs consists of all devices and packages offered commercially. The HiRel family of ceramic FPGAs consists of thirteen products: the 1,200-gate A1010B, the 2,000-gate A1020B, the 2,500-gate A1425A, the 4,000-gate A1240A, the 6,000-gate A1460A, the 8,000-gate A1280A and A1280XL, the 10,000-gate A14100A and A32100DX, the 16,000-gate A54SX16, the 20,000-gate A32200DX, the 32,000-gate A54SX32, and the 36,000-gate A42MX36. In September 1998, Actel announced it had achieved MIL-PRF-38535 Qualified Manufacturer Listing ("QML") certification for its plastic FPGAs. The certification from the Defense Supply Center Columbus ("DSCC") covers international packaging subcontractors ASAT in Hong Kong and ANAM in South Korea. ASAT and ANAM produce PLCC, PQFP, TQFP, VQFP, and RQFP packages for the Company's ACT1, ACT2, ACT3, 1200XL, and 3200DX device families, which have capacities ranging from 2,000 to 36,000 gates. These QML certified components are available at commercial, industrial, and military temperature levels. In November 1998, the Company announced that the MX family had been added to its MIL-PRF-38535 QML certification for plastic components. The additional listing included international packaging subcontractor STATS in Singapore, and the listed packages included PLCCs, PQFPs, a VQFP, and a TQFP. In March 1999, Actel announced it has been awarded full certification to QML status for all military, HiRel, and space products. QML certification qualifies processes and materials rather than individual products or production lots. With QML certification, devices with plastic packages can be integrated into design applications that would otherwise require higher-cost ceramic packages, thereby providing designers with a lower-cost solution. The certification also permits the integration of commercial and military production without compromising quality or reliability. Many suppliers of microelectronic components have implemented QML as their primary worldwide business standard. Appropriate use of this standard helps not only in the implementation of advanced technologies, but also in providing more effective logistical support throughout the life cycle of the product. RT/RP RadTolerant devices are specifically designed for use in space applications, including commercial, military, and civilian satellites and deep-space probes. Actel's RadTolerant devices are offered in ceramic packages and certified for military temperature ranges with either Class B or Class E (extended flow/space) qualification. The RadTolerant family of FPGAs consists of five products: the 2,000-gate RT1020, the 2,500-gate RT1425A, the 6,000-gate RT1460A, the 8,000-gate RT1280A, and the 10,000-gate RT14100A. In September 1998, the Company announced the addition of RT54SX16 and RT54SX32 to the RadTolerant product line, which should be qualified in 1999. The RT54SX16 and RT54SX32 are manufactured at the Matsushita fabrication facility in Japan, which has produced devices with better total dose capabilities than typical commercial fabrication facilities. In February 1998, Actel announced that it had signed a memorandum of understanding with Space Electronics, Inc. ("SEi") to develop and market a new line of high-reliability, radiation-tolerant FPGA products. The agreement called for the two companies to link Actel's commercial FPGA products with SEi's RAD-PAK package shielding technology, which can significantly increase the total dose survivability of commercial FPGA devices. The RAD-PAK family of FPGAs consists of two products: the 8,000-gate RP1280A and the 10,000-gate RP14100A. Actel's RAD-PAK devices are offered in ceramic packages and certified for commercial or military temperature ranges or with Class B or Class E qualification. RadTolerant and RAD-PAK FPGAs provide cost-effective alternatives to radiation hardened devices for applications that require high reliability. One such application is the growing commercial satellite market, widely used in telecommunications for cellular phones, pagers, and global positioning system products and services. RH The RadHard family of FPGAs consists of two products: the 8,000-gate RH1280, which was first shipped for revenue in 1996; and the 2,000-gate RH1020. In March 1998, the Company announced the availability of the RH1020. RadHard devices are offered in ceramic packages and certified with Class VQ (QML) qualification. Actel's RadHard FPGAs are manufactured by Lockheed Martin FSC at its QML facility in Manassas, Virginia, using a high-reliability, radiation-hardened 0.8 micron process. The Company and LMFSC are jointly developing the RadHard family to meet the demands of applications requiring guaranteed levels of performance and radiation survivability, including the growing telecommunications satellite market. Additional applications for RadHard FPGAs include satellites for military use, deep space probes and planetary missions, and ground-based military applications in which radiation survivability is required. Software A key element of the Company's strategy is to support users' 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, and Synplicity. Designer Series Development System In 1995, Actel introduced the Designer Series Development System toolset, a revolutionary software suite built on an object-oriented database that helps optimize and simplify FPGA circuit design, implementation, and testing. The Designer Series has continuously evolved since its introduction and has recently been integrated into the Actel DeskTOP integrated software tools to efficiently perform the suite's place and route tasks. In August 1998, Actel announced the latest revision to its Designer Series FPGA design software, version R2-1998. This new version enhanced timing, precision, and ease of use, and provided full programming for all Actel FPGAs, including the members of Actel's SX family, the industry's fastest devices. By ensuring a greater level of timing analysis accuracy, Actel's R2-1998 Designer Series software helps designers work at the extremely high-frequency capabilities of Actel's new SX FPGA family. A new flip-flop report helps designers to determine the number of sequential and combinatorial macros used in a design for accurate prediction of device utilization. Refinements were made to ACTmap, including clock resource checking and speed/utilization performance improvements; and to ACTgen, including a new user interface, new macro types, behavioral VHDL and Verilog model generation capability, and improved reporting. DeskTOP In February 1999, Actel became the first programmable device supplier to offer a free integrated suite of design tools, the Actel DeskTOP. Introduction of the basic DeskTOP suite was the first phase of Actel's integrated design tool strategy. DeskTOP is a three-vendor suite of logic design tools from Synplicity, VeriBest and Actel, with technical support provided by Actel. The basic DeskTOP version will be offered at no charge to qualified designers through January 31, 2000. It offers synthesis for selected devices of up to 50,000 gates and can be used to design more than 20 Actel device types for commercial and HiRel applications. One year of DeskTOP maintenance, which includes full technical support and upgrades for future Actel device family additions, is $995. Actel's basic DeskTOP offering integrates the functionality of VeriBest's DesignView Design Manager, schematic entry, and VHDL simulator; Synplicity's Synplify synthesis software; and Actel's Designer place and route tool as well as programming, logic analyzer, and timing analysis software. Optional Verilog simulation is scheduled to be added to Actel DeskTOP during the second quarter of 1999. The second phase of Actel's integrated design tool strategy is scheduled for the second quarter of 1999 with the introduction of DeskTOP Pro and DeskTOP Open. As a migration path option, DeskTOP Pro will take the entire DeskTOP development software offering from VeriBest, Synplicity, and Actel to the highest level of functional performance and productivity for the design of all Actel devices. DeskTOP Pro is targeted as a very reasonably priced, complete tool suite solution for "power users" designing high gate count, system-level devices. Actel DeskTOP Open will feature an open synthesis environment is being developed to appeal to customers who have already invested in their own synthesis tools. Both DeskTOP Open and DeskTOP Pro will offer feature-rich design solutions with no maximum size limitation for all supported Actel devices. 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 consists of three cores, which are available in either Verilog-HDL or VHDL source code: CorePCI Target, CorePCI Target+DMA, and Serial Communication UART. There are two versions of each PCI core, one that has been ported to the Company's PCI-compliant ACT 3 devices (A1460BP and A14100BP) and one that has been ported to the PCI-compliant MX (A42MX24 and A42MX36) and SX (A54SX16P) devices. Actel also offers nine cores developed by Inicore AG, a Swiss IP provider, which are available only in VHDL source code: ADPLL, CANbus, CPU 6809, G704 (ISDN Framer), HDLC, I2C, UART, Utopia (ATM), and VME. In general, these cores are targeted to telecommunications and industrial control applications. Silicon Explorer Silicon Explorer is a powerful debugging and verification tool that enables the user to monitor the internal operation of a programmed FPGA as it performs its functions at speed within a real system. By permitting real-time probing, Silicon Explorer can significantly reduce the amount of time necessary to debug and verify an FPGA design. 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 is 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 an 18 channel logic analyzer and features high-speed 100 MHz asynchronous or 66 MHz synchronous sampling rates. ProbePilot connects directly to any desktop or laptop computer through the serial 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 as a companion to Actel's Designer Series FPGA development tools. Silicon Explorer's software graphically displays the waveforms accessed through ProbePilot - essentially turning your PC into a full-featured 18 channel logic analyzer, eliminating the need for a costly stand-alone logic analyzer. Programmers Actel's FPGAs can be programmed by Activator or Silicon Sculptor device programmers. The programmers obtain the fuse file, which includes instructions on programming an FPGA, from the Company's Designer Series software and use the file to program the device. Once a device is programmed, Actel's optional Silicon Explorer diagnostic debugging tool kit supports functional and timing verification of every internal signal. The Company also supports programmers that are offered by third parties, including BP Microsystems Inc., Data I/O, SMS Sprint, and System General. Activator There are 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. Silicon Sculptor In February 1998, announced the availability of Silicon Sculptor, a new FPGA programmer for the PC. Silicon Sculptor is a cost-effective, highly reliable programmer for Actel devices that is convenient and easy-to-use. The compact size of the Silicon Sculptor makes it easy for designers to program Actel FPGAs from their desktop PC rather than in a lab. A single adapter module can be used to program all Actel devices within a package type, regardless of pin count. In addition, up to four Silicon Sculptors can concurrently program up to four devices from the same PC by simply connecting an expansion cable. Sockets Sockets for Actel FPGAs are available in prototype quantities from Actel and in production quantities from Actel-qualified socket manufacturers. Sockets permit designers to replace a chip without damaging the board, which reduces some of the risk commonly associated with using an antifuse FPGA in prototype board design. The complete line of sockets accommodates all Actel FPGAs in TQFP, PQFP, RQFP, and VQFP packages. In March 1999, the Company announced a range of ball grid array (BGA) sockets for use with its FPGAs. The BGA sockets are well suited to the prototyping environment and are compatible with Actel's MX and SX devices as well as upcoming reprogrammable Actel FPGA families. The use of BGA sockets facilitates migration to full production, decreasing both time-to-market and production costs. The sockets are designed to be reliable and have zero insertion force, meaning that the device is not stressed before, during, or after testing. The main benefit of these sockets is that they are accommodated onto the same pad layout on the printed circuit board (PCB) as the device itself will eventually occupy. This avoids changes to the PCB during the crossover between prototyping and production. BGA packaging is becoming more popular, due mainly to their ease of use and ability to be re-worked. Design Services Group FPGAs are becoming more dense and their design more complex as designers integrate system-level logic functionality and IP onto a single piece of silicon. FPGA suppliers who possess system-level design expertise to offer to their customers will have a distinct advantage in the market. With its acquisition of the GateField Design Services Business Unit in August 1998, Actel became the first FPGA provider to offer such expertise. The Actel Design Services Group has expanded the Company's ability to support a greater portion of customers' overall design and risk management. The Design Services Group is located in a secure facility in Mt. Arlington, New Jersey, and is certified to handle government, military, and proprietary designs. The Actel Design Services Group provides varying levels of design services, including design methodology and tool consulting; turnkey FPGA and ASIC design, IP development and integration, and board and system design; software design and implementation; and development of prototypes, first articles and production units. In January 1999, Actel announced that its Design Services Group was actively involved with a major customer to supply an FPGA and a new register transfer level (RTL) core for a 66MHz PCI design application. This design is being implemented with the beta version of an Actel 66MHz CorePCI macro in the Actel 16,000-gate PCI FPGA, the A54SX16P. This PCI solution is being developed by the Design Services Group for a PC-based accelerator board that will also use a number of Actel's new flash-based ProASIC reprogrammable FPGAs. The Company believes this PCI implementation, when complete, will be the first programmable application operating within the PCI 66MHz specification. 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 antifuse FPGAs in low to medium volumes in the final production form of their products. Some high-volume electronic system manufacturers use Actel's antifuse FPGAs as a prototyping vehicle and convert production to lower-cost conventional gate arrays or standard cells, while others with time-to-market constraints use the Company's FPGAs in the initial production and then convert to conventional gate arrays or standard cells. As product life cycles continue to shorten and manufacturing efficiencies increase in antifuse FPGAs, some high-volume electronic system manufacturers are electing to retain antifuse FPGAs in volume production because conversion to conventional gate arrays or standard cells may not yield sufficiently attractive savings before the electronic system reaches the end of its life. With the introduction of the MX and SX families, Actel believes that its antifuse FPGAs will increasingly be used in high volume production. Communications The high capacity, high performance, and low power consumption of antifuse 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 antifuse 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 antifuse FPGAs are especially well suited for space applications, due to the high radiation tolerance of the antifuse, and for many aircraft and missile flight applications, due to the high density and performance of antifuse FPGAs. For these reasons, the Company is the world's leading supplier of military, radiation tolerant, and radiation hardened 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. In March 1999, Actel announced the appointment of Paul Indaco as Vice President of Worldwide Sales Actel's domestic sales force consists of 70 sales and administrative personnel and field application engineers ("FAEs") operating from 21 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 19 manufacturers' representative firms that operate from approximately 48 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 Arrow Electronics, Inc. and Zeus Electronics (collectively, "Arrow"), Pioneer-Standard Electronics, Inc. ("Pioneer"), and Unique Technologies ("Unique"). Arrow, Pioneer, and Unique have 75, 50, and 30 branch offices in North America, respectively. In March 1998, Actel announced that its RadHard FPGAs were being made available through the Company's North American distribution network, making it easier for small subcontractors on communications satellite and military/aerospace projects to incorporate such devices into their designs. Prior to the announcement, all sales were made direct from the factory. In August 1998, Actel announced that it had switched its Veba Electronics Group distribution partner in North America from Wyle Electronics ("Wyle") to Unique. Veba Electronics Group is one of the world's largest distributors of electronic components. Veba's Northern American distribution group includes Unique, Insight, and Wyle. A majority of the transition from Wyle to Unique was completed within 45 days. Actel is now strategically positioned as Unique's only FPGA supplier. This means that Unique's FPGA focus will be exclusively on Actel's channel distribution, service, and support requirements. Under its agreement with the Company, Unique will furnish distribution services and customer design support for Actel's existing and future FPGA product lines, including the ProASIC family of flash-based reprogrammable products. The agreement also provides for Unique to add FAEs dedicated to the Company. Actel generates a significant portion of its revenues from international sales. Sales to customers outside the United States for 1998, 1997, and 1996 accounted for 33%, 31%, and 33% of net revenues, respectively. Of these export sales, the largest portion was derived from European customers. The Company's European sales organization consists of 26 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. Actel's Pan-Asia sales organization consists of 12 distributors having approximately 25 branch offices. The activities of these distributors are supervised from sales management offices in Hong Kong (China), Seoul (Korea), Taipei (Taiwan), and Tokyo (Japan), where a total of nine people are employed. In June 1998, the Company announced the appointment of a regional sales manager and a synthesis expert for the Pan-Asian region and a Korean account sales manager. Two additional distributors serve the remaining international markets in which Actel offers its products. In January 1998, Actel announced an agreement with High Reliability Components Corporation ("HIREC") to bring high reliability FPGAs to the Japanese satellite and space exploration industry. This includes the latest Japanese National Space Development Agency ("NASDA") launch vehicle, the H-IIA Rocket. The Company's radiation tolerant and radiation hardened FPGAs have been a part of many historic U.S. space missions, including such high profile projects as the Hubble Telescope and Mars Explorer. HIREC is a leading distributor of electronic devices and engineering services to the Japanese space industry. The agreement brings together Actel's significant experience in providing mission critical logic devices used in space exploration and communications satellites with HIREC's value added testing and quality assurance services. The result should be more reliable designs and faster time-to-launch for Japan's growing telecommunications and space infrastructure. HIREC has already delivered the Company's FPGAs combined with HIREC's extended tests and quality assurance services to NASDA satellite programs. In September 1998, Actel announced that it had signed an agreement with Unique of Hong Kong under which Unique will distribute all of the Company's existing and future FPGAs in the People's Republic of China (PRC) and ASEAN regions. Unique, a division of Memec (Asia Pacific) Ltd. and part of the worldwide Memec Group within Veba Electronics Inc., is a leading distributor in marketing specialist semiconductors. In October 1998, the Company announced that it had signed an agreement with Maojet Technology Corp. of Taipei, an independent EDA software distributor, to distribute Actel's new ProASIC products in Taiwan; and an agreement with Tomen Electronics Corp. of Tokyo to distribute ProASIC products in Japan. Tomen Electronics is one of Japan's leading distributors of semiconductors, computer peripherals and software. Under the agreements, Maojet and Tomen will distribute all ProASIC products in process of geometries of 0.25-micron and smaller, as well as GateField's ASICmaster design tools software. Actel decided to work with Maojet and Tomen because of their experience distributing ProASIC products for GateField. The Company's sales cycle for the initial sale of a design system is generally lengthy and often requires the ongoing participation of salespersons, engineers, and management. After a sales representative or distributor evaluates a customer's logic design requirements and determines 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. In 1998, 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 does not recognize revenue on products sold to distributors until the products are resold to end customers. Backlog At December 31, 1998, Actel's backlog was approximately $25.5 million, compared with approximately $28.0 million at December 31, 1997. 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 Europe, Japan, Korea, Taiwan, and the Untied States. 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 or web-based technical support database called "Guru." In addition, Actel offers technical seminars on its products and comprehensive training classes on its software. The Company generally warrants its products against defects in material and workmanship for one year. 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 Assembly Actel's 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 Manassas, Virginia; by Matsushita in Japan; by UMC in Taiwan; and by Winbond in Taiwan. The Company's FPGAs in production are manufactured by Chartered Semiconductor using 0.6, 0.45, and 0.35 micron design rules; by Lockheed-Martin FSC using 0.8 micron design rules; by Matsushita using 1.0, 0.8, and 0.6 micron design rules; and by Winbond using 0.8 and 0.6 micron design rules. In March 1999, Actel announced that it had, in partnership with Matsushita, successfully developed a 0.25-micron antifuse process that is being qualified for production. The new process technology was developed in record time, and is expected to sample in the second quarter of 1999 with volume production expected by the third quarter. 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, Korea, and Singapore. Ceramic package assembly, which is generally required for military applications, is performed at one or more subcontractor manufacturing facilities, some of which are in the United States. In September 1998, the Company also announced it had received ISO 9002 certification for the manufacturing and testing of its FPGAs. The certification was granted by DSCC. The ISO standards, developed by the International Organization for Standardization, provide an international benchmark for quality systems. Specifically, ISO 9002 requires compliance in the following areas: management responsibility, customer service, supplier management, internal quality audits, training process control, and inspection. As Actel continues to establish itself as a leading supplier of high-quality FPGAs, ISO certification provides a globally recognized benchmark that Actel's devices have been certified for integrity in the manufacturing and test process. Strategic Relationships In addition to strategic relationships that Actel enjoys with its customers, foundries, assembly houses, distributors, and sales representatives, the Company also has the following strategic partners: AGL In May 1998, the Company announced that it had signed a letter of intent to acquire AutoGate Logic, Inc. ("AGL") of Fremont, California. AGL is a software service company that offers a range of development tools, including place and route and timing analysis software. The financial terms of the proposed acquisition were not disclosed. The proposed acquisition was the result of increasing collaboration between the two companies. Consummation of the proposed acquisition was subject to the execution and delivery of definitive agreements and certain other closing conditions. Discussions ceased in the middle of December 1998, after it became evident that the financial terms contained in the letter of intent were no longer viable and that certain closing conditions would not occur. On March 17, 1999, AGL informed the Company of a change in its situation and requested that Actel renew acquisition negotiations. The Company and AGL have restarted negotiations. Boulder Creek Actel has worked exclusively with Boulder Creek Corporation to jointly develop and manufacturer the Silicon Explorer. Boulder Creek designs and manufactures hardware and software tools used by electronic design engineers to debug systems on a chip. Founded in 1994, Boulder Creek is a privately held company located in Santa Cruz, California. BP Microsystems Actel has worked with BP Microsystems of Houston, Texas, to jointly develop Silicon Sculptor based on BP's world class technology. BP Microsystems offers a wide variety of programmers, including EPROM programmers, universal programmers, concurrent programming systems, and Fine Pitch Automated programming systems. The modules of the Silicon Sculptor are designed to be fully upward compatible with all BP Microsystems antifuse FPGA programmers, which permits design engineers to move from prototype programming to high volume production programming. GateField In a strategic move to position Actel as a complete solution provider for reprogrammable ASIC systems, the Company and GateField entered into a multi-year strategic alliance in August 1998. In establishing the alliance, Actel purchased marketing and license rights, the assets of GateField's Design Services Business Unit, and preferred stock. Consideration paid in these transactions totaled $10,447,000, consisting entirely of cash. For the financial details of these transactions, see Note 5 of Notes to Consolidated Financial Statements. Marketing Rights Under the terms of a Product Marketing Agreement, Actel received exclusive, worldwide distribution rights to the GateField's standard ProASIC FPGA products utilizing less than .35 micron geometries, including FPGA products that are integrated with SRAM or flash memory and all resulting next generation reduced process geometry ProASIC FPGA products. For these rights, the Company paid GateField an initial fee and agreed to pay a fee of $1,000,000 upon qualification of the initial .25 micron product. In addition, Actel and GateField will equally share gross profits from ProASIC product sales. License Rights Pursuant to the terms of a License Agreement, GateField granted to the Company a fully paid, non-exclusive, non-transferable license to sell and upon certain events, make, have made, import and use GateField's standard ProASIC FPGA products below .35 micron and all resulting next generation reduced process geometry ProASIC FPGA products. Design Services Business Assets Pursuant to the terms of an Asset Purchase Agreement, the Company purchased the assets of GateField's Design Service Business Unit, which is located in Mt. Arlington, New Jersey, and engaged in the business of providing prototyping design services and verification services for electronic systems, integrated circuits, and other electronic components. The purchase price for such assets may include contingent payments, not to exceed $1.0 million in the aggregate, based on the Actel Design Services Group achieving certain profitability levels. Preferred Stock Pursuant to terms of a Series C Preferred Stock Purchase Agreement, Actel purchased, and GateField issued to the Company, 300,000 shares of GateField's Series C Convertible Preferred Stock, par value $0.10 (the "Shares"). The Shares are initially convertible into 2,000,000 shares of GateField common stock and are entitled to certain liquidation and redemption rights. In the event that all of GateField's outstanding shares of Series B Preferred Stock are redeemed, Actel shall be entitled to redeem its Series C Shares, subject to applicable law. The Company is entitled to certain registration rights and has a right of first refusal to purchase its pro rata share of certain new securities GateField may issue. Synplicity and VeriBest In November 1998, the Company announced that it had, together with Synplicity and VeriBest, begun developing an integrated tool environment for Actel FPGA designs. The suite of tools, based exclusively on VHDL and Verilog standards and targeted for the PC environment, was released in the first quarter of 1999 (see "Products -- Software -- DeskTOP"). In March 1998, the Company announced that it and Synplicity have jointly developed a seamless synthesis methodology in Synplify 3.0c that allows designers of radiation hardened and radiation tolerant FPGAs to quickly and easily meet the tight single event upset (SEU) requirements specified in the next generation of communication, military, deep space and planetary mission satellites. The new version of Synplify, which is designed to work with Actel's RH1280, RP1280A, RP14100, RT1280, and RT14100 devices, permits designers to automatically infer sequential elements, such as C-C flip-flop macros and triple modular redundancy (TMR) macros, that dramatically improve SEU occurrence. Research and Development In 1998, 1997, and 1996, the Company spent $31.2 million, $26.5 million, and $23.9 million, respectively, on research and development, which represented approximately 20%, 17%, and 16% of net revenues, respectively, for such periods. Actel's research and development expenditures are divided among circuit design, software development, and process technology activities, all of which are dedicated to developing new families of FPGA products based on existing or emerging technologies. 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. Actel's software research and development activities include 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. The research and development projects that the Company publicly discussed in 1998 included the following: ProASIC and ASICmaster As part of its strategic alliance with GateField, Actel acquired the exclusive right to market and sell GateField's Standard ProASIC products in process geometries of 0.35-micron and smaller, as well as GateField's ASICmaster design tool software, as part of Actel's PLD and design suite product families. Under the terms of the Product Marketing Agreement, GateField is to provide Actel with a 0.25-micron ProASIC product family that is expected to support densities of up to half a million programmable logic gates. The Agreement further provides for migration to smaller process technologies, with the potential to produce multi-million gate devices. The non-volatile, single-device, reprogrammable Standard ProASIC products are being developed from GateField's patented, flash-based reprogrammable ASIC technology and architecture. ProASIC devices exhibit a high level of portability between PLD and ASIC design flows. The Company believes that 0.25-micron ProASIC products will be available in 1999. Flash-based ProASIC products offer some benefits over other programmable devices available on the market today. Unlike SRAM and FPGA programmable products, which are either volatile or non-reprogrammable, ProASIC devices are non-volatile and reprogrammable. ProASIC devices permit designers to use their standard ASIC design flow, with no new design methodologies to learn, saving both time and money. ProASIC products also permit a seamless migration to standard ASIC designs, again saving time and money. In addition, ProASIC's high gate density translates into high performance capabilities. The 0.25-micron ProASIC products are closely coupled with ASICmaster automated place-and-route EDA design tool software, which is optimized for HDL design and methodology. ASICmaster software, running on UNIX and Windows NT platforms, accepts netlists from standard mask programmable ASIC tools provided by companies such as Exemplar, Mentor Graphics, ViewLogic, Cadence, and Synopsys. ASICmaster performs place and route of the design into the selected device and provides back-annotated delay information for simulation. Once the design is verified, ASICmaster downloads the layout into a device programmer for chip programming. Design services are provided as needed to help the customer accelerate verification, prototyping, and time-to-market. Because of its agreement with GateField, Actel also expects to benefit from GateField's strategic alliance with Siemens Semiconductor Group of Munich, Germany. This GateField relationship provides access to Siemens' 0.25-micron flash process technology at its new, state-of-the-art wafer fabrication facility in Dresden, Germany, plus assembly and test support. ES Architecture and RS 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 "RS" 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 possible future variants of the ES architecture employing 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 is completing a set of changes to both the silicon and the software, and believes that the product will be available in the second half of 1999. 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, standard cells, PLDs, and FPGAs. Of these, the Company competes principally with suppliers of conventional gate arrays, standard cells, CPLDs, and FPGAs. The primary advantages of conventional gate arrays and standard cells are high capacity, high speed, and low production cost in high volume. Actel competes with conventional gate array and standard cell suppliers by offering lower design costs, shorter design cycles, and reduced inventory risks. However, some customers elect to design and prototype with the Company's products and then convert to conventional gate arrays or standard cells to achieve lower costs for volume production. For this reason, Actel faces competition from companies that specialize in converting CPLDs and FPGAs, including the Company's products, into conventional gate arrays or standard cells. 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. 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. Patents and Licenses As of March 31, 1999, the Company had 167 United States patents and applications pending for an additional 40 United States patents. Actel also had 36 foreign patents and applications pending for 41 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 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. 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. During the third quarter of 1998, the Company and QuickLogic agreed to settle two patent infringement actions between the parties. See "Legal." As part of the settlement, the Company and QuickLogic entered into a Patent Cross License Agreement that protects all existing FPGA products of both companies for the lives of those products. As is typical in the semiconductor industry, the Company has been 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. The Company is in license negotiations with several companies, including two semiconductor manufacturers with significantly greater financial and intellectual property resources than the Company. No assurance can be given 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 1998, the Company had 457 full-time employees, including 137 in marketing, sales, and customer support; 157 in research and development; 115 in operations; and 33 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. In March 1999, Actel announced the appointment of Suzanne Kinner as Vice President of Human Resources. Risk Factors Shareholders of Actel and prospective investors should carefully consider, along with the other information in this Annual Report on Form 10-K, the following risk factors: Acts of God The performance of 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, standard cells, CPLDs, and FPGAs. The Company's two principal competitors are Xilinx, a supplier of FPGAs based on SRAM technology, and Altera, a supplier of CPLDs and FPGAs. The Company also faces competition from companies that specialize in converting FPGAs, including Actel's products, into conventional gate arrays or standard cells. In addition, all existing FPGAs not based on antifuse technology and certain CPLDs are reprogrammable, a feature that makes them more attractive to designers. The Company also believes that, if there were a downturn in the market for CPLDs and FPGAs, companies with broader product lines and longer-standing customer relationships may be in a stronger competitive position than Actel. Many of the Company's current competitors offer broader product lines and have significantly greater financial, technical, manufacturing, and marketing resources than Actel. Significant additional competition is possible from major domestic and international semiconductor suppliers. All such companies are larger, offer broader product lines, and have substantially greater financial and other resources than the Company, including the capability to manufacture their own wafers. Additional competition could adversely affect 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. 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. In any event, given the intensity of the competition and the research and development being done, no assurance can be given that Actel's technologies will remain competitive. Dependence on Customized Manufacturing Processes Actel's antifuse-based FPGAs and, to a lesser extent, flash-based ProASIC FPGAs are manufactured using customized steps that are added to otherwise standard manufacturing processes of independent wafer suppliers. There is considerably less operating history for the customized processes 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 products of Actel's competitors that use standard manufacturing processes. As a result of these factors, the Company's products typically have been fabricated using processes one or two generations behind the processes used 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 often 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 and Hardware Developers Actel is dependent upon independent software and hardware developers for the development, maintenance, and support of certain elements of its Designer Series Development Systems software and of its Silicon Explorer debugging and verification tool, Activator and Silicon Sculptor device programmers, and sockets. The Company's reliance on independent software and hardware developers involves certain risks, including lack of control over development and delivery schedules and the availability of customer support. No assurance can be given that the Company's independent developers will be able to complete software and/or hardware under development, or provide updates or customer support in a timely manner, which could delay future software or FPGA releases and disrupt Actel's ability to provide customer support services. Any significant delays in the availability of the Company's software and/or hardware could be detrimental to the capability of the Company's new families of products to win designs, delay shipments and result in the loss of customers or revenues, or otherwise have a materially adverse effect on 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. Such wafers are manufactured by Chartered Semiconductor in Singapore, Lockheed-Martin FSC in the United States, Matsushita in Japan, by UMC in Taiwan, and Winbond in Taiwan. The Company's reliance on independent wafer manufacturers to fabricate its wafers involves significant risks, including the risk of events limiting production and reducing yields, such as technical difficulties or damage to production facilities, lack of control over capacity allocation and delivery schedules, and 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 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 1998. In general, Actel believes that the military and aerospace industries have 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. In June 1994, Secretary of Defense William Perry directed that the Department of Defense adopt a new way of doing business as it relates to acquisition by avoiding government-unique requirements and relying more on the commercial marketplace. Under the Perry initiative, the Department of Defense must increase access to commercial state-of-the-art technology and must facilitate the adoption by its suppliers of business processes characteristic of world class suppliers. Integration of commercial and military development and manufacturing facilitates the development of dual-use processes and products and contributes to an expanded industrial base that is capable of meeting defense needs at lower costs. To that end, many of the cost-driving specifications that have been part of military procurements for many years have been cancelled in the interest of buying commercial products. The Company anticipates that this trend toward the use of commercial off-the-shelf (COTS) products will continue, and it may erode the revenues and/or margins that Actel derives from sales to customers in the military and aerospace industries, which could have a materially adverse effect on Actel's business, financial condition, or results of operations. Orders from the military and aerospace customers tend to be large and irregular, which creates operational challenges and contributes to fluctuations in 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 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 and, to a lesser extent, flash 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 most members of the MX family and all 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 and SX families are 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. Similarly, Actel anticipates introducing the first members of its new ProASIC and RS families in 1999. 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 and 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. Similarly, the Company anticipates introducing the first members of its new ProASIC and RS families in 1999. While these products are based on flash and SRAM process technologies, respectively, and are therefore less customized than an antifuse process, they are leading edge technologies and less familiar to Actel. The Company has always experienced difficulty achieving satisfactory, sustainable yields on new process technologies at new foundries, and does not believe that ProASIC or RS will be much different. Although Actel 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 ProASIC or RS products. In any event, 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 and could have a materially adverse effect on the Company's operating results. The fabrication of high-performance antifuse wafers or state-of-the-art flash or SRAM 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. 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 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 any 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 1998, 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/Unique, Arrow, and Pioneer, accounted for approximately 14%, 14%, and 9%, respectively, of the Company's net revenues in 1998. 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 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 33%, 31%, and 33% of net revenues for 1998, 1997, and 1996, 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 RS family of products. It is anticipated that both the computational memory capacities and tool runtimes will be several times greater than those 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 scheduled to introduce members of the ProASIC and RS families in 1999. 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 conducts most of its research and development activities at facilities operated by its foundries. Although the Company has not to date experienced any significant difficulty in obtaining access to 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 is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. Based on recent assessments, the Company determined that it would be required to upgrade, modify, and/or replace portions of its internal software and certain internal hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that, with modifications or replacements of existing software and certain hardware, the impact of the Year 2000 issue can be mitigated. However, if the modifications and replacements are not made on a timely basis, no assurance can be given that the Company's internal networks, desktops, and test equipment will be operational, or that third party vendors will be able to meet the Company's production needs. The Company's plan to resolve the Year 2000 issue involves the following four phases: inventory, assessment, remediation, and testing/implementation. The Company has completed its inventory and assessment of information technology ("IT") and non-information technology ("Non-IT") systems that could be significantly affected by the Year 2000. The assessment indicated that most of the Company's significant IT systems could be affected, particularly the order entry, general ledger, billing, and inventory systems. Non-IT systems that could be affected include testers and bar-code devices used in various aspects of the manufacturing and shipping process. Based on a review of its product lines (FPGA devices and programming software and hardware), the Company has determined that the majority of its products it has sold and will continue to sell do not require remediation to be Year 2000 compliant. Accordingly, the Company does not believe that the Year 2000 presents a material exposure as it relates to the Company's products. With respect to its IT exposure, to date the Company has completed the remediation of its ERP systems (systems for order entry, general ledger, billing, production tracking, inventory and shipping) by upgrading to year 2000 compliant versions. Once software is reprogrammed or replaced for a system, testing and implementation are carried out. These phases run concurrently for different systems. The Company plans to have most IT systems fully tested and implemented by June 30, 1999, with 100% completion targeted for September 30, 1999. The remediation of Non-IT systems is significantly more difficult than remediation of IT systems due to the dependency on manufacturers for information on the Year 2000 compliance status of the various components and products. The Company is 30% complete with the remediation phase of its Non-IT systems. The Company expects to complete its remediation of Non-IT systems by June 30, 1999. Testing and implementation of affected equipment is expected to be fully completed by September 30, 1999. The Company has queried all of its significant suppliers and subcontractors ("Suppliers"). To date, the Company is not aware of any Supplier with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that its Suppliers will be Year 2000 ready. The inability of Suppliers to complete their Year 2000 compliance process in a timely fashion could materially and adversely impact the Company. The Company will utilize both internal and external resources to reprogram or replace, test, and implement the software and embedded systems for Year 2000 modifications. To date, the Company has incurred approximately $0.5 million of expenses on efforts directed solely at Year 2000 compliance. The total cost of the Year 2000 project is not expected to exceed $2.0 million and is being funded through operating cash flows. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. The Company believes that it is more likely to experience Year 2000 problems with the systems of Suppliers rather than with the Company's internal systems or products. The Company's Year 2000 program includes efforts to assess the Year 2000 compliance of its Suppliers. The Company currently has no contingency plans in place in the event it does not complete all phases of the Year 2000 program. The Company intends to develop a contingency plan to deal with Year 2000 issues that may materially adversely affect its business processes. The Company intends to have a contingency plan in place no later than June 30, 1999. 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. Executive Officers of the Registrant The following table identifies each executive officer of Actel as of March 31, 1999:
Name Age Position - ------------------------------- ---- ----------------------------------------------------- John C. East................... 54 President and Chief Executive Officer Henry L. Perret................ 53 Vice President of Finance and Chief Financial Officer Esmat Z. Hamdy................. 49 Senior Vice President of Technology & Operations Carl N. Burrow................. 38 Vice President of Marketing Anthony Farinaro............... 36 Vice President & General Manager of Design Services Paul V. Indaco................. 48 Vice President of Worldwide Sales Suzanne M. Kinner.............. 35 Vice President of Human Resources Fares N. Mubarak............... 37 Vice President of Engineering Robert J. Smith, II............ 54 Vice President of Software David L. Van De Hey............ 43 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. Burrow joined the Company in January 1992 as Southwest Regional Sales Manager, was Director of Western Area Sales from February 1996 to October 1997, and has been Vice President of Marketing since October 1997. From June 1983 until January 1992, he held various sales and marketing positions at Texas Instruments, a semiconductor manufacturer. Mr. Farinaro joined Actel in August 1998 as Vice President & General Manager of Design Services. From February 1990 until joining Actel, he held various engineering and management positions with GateField (formally Zycad Corporation until 1997), a semiconductor company, with the most recent position of Vice President of Application & Design Services. From 1985 to 1990, Mr. Farinaro held various engineering and management positions at Singer Kearfott, an aerospace electronics company, and it's spin-off, Plessey Electronic Systems Corporation. Mr. Indaco joined Actel in March 1999 as Vice President of Worldwide Sales. From March 1999 until joining the Company, he served as Vice President of Sales for Chip Express, a semiconductor manufacturer. From January 1996 to February 1999, Mr. Indaco held senior sales management positions with Redwood Microsystems, a semiconductor manufacturer. From October 1994 to January 1996, he held senior sales management positions with LSI Logic, a semiconductor manufacturer. From March 1984 to October 1994, Mr. Indaco held various field engineering sales and marketing for Intel Corporation, a semiconductor manufacturer. From July 1978 to February 1984, he held various field engineering sales and marketing for Texas Instruments, a semiconductor manufacturer. Ms. Kinner joined Actel in March 1999 as Vice President of Human Resources. From November 1994 until joining the Company, she held human resource management positions at S3 Inc., a semiconductor manufacturer. From August 1985 to November 1994, Ms. Kinner held various human resources position for Mentor Graphics, an ECD supplier. 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, IC Works, Inc. From 1984 to 1989, Mr. Mubarak held various engineering, product planning, and engineering management positions with Advanced Micro Devices, a semiconductor manufacturer. 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, Hong Kong (China), Kanata (Ontario) Los Angeles, Milano (Italy), Minneapolis, Munich (Germany), Orlando, Paris (France), Philadelphia, Raleigh, Seoul (Korea), Taipei (Taiwan), and Tokyo (Japan), as well as the facilities of the Design Services Group in Mt. Arlington, New Jersey. The Company believes its facilities will be adequate for its needs in 1999, but is investigating options for continued expansion beyond that time. ITEM 3. LEGAL 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. QuickLogic During the third quarter of 1998, the Company and QuickLogic agreed to settle and dismiss the two patent infringement actions between the parties pending before the United States Court for the Northern District of California, San Jose Division. The actions were dismissed on September 4, 1998. As part of the settlement, the Company and QuickLogic entered into a Patent Cross License Agreement. Management is satisfied with the terms of the settlement, which is immaterial to the Company's business, financial condition, or operating results. Lemelson During the third quarter of 1998, the Lemelson Medical, Education & Research Foundation (the "Foundation"), filed a lawsuit in the United States District Court for the District of Arizona, against the Company and 25 other United States semiconductor companies seeking monetary damages and injunctive relief based on such companies' alleged infringement of certain patents held by the Foundation. The action was dismissed as to the Company on December 8, 1998, pursuant to the terms of a settlement agreement between the Foundation and the Company. The settlement is immaterial to the Company's business, financial condition, or operating results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The information appearing under the caption "Stock Listing" in the Registrant's annual report to security holders for the fiscal year ended January 2, 1999 (the "1998 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 1998 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 1998 Annual Report is incorporated herein by this reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information appearing under the captions "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Shareholders' Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements," and "Report of Ernst & Young LLP, Independent Auditors" in the 1998 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 29, 1999, as filed on or about April 9, 1999, with the Securities and Exchange Commission (the "1999 Proxy Statement") in Part III of this Annual Report on Form 10-K, the 1999 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 1999 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 1999 Proxy Statement and the information under the main caption "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934" in the 1999 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 1999 Proxy Statement and the information under the caption "Executive Compensation" under the main caption "OTHER INFORMATION" in the 1999 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 1999 Proxy Statement and the information under the caption "Security Ownership of Management" under the main caption "OTHER INFORMATION" in the 1999 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 1999 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 1998 Annual Report are incorporated by reference in Item 8 of this Annual Report on Form 10-K: Consolidated balance sheets at December 31, 1998 and 1997 Consolidated statements of income for each of the three years in the period ended December 31, 1998 Consolidated statements of shareholders' equity for each of the three years in the period ended December 31, 1998 Consolidated statements of cash flows for each of the three years in the period ended December 31, 1998 Notes to consolidated financial statements (2) Financial Statement Schedule. The financial statement schedule listed under 14(d) hereof is filed with this Annual Report on Form 10-K. (3) Exhibits. The exhibits listed under Item 14(c) hereof are filed with, or incorporated by reference into, this Annual Report on Form 10-K. (b) Reports on Form 8-K. Actel filed no reports on Form 8-K during the quarter ended January 3, 1999. (c) Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this Report on Form 10-K: Exhibit Number Description - ------------------ ------------------------------------------------------------- 3.1 Restated Articles of Incorporation (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993). 3.2 Restated Bylaws of the Registrant (filed as Exhibit 3.3 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993). 10.1 (2) Form of Indemnification Agreement for directors and officers (filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993). 10.2 (2) 1986 Incentive Stock Option Plan, as amended and restated (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 29, 1996). 10.3 (2) 1993 Directors' Stock Option Plan, as amended and restated (filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 28, 1997). 10.4 (2) 1993 Employee Stock Purchase Plan, as amended and restated (filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 28, 1997). 10.5 (2) 1995 Employee and Consultant Stock Plan, as amended and restated (filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 29, 1996). 10.6 Form of Distribution Agreement (filed as Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993). 10.7 (1) Patent Cross License Agreement dated April 22, 1993 between the Registrant and Xilinx, Inc. (filed as Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993). 10.8 Subscription and Participation Agreement dated February 3, 1994 between the Registrant, Singapore Technologies Ventures Pte Ltd and Chartered Semiconductor Manufacturing Pte Ltd (filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 2, 1994). 10.9 Manufacturing Agreement dated February 3, 1994 between the Registrant and Chartered Semiconductor Manufacturing Pte Ltd (filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 2, 1994). 10.10 Distribution Agreement dated June 1, 1994, between the Registrant and Arrow Electronics, Inc. (filed as Exhibit 10.18 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21970) for the quarterly period ended July 3, 1994). 10.11 (1) Product Development and Marketing Agreement dated August 1, 1994, between the Registrant and Loral Federal Systems Company (filed as Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21970) for the quarterly period ended October 2, 1994). 10.12 (1) Foundry Agreement dated as of June 29, 1995, between the Registrant and Matsushita Electric Industrial Co., Ltd and Matsushita Electronics Corporation (filed as Exhibit 10.25 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21970) for the quarterly period ended July 2, 1995). 10.13 Lease Agreement for the Registrant's offices in Sunnyvale, California, dated May 10, 1995 (filed as Exhibit 10.19 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 31, 1995). 10.14 (1) License Agreement dated as of March 6, 1995, between the Registrant and BTR, Inc. (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 29, 1996). 10.15 Asset Purchase Agreement dated August 14, 1998, between GateField Corporation and Actel Corporation (filed as Exhibit 2.1 to GateField Corporation's Current Report on Form 8-K (File No. 0-13244) on August 14, 1998, and incorporated herein by this reference). 10.16 Series C Preferred Stock Purchase Agreement dated August 14, 1998 between GateField Corporation and Actel Corporation (filed as Exhibit 4.1 to GateField Corporation's Current Report on Form 8-K/A (File No. 0-13244) on August 31, 1998, and incorporated herein by this reference). 10.17 Product Marketing Agreement dated August 14, 1998, between the GateField Corporation and Actel Corporation (filed as Exhibit 10.24 to GateField Corporation's Quarterly Report on Form 10-Q (File No. 0-13244) on November 19, 1998, and incorporated herein by this reference.) 10.18 License Agreement dated August 14, 1998, between GateField Corporation and Actel Corporation (filed as Exhibit 10.25 to GateField Corporation's Quarterly Report on Form 10-Q (File No. 0-13244) on November 19, 1998, and incorporated herein by this reference.) 10.19 (1) Patent Cross License Agreement dated August 25, 1998, between Actel Corporation and QuickLogic Corporation. 13 Portions of Registrant's Annual Report to Shareholders for the fiscal year ended January 2, 1999, incorporated by reference into this Report on Form 10-K. 21 Subsidiaries of Registrant 23 Consent of Ernst & Young LLP, Independent Auditors 24 Power of Attorney - ------------------ (1) Confidential treatment requested as to a portion of this Exhibit. (2) This Exhibit is a management contract or compensatory plan or arrangement. (d) Financial Statement Schedule. The following financial statement schedule of Actel Corporation is filed as part of this Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements of Actel Corporation, including the notes thereto, and the Report of Independent Auditors with respect thereto: Schedule Description Page - --------------- ----------------------------------------------------- --------- II Valuation and qualifying accounts -- All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACTEL CORPORATION April 2, 1999 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, 1996.................. $ 567 $ 81 $ 15 $ 633 Year ended December 31, 1997.................. 633 1,611 612 1,632 Year ended December 31, 1998.................. 1,632 5 83 1,554
EX-13 2 PORTIONS OF 1998 ANNUAL REPORT TO SHAREHOLDERS ACTEL CORPORATION SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share data)
Year Ended December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ Statements of Operations Data: Net revenues................................ $ 154,427 $ 155,858 $ 148,779 $ 108,516 $ 76,007 Costs and expenses: Cost of revenues......................... 61,642 64,244 64,420 52,517 33,349 Research and development................. 31,220 26,465 23,934 20,560 14,406 Selling, general, and administrative..... 41,743 41,194 38,395 27,364 19,699 In-process R&D (1)....................... -- -- -- 16,600 -- ------------ ------------ ------------ ------------ ------------ Total costs and expenses........... 134,605 131,903 126,749 117,041 67,454 ------------ ------------ ------------ ------------ ------------ Income (loss) from operations............... 19,822 23,955 22,030 (8,525) 8,553 Interest expense............................ -- -- (13) (93) (232) Interest income and other, net.............. 2,380 1,842 1,068 846 935 ------------ ------------ ------------ ------------ ------------ Income (loss) before taxes.................. 22,202 25,797 23,085 (7,772) 9,256 Tax provision (benefit)..................... 7,215 9,029 8,147 (6,640) 1,389 ------------ ------------ ------------ ------------ ------------ Net income (loss)........................... $ 14,987 $ 16,768 $ 14,938 $ (1,132) $ 7,867 ============ ============ ============ ============ ============ Net income (loss) per share: Basic (2)................................ $ 0.71 $ 0.82 $ 0.84 $ (0.07) $ 0.46 ============ ============ ============ ============ ============ Diluted (2).............................. $ 0.68 $ 0.76 $ 0.70 $ (0.07) $ 0.45 ============ ============ ============ ============ ============ Shares used in computing net income (loss) per share: Basic.................................... 21,251 20,370 17,826 17,367 16,995 ============ ============ ============ ============ ============ Diluted.................................. 21,921 21,968 21,485 17,367 17,579 ============ ============ ============ ============ ============
December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ Consolidated Balance Sheet Data: Working capital............................ $ 85,858 $ 76,279 $ 55,397 $ 39,867 $ 35,971 Total assets............................... 179,708 159,994 136,712 107,119 67,855 Long-term obligations (3).................. -- -- -- -- 72 Convertible preferred stock (4)............ -- -- 18,147 18,147 -- Total shareholders' equity................. $ 127,054 $ 109,010 $ 69,357 $ 50,920 $ 49,311 - ----------------------------------------------------------- (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 Note 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 and capital lease obligations. (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 ("Actel" or the "Company") is the world's leading supplier of antifuse-based field programmable gate arrays ("FPGAs") and associated software development tools. FPGAs are used by designers of communication, computer, industrial control, military/aerospace, and other electronic systems to differentiate their products and get them to market faster. Business Developments GateField In the third quarter of 1998, the Company entered into a product marketing rights agreement with, and purchased convertible stock of, GateField Corporation ("GateField"). Simultaneously, the Company acquired the Design Services Business Unit of GateField in a transaction accounted for as a purchase. Consideration paid in these transactions totaled $10,447,000, consisting entirely of cash. In accordance with provisions of APB Opinion 16, all identifiable assets, including identifiable intangible assets, were assigned a portion of the total consideration on the basis of their respective fair values. Standard valuation procedures and techniques were utilized in determining the fair value of each acquired asset. This included consideration of cost, income, and market-based valuation approaches, as appropriate, based on the nature of the assets being valued. An income-based approach, which focuses on the cash-flow generating capacity and associated risks of an asset, was considered most appropriate for analyzing the product marketing rights agreement and backlog of the Design Services Business Unit due to their future earnings potential. The value of the assembled work force was estimated on a replacement cost basis by determining the cost to find and interview candidates and to train new employees in their new positions. Lastly, the convertible preferred stock was valued as if converted into common stock at the date of the acquisition, subject to certain valuation adjustments. The assumptions used to estimate the value of the identified intangible assets were developed by the Company and GateField management and were further supported through relevant industry data. The consideration was allocated as follows: $6,000,000 to the product marketing rights agreement; $1,650,000 to the convertible preferred stock; and $2,797,000 (consisting of $447,000 related to net assets and $2,350,000 related to intangible assets) to the Design Services Business Unit. The product marketing rights agreement provides the Company with an exclusive right to market and sell GateField's standard ProASIC products in process geometries of 0.35 micron and smaller as part of the Company's product line. Development of the underlying technology and products is managed and executed exclusively by GateField, and the products are expected to be production qualified by the end of 1999. The Company has agreed to pay additional consideration of $1,000,000 upon qualification of the initial .25 micron product. As of December 31, 1998, GateField's progress in developing the technology and products was consistent with the Company's expectations; however, there can be no assurance that GateField's future technology and product development efforts will result in product sales sufficient to recover the Company's investment. The $6,000,000 allocated to product marketing rights will be amortized over the related products' currently estimated revenue-producing life of seven years; the Company will re-evaluate the expected life if product sales do not commence as scheduled or fail to achieve expected volumes in the future. The Company's investment in GateField's convertible preferred stock consists of 300,000 shares of GateField Series C Preferred Stock that are convertible, at the Company's election, into 2,000,000 shares of GateField Common Stock. The Company's investment in GateField represents less than 5% of total common-equivalent equity of GateField, determined assuming conversion of all GateField convertible preferred stock into common stock. The Company accounts for its preferred stock investment in GateField under the cost method; therefore, changes in the value of the investment are not recognized unless impairment in the value of the investment is deemed to be "other than temporary." Such an impairment could occur if, among other things, product sales subject to the product marketing rights agreement discussed in the preceding paragraph do not commence as scheduled or fail to achieve expected volumes in the future. The Company also purchased from GateField its Design Services Business Unit located in Mt. Arlington, New Jersey. The Actel Design Services Group provides varying levels of design services, including: design methodology and tool consulting; turnkey FPGA and application specific integrated circuit ("ASIC") design; intellectual property ("IP") development and integration; board and system design; software design and implementation; and development of prototypes, first articles, and production units. The Company is the first FPGA provider to offer system-level design expertise, expanding the Company's ability to support a greater portion of customers' overall design and risk management. The Design Services Group is a secure facility certified to handle government, military, and proprietary designs. The Design Services Group is not involved in the development efforts underlying the product marketing rights agreement. The net assets of the Design Services Group were valued at $447,000 and consist principally of fixed assets, accounts receivable, deposits, and accounts payable. Intangible assets were valued at $2,350,000 and consist of $300,000 related to backlog, $1,000,000 related to workforce-in-place, and $1,050,000 related to goodwill. Backlog is being amortized over its estimated useful life of six months. The Design Services Group workforce and goodwill are being amortized over their estimated useful life of five years. QuickLogic During the third quarter of 1998, the Company and QuickLogic Corporation ("QuickLogic") agreed to settle and dismiss the two patent infringement actions between the parties pending before the United States Court for the Northern District of California, San Jose Division. The actions were dismissed on September 4, 1998. As part of the settlement, the Company and QuickLogic entered into a Patent Cross License Agreement. Management is satisfied with the terms of the settlement, which is immaterial to the Company's business, financial condition, or operating results. Lemelson During the third quarter of 1998, the Lemelson Medical, Education & Research Foundation (the "Foundation"), filed a lawsuit in the United States District Court for the District of Arizona, against the Company and 25 other United States semiconductor companies seeking monetary damages and injunctive relief based on such companies' alleged infringement of certain patents held by the Foundation. The action was dismissed as to the Company on December 8, 1998, pursuant to the terms of a settlement agreement between the Foundation and the Company. The settlement is immaterial to the Company's business, financial condition, or operating results. 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, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Net revenues............................................................ 100.0% 100.0% 100.0% Cost of revenues........................................................ 39.9 41.2 43.3 ------------ ------------ ------------ Gross margin............................................................ 60.1 58.8 56.7 Research and development................................................ 20.2 17.0 16.1 Selling, general, and administrative.................................... 27.0 26.4 25.8 ------------ ------------ ------------ Income from operations.................................................. 12.9 15.4 14.8 Interest and other income, net.......................................... 1.5 1.2 0.7 ------------ ------------ ------------ Income before taxes..................................................... 14.4 16.6 15.5 Tax provision........................................................... 4.7 5.8 5.5 ------------ ------------ ------------ Net income.............................................................. 9.7% 10.8% 10.0% ============ ============ ============
Beginning in 1998, the Company's fiscal year ends on the first Sunday in January, instead of the Sunday closest to December 31. Fiscal 1998 was a fifty-three week fiscal year, rather than a normal fifty-two week fiscal year, but that would also have been the case under the old policy. Fiscal 1998, 1997, and 1996 ended on January 3, 1999, December 28, 1997, and December 29, 1996, respectively. For ease of presentation, December 31 has been utilized as the fiscal year-end for all years. Net Revenues Net revenues for fiscal 1998 were $154.4 million, a decrease of 1% from net revenues for fiscal 1997. This compares with an increase in net revenues of 5% for fiscal 1997 over fiscal 1996. The Company derives its revenues primarily from the sale of FPGAs, which accounted for 97% of net revenues for 1998, compared with 98% for 1997 and 97% for 1996. The Company also derives revenues from royalties and the sale of software, hardware, maintenance, and design services. Net revenues from the sale of FPGAs for 1998 decreased 2% from net revenues from the sale of FPGAs for 1997. This compares with an increase of 6% in net revenues from the sale of FPGAs for 1997 over 1996. The decrease in net revenues from the sale of FPGAs for 1998 from 1997 was primarily due to an 11% decrease in the overall average selling price of FPGAs, which was mostly offset by an increase of 12% in unit sales. The decrease in the overall average selling price of FPGAs for 1998 was driven by a higher percentage of shipments of MX product, which has lower average selling prices than other families, coupled with selling price erosion typical to the semiconductor industry. 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 prices of FPGAs. The increase in the overall average selling price in 1997 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. As is typical in the semiconductor industry, the average selling prices of the Company's products generally decline over the lives of such products. To increase revenues, the Company seeks to increase unit sales of existing products, principally by reducing prices, and to introduce and sell new products. No assurance can be given that these efforts will be successful. As is common in the semiconductor industry, the Company generates significant revenues from the sales of its products through distributors. The Company's principal distributors are Unique Technologies, Inc. ("Unique") and Pioneer-Standard Electronics, Inc. ("Pioneer") in North America and Arrow Electronics, Inc. and Zeus Electronics (collectively, "Arrow") worldwide. Unique replaced Wyle Electronics Marketing Group ("Wyle") as an Actel distributor in the second half of 1998. Unique and Wyle are both part of the worldwide Veba Electronics Group. The Company is now strategically positioned as Unique's only FPGA supplier. This provides the Company with a partner whose FPGA focus will be exclusively on the Company's channel distribution, service, and support requirements. The following table sets forth, for each of the last three years, the percentage of revenues derived from all customers accounting for 10% or more of net revenues in any of such years:
1998 1997 1996 ------------ ------------ ------------ Wyle/Unique............................................................. 14% 17% 14% Arrow................................................................... 14% 17% 14% Pioneer................................................................. 9% 12% 11%
The Company does not recognize revenue on product shipped to a distributor until the distributor resells the product to its customer. Sales to customers outside the United States for 1998, 1997, and 1996 accounted for 33%, 31%, and 33% of net revenues, respectively. Of these export sales, the largest portion was derived from European customers. Gross Margin Gross margin for 1998 was 60% of net revenues, compared with 59% of net revenues for 1997 and 57% of net revenues for 1996. The improvements in gross margin resulted primarily from improved manufacturing yields, wafer price reductions, 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 Company periodically enters into foreign exchange contracts to minimize foreign exchange risk relating to wafer purchases denominated in yen. 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 generally 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 1998 were $31.2 million, or 20% of net revenues, compared with $26.5 million, or 17% of net revenues, for 1997 and $23.9 million, or 16% of net revenues, for 1996. Research and development expenditures for 1998 increased by 18% compared with 1997, and increased as a percentage of net revenues as the Company boosted the level of its research and development expenditures to accelerate the introduction of new products. 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 decreased from the first half of 1997. The Company's research and development consists of circuit design, software development, and process technology activities. The Company believes that continued substantial investment in research and development is critical to maintaining a strong technological position in the industry. Since the Company's antifuse FPGAs are manufactured using a customized process, the Company's research and development expenditures will probably always be higher as a percentage of net revenues than that of its major competitors. Selling, General, and Administrative Selling, general, and administrative expenses for 1998 were $41.7 million, or 27% of net revenues, compared with $41.2 million, or 26% of net revenues, for 1997 and $38.4 million, or 26% of net revenues, for 1996. Selling, general, and administrative expenses for 1998 increased by 1% compared with 1997, while the Company's net revenues for 1998 decreased by 1% compared with 1997. Selling, general, and administrative expenses for 1998 increased as a percentage of net revenues principally because of an increased level of sales and marketing activities in support of new products. Selling, general, and administrative expenses for 1997 increased by 7% compared with 1996, while revenues increased in 1997 by 5% over 1996. This spending increase was primarily due to increased sales and marketing support for new products and increased legal spending for litigation support. Tax Provision The Company's effective tax rates for 1998, 1997, and 1996 were 32.5%, 35.0% and 35.0%, respectively. Significant components affecting the effective tax rate include benefits of federal research and development credits, income from tax exempt securities, state composite rate, and the recognition of certain deferred tax assets subject to valuation allowances as of December 31, 1997, December 31, 1996, and December 31, 1995. The effective tax rate for 1998 was less than the effective tax rate for 1997 due primarily to increased R&D spending, increased income from tax exempt securities, and a lower state composite rate. Financial Condition, Liquidity, and Capital Resources The Company's total assets were $179.7 million at the end of 1998, compared with $160.0 million at the end of 1997. The increase in total assets was attributable principally to increased cash, cash equivalents, short-term investments, and inventory. The following table sets forth certain financial data from the Consolidated Balance Sheets expressed as the percentage change from the end of fiscal 1997 to the end of fiscal 1998:
Percentage Change From 1997 to 1998 -------------------------- Cash, cash equivalents, and short-term investments..................................... 19.2% Accounts receivable, net............................................................... (17.2) Inventories............................................................................ 25.4 Property and equipment, net............................................................ (3.2) Other assets (primarily GateField)..................................................... 128.5 Total assets........................................................................... 12.3 Total current liabilities.............................................................. 3.3 Shareholders' equity................................................................... 16.6
Cash, Cash Equivalents, and Short-Term Investments The Company's cash, cash equivalents, and short-term investments were $70.4 million at the end of 1998, compared with $59.0 million at the end of 1997. The amount of cash, cash equivalents, and short-term investments increased as a result of $27.2 million of cash provided by operations and $1.5 million of cash provided by financing activities, which were offset in part by $17.4 million of cash used in investing activities. These activities included approximately $10.4 million used in the GateField transaction and $6.1 million used in the repurchase of Company Common Stock. The Company currently has no material financial obligations to its 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 generated from operations, will be sufficient to meet its cash requirements for 1999. 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 $20.8 million at the end of 1998, compared with $25.1 million at the end of 1997. This decline of 17% in net accounts receivable compares favorably with the 1% decrease in net revenues for 1998 compared with 1997. The Company believes that its net accounts receivable for 1998 declined through more focused collection efforts and process improvements. Inventories The Company's inventories were $25.7 million at the end of 1998, compared with $20.5 million at the end of 1997. This increase was driven primarily by intentional inventory builds in the Company's newest product families, MX and SX, driving an increase in days of inventory from 122 to 148 days. This build enables the Company to have MX and SX products available for immediate shipment to customers. 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. Property and Equipment The Company's net property and equipment was $14.6 million at the end of 1998, compared with $15.1 million at the end of 1997. The Company invested $7.6 million in property and equipment in 1998, compared with $6.8 million in 1997. Depreciation of property and equipment was $8.1million for 1998, compared with $7.5 million for 1997. Capital expenditures during the past two years have been primarily for engineering, manufacturing, and office equipment. Other Assets The Company's other assets grew to $15.9 million at the end of 1998, compared with $7.0 million at the end of 1997. This increase was attributable primarily to the Company's transactions with GateField. See Note 5 of Notes to Consolidated Financial Statements. Current Liabilities The Company's total current liabilities were $52.7 million at the end of 1998, compared with $51.0 million at the end of 1997. Shareholders' Equity Shareholders' equity was $127.1 million at the end of 1998, compared with $109.0 million at the end of 1997. The increase included $15.0 million of net income and proceeds of $7.6 million from the sale of Common Stock under employee stock plans. These increases were offset by the repurchase of 675,000 shares of Common Stock at a cost of $6.1 million. Employees At the end of 1998, the Company had 457 full-time employees, including 137 in marketing, sales, and customer support; 157 in research and development; 115 in operations; 15 in Design Services; and 33 in administration and finance. This compares with 380 full-time employees at the end of 1997, an increase of 20%. Net revenues per employee was approximately $338,000 for 1998, compared with approximately $410,000 for 1997. Impact of Recently Issued Accounting Standards As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS 130 had no impact on the Company's net income or shareholders' equity. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. Total comprehensive income for 1998 and 1997 were $15,114,000 and $16,818,000, respectively. During 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which established standards for the way public enterprises report information in annual statements and financial reports regarding operating segments, products, services, geographic areas, and major customers. The Company currently has one reportable segment under SFAS 131. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is required to be adopted in years beginning after June 15, 1999. The Company is currently evaluating the impact adoption of SFAS 133 will have on financial position, operating results, and cash flow. The American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting For the Costs of Computer Software Developed or Obtained For Internal Use" ("SOP 98-1"), on March 4, 1998. SOP 98-1 provides guidelines for accounting for costs of computer software developed for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 is not expected to materially impact the Company's results of operations, financial position, or cash flow. Market Risk As of December 31, 1998, the Company's investment portfolio consisted of corporate bonds, floating rate notes, and municipal obligations. The primary objectives of the Company's investment activities are to preserve principal, meet liquidity needs, and maximize yields. To meet these objectives, the Company invests in only high credit quality debt securities with average maturities of less than twelve months. The Company also limits the percentage of total investments that may be invested in any one issuer. Corporate investments as a group are also limited to a maximum percentage of the Company's investment portfolio. The Company's investments are subject to interest rate risk. An increase in interest rates could subject the Company to a decrease in the market value of its investments. These risks are mitigated by the ability of the Company to hold these investments to maturity. A hypothetical 60 basis point increase in interest rates would result in an approximate $156,000 decrease (less than 0.3%) in the fair value of the Company's available-for-sale securities. The Company purchases a portion of the wafers it uses in production from Japanese suppliers in purchases denominated in Japanese Yen. An adverse change in the foreign exchange rate would have an effect on the price the Company pays for a portion of the wafers used in production over the long term. The Company attempts to mitigate its exposure to risks from foreign currency fluctuations by purchasing forward foreign exchange contracts to hedge firm purchase commitments denominated in foreign currencies. The Company's forward contracts are subject to foreign exchange risk. The Company's accounting policies for these contracts are based on the Company's designation of the contracts as hedging transactions. The criteria the Company uses for designating a contract as a hedge includes the contract's effectiveness in risk reduction and one-to-one matching of the derivative financial instrument to the underlying transaction being hedged. Forward exchange contracts are short term and do not hedge purchases that will be made for anticipated longer-term wafer needs. An adverse change of 10% in exchange rates would result in a decline in income before taxes of approximately $860,000. All of the potential changes noted above are based upon sensitivity analysis performed on the Company's financial position at December 31, 1998. Actual results may differ materially. Year 2000 Risks The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. Based on recent assessments, the Company determined that it would be required to upgrade, modify, and/or replace portions of its internal software and certain internal hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that, with modifications or replacements of existing software and certain hardware, the impact of the Year 2000 issue can be mitigated. However, if the modifications and replacements are not made on a timely basis, no assurance can be given that the Company's internal networks, desktops, and test equipment will be operational, or that third party vendors will be able to meet the Company's production needs. The Company's plan to resolve the Year 2000 issue involves the following four phases: inventory, assessment, remediation, and testing/implementation. The Company has completed its inventory and assessment of information technology ("IT") and non-information technology ("Non-IT") systems that could be significantly affected by the Year 2000. The assessment indicated that most of the Company's significant IT systems could be affected, particularly the order entry, general ledger, billing, and inventory systems. Non-IT systems that could be affected include testers and bar-code devices used in various aspects of the manufacturing and shipping process. Based on a review of its product lines (FPGA devices and programming software and hardware), the Company has determined that the majority of its products it has sold and will continue to sell do not require remediation to be Year 2000 compliant. Accordingly, the Company does not believe that the Year 2000 presents a material exposure as it relates to the Company's products. With respect to its IT exposure, to date the Company has completed the remediation of its ERP systems (systems for order entry, general ledger, billing, production tracking, inventory and shipping) by upgrading to year 2000 compliant versions. Once software is reprogrammed or replaced for a system, testing and implementation are carried out. These phases run concurrently for different systems. The Company plans to have most IT systems fully tested and implemented by June 30, 1999, with 100% completion targeted for September 30, 1999. The remediation of Non-IT systems is significantly more difficult than remediation of IT systems due to the dependency on manufacturers for information on the Year 2000 compliance status of the various components and products. The Company is 30% complete with the remediation phase of its Non-IT systems. The Company expects to complete its remediation of Non-IT systems by June 30, 1999. Testing and implementation of affected equipment is expected to be fully completed by September 30, 1999. The Company has queried all of its significant suppliers and subcontractors ("Suppliers"). To date, the Company is not aware of any Supplier with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that its Suppliers will be Year 2000 ready. The inability of Suppliers to complete their Year 2000 compliance process in a timely fashion could materially and adversely impact the Company. The Company will utilize both internal and external resources to reprogram or replace, test, and implement the software and embedded systems for Year 2000 modifications. To date, the Company has incurred approximately $0.5 million of expenses on efforts directed solely at Year 2000 compliance. The total cost of the Year 2000 project is not expected to exceed $2.0 million and is being funded through operating cash flows. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. The Company believes that it is more likely to experience Year 2000 problems with the systems of Suppliers rather than with the Company's internal systems or products. The Company's Year 2000 program includes efforts to assess the Year 2000 compliance of its Suppliers. The Company currently has no contingency plans in place in the event it does not complete all phases of the Year 2000 program. The Company intends to develop a contingency plan to deal with Year 2000 issues that may materially adversely affect its business processes. The Company intends to have a contingency plan in place no later than June 30, 1999. Other Risks The Company's operating results are subject to general economic conditions and a variety of risks characteristic of the semiconductor industry (including booking and shipment uncertainties, wafer supply fluctuations, and price erosion) or specific to the Company, any of which could cause the Company's operating results to differ materially from past results. For a discussion of such risks, see "Risk Factors" in Part I of the Company's Annual Report on Form 10-K for 1998, which is incorporated herein by this reference. Quarterly Information The following table presents certain unaudited quarterly results for each of the eight quarters in the period ended January 3, 1999. 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 indicative of the results for any future period.
Three Months Ended ------------------------------------------------------------------------------------------ Jan. 3, Oct. 4, June 28, Mar. 29, Dec. 28, Sept. 28, June 29, Mar. 30, 1999 1998 1998 1998 1997 1997 1997 1997 --------- -------- ---------- --------- ---------- --------- ---------- --------- (in thousands, except per share amounts) Statements of Operations Data: Net revenues.......................... $ 40,174 $ 38,628 $ 37,160 $ 38,465 $ 37,012 $ 38,220 $ 40,823 $ 39,803 Cost of revenues...................... 15,797 15,245 14,815 15,785 15,287 15,788 16,731 16,439 --------- -------- ---------- --------- ---------- --------- ---------- --------- Gross profit.......................... 24,377 23,383 22,345 22,680 21,725 22,432 24,092 23,364 Research and development.............. 8,483 7,960 7,527 7,250 6,816 6,641 6,461 6,547 Selling, general, and administrative.. 10,359 10,411 10,392 10,581 10,313 10,355 10,394 10,131 --------- -------- ---------- --------- ---------- --------- ---------- --------- Income from operations................ 5,535 5,012 4,426 4,849 4,596 5,436 7,237 6,686 Net income............................ $ 4,118 $ 3,837 $ 3,419 $ 3,613 $ 3,382 $ 3,921 $ 4,934 $ 4,531 Net income per share: Basic (1)........................... $ 0.20 $ 0.18 $ 0.16 $ 0.17 $ 0.16 $ 0.19 $ 0.24 $ 0.24 ========= ======== ========== ========= ========== ========= ========== ========= Diluted (1)......................... $ 0.19 $ 0.18 $ 0.16 $ 0.17 $ 0.16 $ 0.18 $ 0.23 $ 0.21 ========= ======== ========== ========= ========== ========= ========== ========= Shares used in computing net income per share: Basic............................... 21,091 21,449 21,288 21,163 21,032 20,956 20,834 18,636 ========= ======== ========== ========= ========== ========= ========== ========= Diluted............................. 22,201 21,724 21,968 21,864 21,623 22,172 21,890 22,082 ========= ======== ========== ========= ========== ========= ========== =========
Three Months Ended ------------------------------------------------------------------------------------------ Jan. 3, Oct. 4, June 28, Mar. 29, Dec. 28, Sept. 28, June 29, Mar. 30, 1999 1998 1998 1998 1997 1997 1997 1997 --------- -------- ---------- --------- ---------- --------- ---------- --------- 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...................... 39.3 39.5 39.9 41.0 41.3 41.3 41.0 41.3 --------- -------- ---------- --------- ---------- --------- ---------- --------- Gross margin.......................... 60.7 60.5 60.1 59.0 58.7 58.7 59.0 58.7 Research and development.............. 21.1 20.6 20.3 18.9 18.4 17.4 15.8 16.4 Selling, general, and administrative.. 25.8 27.0 28.0 27.5 27.9 27.1 25.5 25.5 --------- -------- ---------- --------- ---------- --------- ---------- --------- Income from operations................ 13.8 13.0 11.9 12.6 12.4 14.2 17.7 16.8 Net income............................ 10.3 9.9 9.2 9.4 9.1 10.3 12.1 11.4 - ------------------------------------------------ (1) The earnings per share amounts for the first three quarters of 1997 have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
ACTEL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
December 31, -------------------------- 1998 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents........................................................... $ 13,947 $ 7,763 Short-term investments.............................................................. 56,449 51,272 Accounts receivable, net............................................................ 20,820 25,135 Inventories, net.................................................................... 25,669 20,472 Deferred income taxes............................................................... 18,169 20,782 Notes receivable from officers...................................................... 356 364 Other current assets................................................................ 3,102 1,475 ------------ ------------ Total current assets.......................................................... 138,512 127,263 Property and equipment, net............................................................ 14,592 15,081 Investment in Chartered Semiconductor.................................................. 10,680 10,680 Other assets, net...................................................................... 15,924 6,970 ------------ ------------ $ 179,708 $ 159,994 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................... $ 11,525 $ 12,440 Accrued salaries and employee benefits.............................................. 4,960 4,718 Other accrued liabilities........................................................... 828 1,391 Income taxes payable................................................................ 3,370 1,507 Deferred income..................................................................... 31,971 30,928 ------------ ------------ Total current liabilities..................................................... 52,654 50,984 Commitments and contingencies Shareholders' equity: Preferred stock, $.001 par value; 5,000,000 shares authorized; 1,000,000 issued and converted to common stock, and none outstanding................................... -- -- Common stock, $.001 par value; 55,000,000 shares authorized; 21,181,930 and 21,046,894 shares issued and outstanding at December 31, 1998 and 1997, respectively...................................................................... 21 21 Additional paid-in capital.......................................................... 92,092 85,965 Retained earnings .................................................................. 34,763 22,973 Accumulated Other Comprehensive Income ............................................. 178 51 ------------ ------------ Total shareholders' equity.................................................... 127,054 109,010 ------------ ------------ $ 179,708 $ 159,994 ============ ============
ACTEL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
Year Ended December 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Net revenues............................................................ $ 154,427 $ 155,858 $ 148,779 Costs and expenses: Cost of revenues..................................................... 61,642 64,244 64,420 Research and development............................................. 31,220 26,465 23,934 Selling, general, and administrative................................. 41,743 41,194 38,395 ------------ ------------ ------------ Total costs and expenses....................................... 134,605 131,903 126,749 ------------ ------------ ------------ Income from operations.................................................. 19,822 23,955 22,030 Interest expense........................................................ -- -- (13) Interest income and other, net.......................................... 2,380 1,842 1,068 ------------ ------------ ------------ Income before taxes..................................................... 22,202 25,797 23,085 Tax provision........................................................... 7,215 9,029 8,147 ------------ ------------ ------------ Net income.............................................................. $ 14,987 $ 16,768 $ 14,938 ============ ============ ============ Net income per share: Basic................................................................ $ 0.71 $ 0.82 $ 0.84 ============ ============ ============ Diluted.............................................................. $ 0.68 $ 0.76 $ 0.70 ============ ============ ============ Shares used in computing net income per share: Basic................................................................ 21,251 20,370 17,826 ============ ============ ============ Diluted.............................................................. 21,921 21,968 21,485 ============ ============ ============
ACTEL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share amounts)
Retained Accumulated Additional Earnings/ Other Total Common Paid-In (Accumulated Comprehensive Shareholders' Stock Capital Deficit) Income Equity ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1995............ $ 18 $ 59,638 $ (8,733) $ (3) $ 50,920 Issuance of 429,745 shares of common stock under employee stock plans..... -- 2,955 -- -- 2,955 Tax benefit from exercise of stock options.............................. -- 540 -- -- 540 Net income.............................. -- -- 14,938 -- 14,938 Other comprehensive income: Change in unrealized gain on investments........................ -- -- -- 4 4 ------------ Comprehensive income.................. 14,942 ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1996............ $ 18 $ 63,133 $ 6,205 $ 1 $ 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 Tax benefit from exercise of stock -- 718 -- -- 718 options.............................. Net income.............................. -- -- 16,768 -- 16,768 Other comprehensive income: Change in unrealized gain on investments........................ -- -- -- 50 50 ------------ Comprehensive income.................. 16,818 ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1997............ $ 21 $ 85,965 $ 22,973 $ 51 $ 109,010 ============ ============ ============ ============ ============ Issuance of 785,036 shares of common stock under employee stock plans..... 1 7,599 -- -- 7,600 Issuance of 25,000 shares of common stock for patent acquisition......... -- 366 -- -- 366 Tax benefit from exercise of stock -- 1,097 -- -- 1,097 options.............................. Net income.............................. -- -- 14,987 -- 14,987 Other comprehensive income: Change in unrealized gain on investments....................... -- -- -- 127 127 ------------ Comprehensive income.................. 15,114 Repurchase of common stock.............. (1) (2,935) (3,197) -- (6,133) ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1998............ $ 21 $ 92,092 $ 34,763 $ 178 $ 127,054 ============ ============ ============ ============ ============
ACTEL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Operating activities: Net income........................................................... $ 14,987 $ 16,768 $ 14,938 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization...................................... 9,320 8,358 6,755 Loss on disposal of fixed assets................................... -- 175 -- Changes in operating assets and liabilities: Accounts receivable.............................................. 4,315 4,360 (11,690) Inventories...................................................... (5,197) 6,376 878 Deferred income taxes............................................ 2,613 (5,050) (6,373) Other current assets & notes receivable from officers............ (1,619) 577 (319) Accounts payable, accrued salaries and employee benefits, and other accrued liabilities...................................... 1,724 (1,048) 5,140 Deferred income.................................................. 1,043 3,542 8,238 ------------ ------------ ------------ Net cash provided by operating activities............................ 27,186 34,058 17,567 Investing activities: Purchases of property and equipment.................................. (7,646) (6,764) (7,786) Purchases of available-for-sale securities........................... (134,630) (157,753) (49,429) Sales and maturities of available for sale securities................ 129,580 132,156 26,096 Investment in Chartered Semiconductor................................ -- -- (3,611) Investment in GateField including purchase of design center, preferred stock and other intangible assets ................................. (10,000) ---- ---- Other assets......................................................... 227 (1,447) 126 ------------ ------------ ------------ Net cash used in investing activities................................ (22,469) (33,808) (34,604) Financing activities: Sale of common stock................................................. 7,600 3,970 2,955 Repurchase of common stock........................................... (6,133) -- -- Principal payments under notes payable and capital lease obligations. -- -- (66) ------------ ------------ ------------ Net cash provided by financing activities............................ 1,467 3,970 2,889 Net increase (decrease) in cash and cash equivalents.................... 6,184 4,220 (14,148) Cash and cash equivalents, beginning of year............................ 7,763 3,543 17,691 ------------ ------------ ------------ Cash and cash equivalents, end of year.................................. $ 13,947 $ 7,763 $ 3,543 ============ ============ ============ Supplemental disclosures of cash flows information and non-cash investing and financing activities: Cash paid during the year for interest............................... $ -- $ -- $ 2 Cash paid during the year for taxes.................................. 2,207 15,398 12,370 Tax benefits from exercise of stock options.......................... 1,097 718 540 Issuance of common stock for patent acquisition...................... 366 -- -- 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. The Company also provides design services, including FPGA, application specific integrated circuit ("ASIC"), and system design, software development and implementation, and development of prototypes, first articles and production units. Net revenues from the sale of FPGAs accounted for 97% of the Company's net revenues for 1998, compared with 98% for 1997 and 97% for 1996. Design services, which the Company acquired from GateField Corporation ("GateField") in the third quarter of 1998, accounted for 1% of the Company's net revenues for 1998. FPGAs are logic integrated circuits that 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 $3,454,000, $4,050,000, and $3,595,000 for 1998, 1997, and 1996, 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. Beginning in 1998, the Company's fiscal year ends on the first Sunday in January, instead of the Sunday closest to December 31. Fiscal 1998 was a fifty-three week fiscal year, rather than a normal fifty-two week fiscal year, but that would also have been the case under the old policy. Fiscal 1998, 1997, and 1996 ended on January 3, 1999, December 28, 1997, and December 29, 1996, respectively. For ease of presentation, December 31 has been utilized as the fiscal year-end for all years in the consolidated financial statements and accompanying notes. Cash Equivalents and Short-Term Investments For financial statement purposes, the Company considers all highly liquid debt instruments with insignificant interest rate risk and with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist primarily of cash deposits in money market funds that are available for withdrawal without restriction. Short-term investments consist principally of 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, 1998, all debt securities are designated as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as a component of comprehensive income in shareholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest and other income. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in interest income and other. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income and other. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash investments and trade receivables. The Company invests in securities of A, A1, or P1 grade. The Company is exposed to credit risks in the event of default by the financial institutions or issuers of investments to the extent of amounts recorded on the balance sheet. The Company 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. The Company is exposed to credit risks in the event of insolvency by its customers and limits its exposure to accounting losses by limiting the amount of credit extended whenever deemed necessary. Three of the Company's distributors - Unique (Wyle), Arrow, and Pioneer -- accounted for approximately 14%, 14%, and 9% of the Company's net revenues for 1998, respectively. The same three distributors accounted in the aggregate for approximately 46% of the Company's net revenues for 1997 and 39% for 1996. Unique replaced Wyle as a distributor in the second half of 1998. Unique and Wyle are both part of the worldwide Veba Electronics Group. The loss of any one of these distributors could have a materially adverse effect on the Company's results of operations and financial position. Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: 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 As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS 130 had no impact on the Company's net income or shareholders' equity. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in shareholders' equity to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. The following schedule of other comprehensive income shows the gross current-period gain and the reclassification adjustment. Due to the immaterial components of other comprehensive income in 1998, 1997 and 1996, tax amounts were nominal.
Year Ended December 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (in thousands) Unrealized gain on available-for-sale securities........................ $ 178 $ 51 $ 1 Less reclassification adjustment for gain realized in net income........ (51) (1) 3 Other comprehensive income.............................................. $ 127 $ 50 $ 4
During 1998, the Company adopted the Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which established standards for the way public enterprises report information in annual statements and financial reports regarding operating segments, products, services, geographic areas, and major customers. The Company currently has one reportable segment under SFAS 131. See Note 11 of Notes to the Consolidated Financial Statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is required to be adopted in years beginning after June 15, 1999. The Company is currently evaluating the impact adoption of SFAS 133 will have on financial position, operating results, and cash flow. The American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting For the Costs of Computer Software Developed or Obtained For Internal Use" ("SOP 98-1"), on March 4, 1998. SOP 98-1 provides guidelines for accounting for costs of computer software developed for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 is not expected to materially impact the Company's results of operations or financial position. 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. Off-Balance-Sheet Risk The Company enters into foreign exchange contracts to hedge firm purchase commitments denominated in foreign currencies. The Company does not use forward foreign exchange contracts for speculative or trading purposes. The Company's accounting policies for these instruments are based on the Company's designation of such instruments as hedging transactions. The criteria the Company uses for designating an instrument as a hedge includes its effectiveness in exposure reduction and one-to-one matching of the derivative financial instrument to the underlying transaction being hedged. Gains and losses on these contracts are recognized upon maturity of the contracts and are included in cost of sales. If the criteria for designation of these instruments as hedging transactions is not met, then the instruments would be marked to market, with gains and losses recognized in that period. At December 31, 1998, the Company had foreign exchange contracts maturing in January 1999 to purchase Japanese yen for approximately $85,000 at an average rate of 137 yen per dollar. In addition, the Company had an outstanding standby letter of credit in the amount of approximately $1,062,000 at December 31, 1998. Property and Equipment Property and equipment are carried at cost less accumulated depreciation (see Note 2). Depreciation and amortization have been provided on a straight-line basis over the following estimated useful lives: Equipment......................................... 2 to 5 years Furniture and fixtures............................ 3 to 5 years Leasehold improvements............................ Estimated useful life or lease term, whichever is shorter Revenue Recognition Revenue from product shipped to end customers is generally recorded 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. Design Services revenues are recognized as the services are performed. 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, -------------------------- 1998 1997 ------------ ------------ (in thousands) Accounts receivable: Trade accounts receivable.......................................................... $ 22,374 $ 26,767 Allowance for doubtful accounts.................................................... (1,554) (1,632) ------------ ------------ $ 20,820 $ 25,135 ============ ============ Inventories: Purchased parts and raw materials.................................................. $ 1,285 $ 3,681 Work-in-process.................................................................... 12,052 8,438 Finished goods..................................................................... 12,332 8,353 ------------ ------------ $ 25,669 $ 20,472 ============ ============ Property and equipment: Equipment.......................................................................... $ 39,711 $ 33,664 Furniture and fixtures............................................................. 2,267 2,171 Leasehold improvements............................................................. 4,728 4,476 ------------ ------------ 46,706 40,311 Accumulated depreciation and amortization.......................................... (32,114) (25,230) ------------ ------------ $ 14,592 $ 15,081 ============ ============
Depreciation expense was approximately $8,134,563, $7,481,000, and $5,879,000 for 1998, 1997,and 1996, respectively.
December 31, -------------------------- 1998 1997 ------------ ------------ (in thousands) Other Assets: GateField intangible asset (net of accumulated amortization)....................... $ 1,948 $ -- GateField product marketing agreement.............................................. 6,000 -- GateField preferred stock.......................................................... 1,650 -- Texas instrument intangible asset (net of accumulated amortization)................ 668 1,545 Other.............................................................................. 5,658 5,425 ------------ ------------ $ 15,924 $ 6,970 ============ ============
Amortization expense was approximately $1,185,000 (amortization attributable to the GateField transaction was $252,000), $877,000, and $876,000 for 1998, 1997, and 1996, respectively. Texas Instrument intangible asset is being amortized over its estimated useful life of five years. For further discussion on GateField, see Note 5 of Notes to Consolidated Financial Statements. 3. Available-for-Sale Securities The following is a summary of available-for-sale securities at December 31, 1998 and 1997:
Gross Gross Unrealized Unrealized Estimated Cost Gains Losses Fair Values ------------ ------------ ------------ ------------ (in thousands) December 31, 1998 Corporate bonds........................................ $ 3,500 $ -- $ -- $ 3,500 Commercial paper....................................... 4,415 -- -- 4,415 Floating rate notes.................................... 5,500 -- -- 5,500 Municipal obligations.................................. 47,271 180 (2) 47,449 ------------ ------------ ------------ ------------ Total available-for-sale securities.................... 60,686 180 (2) 60,864 Less amounts classified as cash equivalents............. (4,415) -- -- (4,415) ------------ ------------ ------------ ------------ Total short-term investments.............................. $ 56,271 $ 180 $ (2) $ 56,449 ============ ============ ============ ============ December 31, 1997 Municipal obligations.................................. $ 51,222 $ 50 $ -- $ 51,272 Less amounts classified as cash equivalents............. -- -- -- -- ------------ ------------ ------------ ------------ Total short-term investments.............................. $ 51,222 $ 50 $ -- $ 51,272 ============ ============ ============ ============
The adjustments to net unrealized gains and (losses) on investments included as a separate component of shareholders' equity totaled approximately $127,000, $50,000, and $4,000 for the years ended December 31, 1998, 1997, and 1996, respectively. Realized gains and losses during 1998, 1997, and 1996 were not material. See Note 1 for discussion of how fair values were determined and the Company's policy of accounting for investments. The expected maturities of the Company's investments at December 31, 1998 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.................................... $ 30,117 Due in one year or more...................................... 26,332 ------------ $ 56,449 ============ 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 and are assumed to have maturities of 90 days for average maturity calculations. 4. Investment in Chartered Semiconductor The Company holds an equity investment of approximately $10,680,000 in Chartered Semiconductor Manufacturing Ltd ("Chartered Semiconductor"), a semiconductor company located in Singapore. The Company's investment in Chartered Semiconductor amounts to less than 2% of total equity in Chartered Semiconductor. The investment in Chartered Semiconductor is accounted for under the cost method; therefore, changes in the value of the investment are not recognized unless impairment in the value of the investment is deemed by management to be "other than temporary." 5. GateField In the third quarter of 1998, the Company entered into a product marketing rights agreement with, and purchased convertible stock of, GateField. Simultaneously, the Company acquired the Design Services Business Unit of GateField in a transaction accounted for as a purchase. Consideration paid in these transactions totaled $10,447,000, consisting entirely of cash. In accordance with provisions of APB Opinion 16, all identifiable assets, including identifiable intangible assets, were assigned a portion of the total consideration on the basis of their respective fair values. Standard valuation procedures and techniques were utilized in determining the fair value of each acquired asset. The assumptions used to estimate the value of the identified intangible assets were developed by the Company and GateField management and were further supported through relevant industry data. The consideration was allocated as follows: $6,000,000 to the product marketing rights agreement; $1,650,000 to the convertible preferred stock; and $2,797,000 (consisting of $447,000 related to net assets and $2,350,000 related to intangible assets) to the Design Services Business Unit. The product marketing rights agreement provides the Company with an exclusive right to market and sell GateField's standard ProASIC products in process geometries of 0.35 micron and smaller as part of the Company's product line. Development of the underlying technology and products is managed and executed exclusively by GateField, and the products are expected to be production qualified by the end of 1999. The Company has agreed to pay additional consideration of $1,000,000 upon qualification of the initial .25 micron product. As of December 31, 1998, GateField's progress in developing the technology and products was consistent with the Company's expectations; however, there can be no assurance that GateField's future technology and product development efforts will result in product sales sufficient to recover the Company's investment. The $6,000,000 allocated to product marketing rights will be amortized over the related products' currently estimated revenue-producing life of seven years; the Company will re-evaluate the expected life if product sales do not commence as scheduled or fail to achieve expected volumes in the future. The amount allocated to the product marketing rights agreement is included in "Other assets." The Company's investment in GateField's convertible preferred stock consists of 300,000 shares of GateField Series C Preferred Stock that are convertible, at the Company's election, into 2,000,000 shares of GateField Common Stock. The Company's investment in GateField represents less than 5% of total common-equivalent equity of GateField, determined assuming conversion of all GateField convertible preferred stock into common stock. The Company accounts for its preferred stock investment in GateField under the cost method; therefore, changes in the value of the investment are not recognized unless impairment in the value of the investment is deemed to be "other than temporary." Such an impairment could occur if, among other things, product sales subject to the product marketing rights agreement discussed in the preceding paragraph do not commence as scheduled or fail to achieve expected volumes in the future. The amount allocated to the Company's investment in GateField convertible preferred stock is included in "Other assets." The Company also purchased from GateField its Design Services Business Unit located in Mt. Arlington, New Jersey. The Actel Design Services Group provides varying levels of design services, including: design methodology and tool consulting; turnkey FPGA and ASIC design; IP development and integration; board and system design; software design and implementation; and development of prototypes, first articles, and production units. The Company is the first FPGA provider to offer system-level design expertise, expanding the Company's ability to support a greater portion of customers' overall design and risk management. The Design Services Group is a secure facility certified to handle government, military, and proprietary designs. The Design Services Group is not involved in the development efforts underlying the product marketing rights agreement. The net assets of the Design Services Group were valued at $447,000 and consist principally of fixed assets, accounts receivable, deposits, and accounts payable. Intangible assets were valued at $2,350,000 and consist of $300,000 related to backlog, $1,000,000 related to workforce-in-place, and $1,050,000 related to goodwill. Backlog is being amortized over its estimated useful life of six months. The Design Services Group workforce and goodwill are being amortized over their estimated useful life of five years and are included in "Other assets." 6. Line of Credit The Company has a line of credit with a bank that provides for borrowings not to exceed $5,000,000. The agreement contains covenants that require the Company to maintain certain financial ratios and levels of net worth. At December 31, 1998 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, 1998. The line of credit expires in May 1999. 7. Commitments The Company leases its facilities and certain equipment under non-cancellable lease agreements. The principal facility lease expired in June 1998, and provided for two consecutive five-year renewal options. The Company has elected to take the first five-year renewal option. The current lease agreement expires in June 2003, with one additional five-year renewal option. The equipment leases are accounted for as operating leases. The lease terms expire at various dates through September 2001. All of these leases require the Company to pay property taxes, insurance, and maintenance and repair costs. At December 31, 1998, the Company had no capital lease obligations. Future minimum lease payments under all non-cancellable leases are as follows: Operating Leases ------------ 1999............................................................ $ 3,683 2000............................................................ 3,548 2001............................................................ 3,413 2002............................................................ 3,039 2003............................................................ 1,227 ------------ Total minimum lease payments.................................... $ 14,910 ============ Rental expense under operating leases was approximately $3,282,730, $2,481,313, and $1,615,000 for 1998, 1997, and 1996, 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. The Company also made distributions to the plan in January 1999, based on net revenues and net income for the 1998 fiscal year. For 1998, the plan provided for a maximum contribution of 5.0% 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, 1998, and been an active, regular employee on December 31, 1998. Since the Company did not achieve its net revenue or net income goals in 1998 for purposes of the plan, the amount of the contribution was reduced to 1.5% of an eligible employee's gross earnings, up to a maximum of $1,500. The aggregate amount contributed to the plan for the 1998 plan year was $387,166. In the 1997 plan year, the aggregate amount contributed 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 Repurchase The Company authorized a stock repurchase program in September 1998 whereby up to one million shares of the Company's common stock may be purchased from time to time in the open market at the discretion of management. During 1998, the Company repurchased 675,000 shares of common stock for $6.1 million. The Company plans to reissue these shares. Stock Option Plans The Company has adopted stock option plans under which officers, employees and consultants may be granted incentive stock options or nonqualified options to purchase shares of the Company's common stock. At December 31, 1998, 8,393,454 shares of common stock were reserved for issuance under these plans, of which 284,299 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, but normal vesting schedules were not impacted. Options representing the right to purchase 1,702,141 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, 1998, 230,000 shares of common stock were reserved for issuance under such plan, of which 92,500 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, 1998:
1998 1997 1996 -------------------------- -------------------------- -------------------------- 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...... 4,252,115 $ 13.98 3,542,836 $ 12.38 2,506,331 $ 10.17 Granted....................... 3,626,060 11.44 1,252,895 17.39 2,633,911 14.24 Exercised..................... (495,997) 9.50 (214,821) 8.29 (204,344) 6.60 Cancelled..................... (2,330,338) 16.57 (328,795) 13.40 (1,393,062) 12.79 Outstanding at December 31.... -------------- -------------- -------------- 5,051,840 11.41 4,252,115 13.98 3,542,836 12.38 ============== ============== ==============
The following table summarizes information about stock options outstanding at December 31, 1998:
December 31, 1998 -------------------------------------------------------------------- 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 - $ 9.40.................... 540,009 5.34 years $ 7.51 416,912 $ 6.98 9.50 - 10.00.................... 78,300 8.18 9.84 24,399 9.50 10.06.................... 919,613 9.57 10.06 9,311 10.06 10.25 - 10.50.................... 26,043 7.69 10.28 10,843 10.31 10.63.................... 633,945 6.65 10.63 373,470 10.63 10.88 - 11.13.................... 318,517 9.33 11.09 7,487 11.11 11.75.................... 1,477,476 8.17 11.75 351,723 11.75 11.88 - 14.88.................... 611,722 8.35 13.54 57,643 13.53 15.00 - 22.38.................... 443,215 8.22 16.45 53,511 17.06 22.69.................... 3,000 8.67 22.69 1,125 22.69 ----------- ----------- 1.80 - 22.69.................... 5,051,840 8.03 11.41 1,306,424 10.14 =========== ===========
At December 31, 1997, 1,099,059 outstanding options were exercisable; at December 31, 1996, 691,944 outstanding options were exercisable. The weighted-average fair value of options granted during 1998, 1997, and 1996 were $4.69, $7.38, and $4.92 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, 1998, 3,019,680 shares of common stock were authorized for issuance under the ESPP. The ESPP is administered in consecutive, overlapping offering periods of up to 24 months each, with each offering period divided into four consecutive six-month purchase periods beginning August 1 and February 1 of each year. Pursuant to the terms of the ESPP, all participants were automatically withdrawn from all offering periods on July 31, 1998, and automatically re-enrolled in the new offering period that began on August 1, 1998. 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 291,469 and 208,992 shares issued under the ESPP in 1998 and 1997, respectively, and 1,965,503 remained available for issuance at December 31, 1998. The weighted-average fair value of employee stock purchase rights granted during 1998, 1997, and 1996 were $5.52, $4.69, and $5.46 respectively. Pro Forma Disclosures Pro forma information regarding net income and net income per share is required by SFAS 123, which also requires that the information be determined as if the Company had accounted for its stock-based awards to employees granted subsequent to December 31, 1994, under the fair value method. The fair value for these stock-based awards to employees was estimated at the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions for 1998, 1997, and 1996: risk-free interest rates of 5.34%, 5.95%, and 5.84%, respectively; no dividend yield; volatility factor of the expected market price of the Company's common stock of 51%, 48%, and 50%, respectively; and a weighted average expected life for the options and employee stock purchase rights of four years and two years respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. For purposes of pro forma disclosures, the estimated fair value of the Company's stock-based awards to employees is amortized to expense over the options' vesting period (for options). The Company's pro forma information is as follows:
Year Ended December 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (in thousands, except per share amounts) Pro forma net income.................................................... $ 5,117 $ 11,405 $ 10,452 Pro forma earnings per share: Basic................................................................ 0.24 0.56 0.59 Diluted.............................................................. 0.24 0.54 0.50
Since SFAS 123 is applicable only to awards granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until the year ended December 31, 1999. 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 The tax provision consists of:
December 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (in thousands) Federal - current....................................................... $ 3,565 $ 11,585 $ 12,150 Federal - deferred...................................................... 1,416 (4,544) (5,571) State - current......................................................... 592 2,304 2,460 State - deferred........................................................ 1,197 (506) (1,089) Foreign - current....................................................... 445 190 197 ------------ ------------ ------------ $ 7,215 $ 9,029 $ 8,147 ============ ============ ============
The tax provision reconciles to the amount computed by multiplying income before tax by the U.S. statutory rate as follows:
December 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (in thousands) Provision at statutory rate............................................ $ 7,771 $ 9,029 $ 8,079 Change in valuation allowance........................................... (440) (440) (432) Federal research credits................................................ (856) (772) (425) State taxes, net of federal benefit..................................... 1,163 1,169 891 Other................................................................... (423) 43 34 ------------ ------------ ------------ Tax provision........................................................... $ 7,215 $ 9,029 $ 8,147 ============ ============ ============
Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes are as follows:
December 31, -------------------------- 1998 1997 ------------ ------------ (in thousands) Deferred tax assets: Depreciation................................................................... $ 1,618 $ 219 Distributor reserve............................................................ 12,452 12,350 Charge for in-process research expenses........................................ 4,752 5,450 Inventories.................................................................... 1,455 5,323 Other, net..................................................................... 3,917 3,905 ------------ ------------ 24,194 27,247 Valuation allowance............................................................ (2,166) (2,606) ------------ ------------ Net deferred tax assets................................................ $ 22,028 $ 24,641 ============ ============
The valuation allowance declined by approximately $440,000 during 1997. 11. Segment Disclosures The Company operates in a single industry segment: designing, developing, and marketing FPGAs. Net revenue from FPGA sales was 97%, 98%, and 97% for the years ended December 31, 1998, 1997, and 1996, respectively. The Company also derives revenues from the sale of systems software and hardware, which is used to program the FPGAs. The Company also performs design services, including FPGA, ASIC, and system design; software development and implementation; and development of prototypes, first articles and production units. Design Services, which the Company acquired from GateField. in the third quarter of 1998, accounted for 1% of the Company's net revenue in 1998. The Chief Executive Officer has been identified as the Chief Operating Decision Maker (CODM) because he has final authority over resource allocation decisions and performance assessment. The CODM does not receive discrete financial information about asset allocation, expense allocation, or profitability from its system sales business or Design Services. 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, ---------------------------------------------------------------------------------- 1998 1997 1996 -------------------------- -------------------------- -------------------------- (in thousands, except percentages) United States................. $ 102,817 67% $ 107,308 69% $ 99,131 67% Export: Europe................... 29,675 19 26,239 17 26,105 18 Japan.................... 10,658 7 13,328 8 15,340 10 Other international...... 11,277 7 8,983 6 8,203 5 ------------ ------------ ------------ ------------ ------------ ------------ $ 154,427 100% $ 155,858 100% $ 148,779 100% ============ ============ ============ ============ ============ ============
As is common in the semiconductor industry, the Company generates significant revenues from the sales of its products through distributors. The Company's principal distributors are Unique Technologies, Inc. ("Unique") and Pioneer-Standard Electronics, Inc. ("Pioneer") in North America and Arrow Electronics, Inc. and Zeus Electronics (collectively, "Arrow") worldwide. Unique replaced Wyle Electronics Marketing Group ("Wyle") as a distributor in the second half of 1998. Unique and Wyle are both part of the worldwide Veba Electronics Group. The following table sets forth, for each of the last three years, the percentage of revenues derived from all customers accounting for 10% or more of net revenues in any of such years:
1998 1997 1996 ------------ ------------ ------------ Wyle/Unique............................................................. 14% 17% 14% Arrow................................................................... 14% 17% 14% Pioneer................................................................. 9% 12% 11%
The Company does not recognize revenue on product shipped to a distributor until the distributor resells the product to its customer. 12. Patent Infringement QuickLogic During the third quarter of 1998, the Company and QuickLogic Corporation ("QuickLogic") agreed to settle and dismiss the two patent infringement actions between the parties pending before the United States Court for the Northern District of California, San Jose Division. The actions were dismissed on September 4, 1998. As part of the settlement, the Company and QuickLogic entered into a Patent Cross License Agreement. Management is satisfied with the terms of the settlement, which is immaterial to the Company's business, financial condition, or operating results. Lemelson During the third quarter of 1998, the Lemelson Medical, Education & Research Foundation (the "Foundation"), filed a lawsuit in the United States District Court for the District of Arizona, against the Company and 25 other United States semiconductor companies seeking monetary damages and injunctive relief based on such companies' alleged infringement of certain patents held by the Foundation. The action was dismissed as to the Company on December 8, 1998, pursuant to the terms of a settlement agreement between the Foundation and the Company. The settlement is immaterial to the Company's business, financial condition, or operating results. Other As is typical in the semiconductor industry, the Company has been notified of claims that it may be infringing patents owned by others. Management does not believe that any of these claims will have a materially adverse effect on the Company's financial condition or trends in operating results. Were an unfavorable outcome to occur, however, there exists the possibility of a material adverse impact on the results of operations or cash flows of the period in which the unfavorable outcome occurs. As it has in the past, the Company may obtain licenses under patents that it is alleged to infringe. The Company is currently in license negotiations with several companies, including two semiconductor manufacturers with significantly greater financial and intellectual property resources than the Company. 13. Earnings Per Share The Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), beginning with the financial statements for the year ended December 31, 1997, and all share and per share data for prior periods have been adjusted retroactively to comply with SFAS 128. The following table sets forth the computation of basic and diluted earnings per share:
Year Ended December 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (in thousands, except per share amounts) Basic: Average common shares outstanding....................................... 21,251 20,370 17,826 ------------ ------------ ------------ Shares used in computing net income per share........................... 21,251 20,370 17,836 ============ ============ ============ Net income.............................................................. $ 14,987 $ 16,768 $ 14,938 ============ ============ ============ Net income per share.................................................... $ 0.71 $ 0.82 $ 0.84 ============ ============ ============ Diluted: Average common shares outstanding....................................... 21,251 20,370 17,826 Net effect of dilutive stock options, warrants, and convertible preferred stock - based on the treasury stock method........................... 670 1,598 3,659 ------------ ------------ ------------ Shares used in computing net income per share........................... 21,921 21,968 21,485 ============ ============ ============ Net income.............................................................. $ 14,987 $ 16,768 $ 14,938 ============ ============ ============ Net income per share.................................................... $ 0.68 $ 0.76 $ 0.70 ============ ============ ============
Outstanding options to purchase approximately 1,096,000, 623,000 and 120,000 shares, for the years 1998, 1997, and 1996, respectively, under the Company's Stock Option Plan were not included in the calculation to derive diluted income per share as their inclusion would have had an anti-dilutive effect. 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, 1998 and 1997, and the related consolidated statements of income, cash flows, and shareholders' equity for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP San Jose, California January 21, 1999 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 29, 1999, there were 315 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 9,000. During the last two years, the quarterly high and low sale prices for the common stock were: 1998 High Low - --------------------------------------------------- ------------ ------------ First Quarter...................................... $ 16.125 $ 10.75 Second Quarter..................................... 15.75 10.75 Third Quarter...................................... 13.125 9.00 Fourth Quarter..................................... 20.75 7.6875 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 EX-21 3 SUBSIDIARIES EXHIBIT 21 ACTEL CORPORATION -------------------------------------- Subsidiaries Actel Europe, Ltd., a U.K. corporation Actel Europe SARL, a French corporation Actel GmbH, a German corporation Actel Pan-Asia Corporation, a Nevada corporation Actel Pan-Asia, Hong Kong Ltd., a Hong Kong corporation Actel Japan, KK, a Japanese corporation EX-23 4 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Actel Corporation of our report dated January 21, 1999, included in the 1998 Annual Report to Shareholders of Actel Corporation. Our audits also included the financial statement schedule of Actel Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-74492, Form S-8 No. 333-3398, and Form S-8 No. 333-71627) of our report dated January 21, 1999, 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, 1998, 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 April 2, 1999 EX-24 5 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 April 2, 1999 - ------------------------------------ (Principal Executive Officer) and (John C. East) Director /s/ Henry L. Perret Vice President of Finance and Chief April 2, 1999 - ------------------------------------ Financial Officer (Principal Financial (Henry L. Perret) and Accounting Officer) /s/ Jos C. Henkens Director April 2, 1999 - ------------------------------------ (Jos C. Henkens) /s/ Jacob S. Jacobsson Director April 2, 1999 - ------------------------------------ (Jacob S. Jacobsson) /s/ Frederic N. Schwettmann Director April 2, 1999 - ------------------------------------ (Frederic N. Schwettmann) /s/ Robert G. Spencer Director April 2, 1999 - ------------------------------------ (Robert G. Spencer)
EX-27 6 FDS
5 1,000 YEAR JAN-03-1999 DEC-29-1997 JAN-09-1999 13,947 56,449 22,374 1,554 25,669 138,512 46,706 32,114 179,708 52,654 0 21 0 0 127,033 179,708 154,427 154,427 61,642 31,642 72,963 0 (2,380) 22,202 7,215 14,987 0 0 0 14,987 .71 .68
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