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Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000907687-04-000025.txt : 20040317
<SEC-HEADER>0000907687-04-000025.hdr.sgml : 20040317
<ACCEPTANCE-DATETIME>20040317171959
ACCESSION NUMBER: 0000907687-04-000025
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20040104
FILED AS OF DATE: 20040317
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: 1934 Act
SEC FILE NUMBER: 000-21970
FILM NUMBER: 04676248
BUSINESS ADDRESS:
STREET 1: 2061 STIERLIN COURT
STREET 2: 2061 STIERLIN COURT
CITY: MOUNTAIN VIEW
STATE: CA
ZIP: 94043-4655
BUSINESS PHONE: 6503184200
MAIL ADDRESS:
STREET 1: 2061 STIERLIN COURT
STREET 2: 2061 STIERLIN COURT
CITY: MOUNTAIN VIEW
STATE: CA
ZIP: 94043-4655
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>form10k.txt
<DESCRIPTION>ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
<TEXT>
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 4, 2004
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.)
2061 Stierlin Court
Mountain View, California 94043-4655
(Address of principal executive offices) (Zip Code)
(650) 318-4200
(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
Preferred Stock Purchase Rights
(Title of class)
--------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Annual Report on Form 10-K or any
amendment to this Annual Report on Form 10-K. X
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
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 July 5, 2002, as reported by the National Market System of the
National Association of Securities Dealers Automated Quotation System, was
approximately $371,000,000. In calculating such aggregate market value, shares
of Common Stock owned of record or beneficially by all officers, directors, and
persons known to the Registrant to own more than five percent of any class of
the Registrant's voting securities were excluded because such persons may be
deemed to be affiliates. The Registrant disclaims the existence of control or
any admission thereof for any purpose.
Number of shares of Common Stock outstanding as of March 12, 2004:
25,716,008.
--------------------------------------
================================================================================
In this Annual Report on Form 10-K, Actel Corporation and its consolidated
subsidiaries are referred to as "we," "us," "our," or "Actel." You should read
the information in this Annual Report with the Risk Factors at the end of Part
I. Unless otherwise indicated, the information in this Annual Report is given as
of March 12, 2004, and we undertake no obligation to update any of the
information, including forward-looking statements. All forward-looking
statements are made under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Statements containing 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 Risk Factors could cause actual results to
differ materially from those projected in the forward-looking statements.
<PAGE>
PART I
ITEM 1. BUSINESS
Overview
We design, develop, and market field programmable gate arrays (FPGAs) and
supporting products and services. FPGAs are used by manufacturers of
communications, computer, consumer, industrial, military and aerospace, and
other electronic systems to differentiate their products and get them to market
faster. We are the leading supplier of FPGAs based on flash and antifuse
technologies. Our strategy is to offer innovative solutions to markets in which
our technologies have a competitive advantage, including the value-based,
high-reliability, and high-speed FPGA markets. In support of our FPGAs, we offer
ASIC conversion products; intellectual property (IP) cores; development systems;
programming hardware; debugging tool kits and demonstration boards; a Web-based
Resource Center; and design and programming services.
We shipped our first FPGAs in 1988 and thousands of our development tools
are in the hands of customers, including Abbott Laboratories (Abbott Labs);
Alcatel; BAE Systems (BAE); The Boeing Company; Cisco Systems, Inc. (Cisco);
Hewlett-Packard Company (HP); Honeywell International Inc. (Honeywell); LG
Electronics Inc. (LG); Lockheed Martin Corporation (Lockheed Martin); Marconi
Corporation plc (Marconi); Nokia; Nortel Networks Corporation (Nortel); Raytheon
Company (Raytheon); Siemens AG (Siemens); and Varian Medical Systems, Inc.
(Varian).
We have foundry relationships with BAE in the United States; Chartered
Semiconductor Manufacturing Pte Ltd (Chartered) in Singapore; Infineon
Technologies AG (Infineon) in Germany; Matsushita Electronics Company (MEC) in
Japan; United Microelectronics Corporation (UMC) in Taiwan; and Winbond
Electronics Corp. (Winbond) in Taiwan. Wafers purchased from our suppliers are
assembled, tested, marked, and inspected by us and/or our subcontractors before
shipment to customers.
We market our products through a worldwide, multi-tiered sales and
distribution network. In 2003, sales made through distributors accounted for 69%
of our net revenues. One distributor, Unique Technologies, Inc. (Unique),
accounted for 41% of our net revenues in 2003. Unique has been our sole
distributor in North America since March 1, 2003. In addition to Unique, our
North American sales network includes about 19 sales offices and about 17 sales
representative firms. Our European, Pan-Asia, and Rest of World (ROW) sales
networks include about eight sales offices and about 20 distributors and sales
representative firms. In 2003, sales to customers outside North America
accounted for 39% of net revenues.
On August 18, 2003, we relocated our worldwide headquarters to a larger
facility to better accommodate our existing employees and position ourselves for
future growth. Our principal facilities and executive offices are now located at
2061 Stierlin Court, Mountain View, California 94043-4655, and our telephone
number at that address is (650) 318-4200.
We were incorporated in California in 1985. Our website is located at
http://www.actel.com. We provide free of charge through a link on our website
access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and
Current Reports on Form 8-K, as well as amendments to those reports, as soon as
reasonably practicable after the reports are electronically filed with or
furnished to the Securities and Exchange Commission (SEC). The Actel name and
logo and Libero are registered trademarks of Actel. This Annual Report also
includes unregistered trademarks of Actel as well as registered and unregistered
trademarks of other companies.
Industry Background
The three principal types of integrated circuits (ICs) 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 practically 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-capacity standard
transistor-transistor logic circuits (TTLs) and custom-designed application
specific ICs (ASICs). TTLs are standard logic circuits that can be purchased
"off the shelf" and interconnected on a printed circuit board (PCB), but they
tend to limit system performance and increase system size and cost compared with
logic functions integrated at the circuit (rather than the PCB) level. ASICs are
customized circuits that offer electronic system manufacturers the benefits of
increased circuit integration: improved system performance, reduced system size,
and lower system cost.
ASICs include conventional gate arrays, standard cells, and programmable
logic devices (PLDs). 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 by use of masks,
conventional gate arrays and standard cell circuits are subject to the time and
expense risks associated with any development cycle involving a foundry.
Typically, conventional gate arrays and standard cell circuits are first
delivered in production volumes months after the successful production of
acceptable prototypes. In addition, hard-wired ASICs 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.
PLDs, 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. PLDs are being used by a growing number of
electronic system manufacturers to increase product differentiation and
manufacturing flexibility and speed time to market.
PLDs include simple PLDs, complex PLDs (CPLDs), and FPGAs. CPLDs and FPGAs
have gained market share because they generally offer greater capacity, lower
total cost per usable logic gate, lower power consumption than TTLs and simple
PLDs, and faster time to market and lower development costs than hard-wired
ASICs. As mask costs continue to rise, CPLDs and particularly FPGAs are becoming
a cost-effective alternative to hard-wired ASICs at higher volumes. Even in high
volumes, the time-to-market and manufacturing-flexibility benefits of CPLDs and
FPGAs often outweigh their price premium over hard-wired ASICs of comparable
capacity for many electronic system manufacturers.
Before a CPLD or 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 circuit, verifying the design, and laying out the
circuit. Traditionally, logic functions were defined using schematic capture
software, which permits the designer to essentially construct a circuit diagram
on the computer. As CPLDs and FPGAs have increased in capacity, the time
required to create schematic diagrams using schematic capture tools has often
become unacceptably long. To address this problem, designers are increasingly
turning to hardware description languages (HDLs), also known as high-level
description (HLD). VHDL and Verilog are the most common HDLs, which permit the
designer to describe the circuit functions at an abstract level and to verify
the performance of logic functions at that level. The HDL description of the
desired CPLD or FPGA device function can then be fed into logic synthesis
software that automatically converts the abstract 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 CPLD
or FPGA. This is achieved by placing the logic gates and routing their
interconnections, a process referred to as "place and route." After the layout
of the device has been verified by timing simulation, the CPLD or FPGA can be
programmed. Multiple suppliers of electronic design automation (EDA) tools
provide software to effectively accomplish these place and route and simulation
tasks for CPLDs and FPGAs.
Electronic system manufacturers program a CPLD or FPGA to perform the
desired logical functions by using 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. Programmers are typically available
from both the company supplying the device and third parties, and programming
services are often available from both the company supplying the device and its
distributors. Most CPLDs are programmed with erasable programmable read only
memories or other "floating gate" technologies. Many FPGAs are programmed with
static random access memory (SRAM) technology. Our FPGAs use flash and antifuse
programming elements. After programming, the functionality and performance of
the programmed CPLD or FPGA in the electronic system must be verified.
To a large extent, the characteristics of a CPLD or FPGA are dictated by
the technology used to make the device programmable. CPLDs and FPGAs based on
programming elements controlled by floating gates or SRAMs must be configured by
a separate boot device, such as the serial programmable read only memory (PROM)
commonly used with SRAM FPGAs. The need to boot these devices makes them less
reliable (in the sense of being more prone to generate system errors) and less
secure and means they are not functional immediately on power-up and often
require a separate boot device. In addition, SRAM FPGAs and CPLDs based on
look-up tables (LUTs) tend to consume more power. FPGAs based on flash and
antifuse programming elements do not need to be booted-up, which makes them more
reliable, more secure, "live-at-power-up" single-chip solutions that tend to
operate at lower power. These are all characteristics shared by hard-wired ASICs
but not by SRAM FPGAs or CPLDs.
The technology used to make a CPLD or FPGA programmable also dictates
whether the device is reprogrammable and whether it is volatile. CPLDs and FPGAs
based on programming elements controlled by floating gates or SRAMs are
reprogrammable but lose their circuit configuration in the absence of electrical
power. FPGAs based on antifuse programming elements are one-time programmable
and retain their circuit configuration permanently, even in the absence of
power. FPGAs based on programming elements controlled by flash memory are
reprogrammable and nonvolatile, retaining their circuit configuration in the
absence of power.
SRAM memories are susceptible to being upset by neutrons and alpha
particles. When SRAM memories are used for data storage, these neutron-induced
errors are called "soft errors." When SRAM memories are used to store the
configuration of an FPGA, these neutron-induced errors are called "firm errors."
A firm error affects the device's configuration, which may cause the device to
malfunction. In addition, firm errors are not transient but will persist until
detected and corrected. There is a significant and growing risk of functional
failure in SRAM-based FPGAs due to the corruption of configuration data.
Historically a concern only for military, avionics, and space applications, firm
errors have become more of a problem for ground-based applications with each
manufacturing process generation. Radiation testing data show that antifuse and
flash FPGAs are not subject to loss of configuration due to neutron-induced
upsets.
Strategy
Our flash and antifuse technologies are different from, and have certain
advantages over, the SRAM and other technologies used in competing PLDs. Our
strategy is to offer innovative solutions to markets in which our technologies
have a competitive advantage, including the value-based, high-reliability, and
high-speed FPGA markets.
A general competitive advantage that our technologies have is design
security. Our nonvolatile, single-chip FPGAs offer practically unbreakable
design security. Decapping and stripping of our flash devices reveals only the
structure of the flash cell, not the contents. Similarly, the antifuses that
form the interconnections within our antifuse FPGAs do not leave a signature
that can be electrically probed or visually inspected. Antifuse FPGAs also do
not require a start-up bitstream, eliminating the possibility of configuration
data being intercepted. In addition, special security fuses are hidden
throughout the fabric of our flash and antifuse devices. These FlashLock and
FuseLock security fuses cannot be accessed or bypassed without destroying the
rest of the device, making both invasive and noninvasive attacks ineffective.
Our flash and antifuse FPGAs are also practically immune to neutron-induced firm
errors.
o Value-Based Market
Much of the logic market is driven by cost. We address this value-based
market with our flash FPGAs and our general-purpose antifuse FPGAs. In addition
to low cost, our FPGAs add the value of hard-wired ASICs to the benefits
provided by other PLDs. Like other PLDs, our FPGAs reduce design risk, inventory
investment, and time to market. Unlike other PLDs, our FPGAs are nonvolatile,
"live-at-power-up," low-power, single-chip solutions. In addition, logic
designers can choose to use either hard-wired ASIC or FPGA software tools and
design methodologies, and the architectures of our FPGAs enable the utilization
of predefined IP cores, which can be reused across multiple designs or product
versions. We also offer our customers a wide selection of packages and
industrial-grade devices.
o High-Reliability Market
Much of the logic market for military and aerospace applications is driven
by reliability, volatility, and resistance to radiation effects. We address this
market with our military, avionics, and space-grade FPGAs. Our antifuse and
flash FPGAs are reliable, nonvolatile, and not susceptible to configuration
corruption caused by radiation. We believe that we are the world's leading
supplier of high reliability PLDs. During 2003, we introduced a new line of
FPGAs targeted specifically for the automotive market; announced the
availability of flash-based ProASIC Plus and antifuse-based Axcelerator FPGA
devices qualified to military temperature specifications; and unveiled our
next-generation, radiation-tolerant RTAX-S FPGA offerings. With the addition of
ProASIC Plus to our automotive FPGA product portfolio in 2004, we believe that
we have the PLD industry's broadest automotive offering..
o High-Speed Market
Much of the logic market for communications applications is driven by
speed, which has been a strength of our antifuse FPGAs. During 2003, we
announced the production qualification of the first high-density, high-speed
Axcelerator FPGA devices and the availability of Axcelerator devices qualified
to industrial specifications.
Products and Services
Our product line consists of FPGAs, including
reprogrammable FPGAs based on flash technology,
one-time programmable FPGAs based on antifuse technology, and
high-reliability (HiRel) FPGAs.
In 2003, FPGAs accounted for 96% of our net revenues, almost all of which was
derived from the sale of antifuse FPGAs. In support of our FPGAs, we offer ASIC
conversion products, IP cores, development systems, programming hardware,
debugging tool kits and demonstration boards, a Web-based Resource Center, and
design and programming services.
o FPGAs
The capacity of FPGAs is measured in "gates," which traditionally meant
four transistors. As FPGAs grew larger and more complex, counting gates became
more challenging and no standard counting technique emerged. The appearance of
FPGAs with memory further complicated matters because memory gates cannot be
counted in the same way as logic gates. When we use "gate" or "gates" to
describe the capacity of FPGAs, we mean "maximum system equivalent gates" unless
otherwise indicated.
To meet the diverse requirements of our customers, we offer all of our
FPGAs (except the two radiation-hardened devices) in a variety of speed grades,
package types, and/or ambient (environmental) temperature tolerances. Commercial
devices are qualified to operate at ambient temperatures ranging from zero
degrees Celsius (0(degree)C) to +70(0)C. Industrial devices are qualified to
operate at ambient temperatures ranging from -40(degree)C to +85(degree)C.
Automotive devices are qualified to operate at ambient temperatures ranging from
- -40(degree)C to +125(0)C with junction temperatures up to 150(degree)C. Military
devices are qualified to operate at ambient temperatures ranging from
- -55(degree)C to +125(0)C. "High reliability" or "HiRel" devices are qualified to
automotive or military temperature specifications.
o Flash FPGAs
Our flash-based FPGAs include the ProASIC Plus and ProASIC families.
The combination of a fine-grained, single-chip ASIC-like architecture and
nonvolatile flash configuration memory makes our flash-based FPGAs
economical alternatives to ASICs for low- and medium-speed applications.
Unlike other PLDs available on the market today, which are either volatile
or non-reprogrammable, our flash FPGAs are nonvolatile and reprogrammable.
o ProASIC Plus
The ProASIC Plus family of FPGAs, which was first shipped for
revenue in 2002, consists of seven devices: the 75,000-gate APA075;
the 150,000-gate APA150; the 300,000-gate APA300; the 450,000-gate
APA450; the 600,000-gate APA600; the 750,000-gate APA750; and the
1,000,000-gate APA1000. As our second-generation flash family, ProASIC
Plus devices include added features and improved user-configurable
inputs and outputs (I/Os) and in-system programmability (ISP).
Manufactured on a 0.22-micron process at UMC, the family can be
ordered in approximately 136 speed, package, and temperature
variations.
o ProASIC
The ProASIC family of FPGAs, which was first shipped for revenue
in 1999, consists of four products: the 100,000-gate A500K050; the
290,000-gate A500K130; the 370,000-gate A500K180; and the 475,000-gate
A500K270. Manufactured on a 0.25-micron embedded flash process at
Infineon, the family can be ordered in approximately 30 speed,
package, and temperature variations.
o Antifuse FPGAs
Our antifuse-based FPGAs include the Axcelerator, eX, SX-A, SX, MX,
and legacy families, all of which are nonvolatile, secure, reliable, live
at power-up, single-chip solutions. Our antifuse FPGA devices span six
process generations, with each offering higher performance, lower power
consumption, and improved economies of scale.
o Axcelerator
The Axcelerator family of FPGAs, which was first shipped for
revenue in 2002, consists of five devices: the 125,000-gate AX125; the
250,000-gate AX250; the 500,000-gate AX500; the 1,000,000-gate AX1000;
and the 2,000,000-gate AX2000. Manufactured on a 0.15-micron,
seven-layer metal process at UMC, the family can be ordered in
approximately 176 speed, package, and temperature variations.
The Axcelerator family was targeted at high-speed communications
and bridging applications and designed to deliver high performance
with low power consumption, high logic utilization, and superior
design security. We market the Axcelerator family as the fastest
general-purpose FPGAs.
o eX
The eX family of FPGAs, which was first shipped for revenue in
2001, consists of three devices: the 3,000-gate eX64; the 6,000-gate
eX128; and the 12,000-gate eX256. Manufactured on a 0.25-micron
antifuse process at UMC, the family can be ordered in approximately 66
speed, package, and temperature variations.
The eX family was designed for the e-appliance market of
internet-related consumer electronics and includes a sleep mode to
conserve battery power. eX devices also provide a small form factor,
high design security, and an undemanding design process. We market the
eX family as single-chip programmable replacements for low-capacity
ASICs.
o SX-A and SX
The SX-A family of FPGAs, which was first shipped for revenue in
1999, consists of four products: the 12,000-gate A54SX08A; the
24,000-gate A54SX16A; the 48,000-gate A54SX32A; and the 108,000-gate
A54SX72A. Manufactured on a 0.22-micron antifuse process at UMC and on
a 0.25-micron antifuse process at MEC, the family can be ordered in
approximately 262 speed, package, and temperature variations.
The SX family of FPGAs, which was first shipped for revenue in
1998, consists of four products: the 12,000-gate A54SX08; the
24,000-gate A54SX16 and A54SX16P; and the 48,000-gate A54SX32.
Manufactured on a 0.35-micron antifuse process at Chartered, the
family can be ordered in approximately 201 speed, package, and
temperature variations.
SX was the first family to be built on our fine-grained, "sea of
modules" metal-to-metal architecture. We market the SX-A and SX
families as programmable devices with ASIC-like speed, power
consumption, and pricing in volume production. In addition, the SX-A
family offers I/O capabilities that provide full support for
"hot-swapping." Hot swapping allows system boards to be exchanged
while systems are running, a capability important to many portable,
consumer, networking, telecommunication, and fault-tolerant computing
applications.
o MX
The MX family of FPGAs, which was first shipped for revenue in
1997, consists of six products: the 3,000-gate A40MX02; the 6,000-gate
A40MX04; the 14,000-gate A42MX09; the 24,000-gate A42MX16; the
36,000-gate A42MX24; and the 54,000-gate A42MX36. Manufactured on
0.45-micron antifuse processes at Chartered and Winbond, the family
can be ordered in approximately 330 speed, package, and temperature
variations. We market the MX family as a line of low-cost,
single-chip, mixed-voltage programmable ASICs for 5.0-volt
applications.
o Legacy Products
The MX family incorporates the best features of our legacy FPGAs
and over time should replace those earlier products in new 5.0-volt
commercial designs. Legacy products include the DX, XL, ACT 3, ACT 2,
and ACT 1 families.
o DX and XL
The 3200DX family of FPGAs, which was first shipped for
revenue in 1995, consists of five products: the 12,000-gate
A3265DX; the 20,000-gate A32100DX; the 24,000-gate A32140DX; the
36,000-gate A32200DX; and the 52,000-gate A32300DX. Manufactured
on a 0.6-micron antifuse process at Chartered, the family can be
ordered in approximately 171 speed, package, and temperature
variations.
The 1200XL family of FPGAs, which was first shipped for
revenue in 1995, consists of three products: the 6,000-gate
A1225XL; the 9,000-gate A1240XL; and the 16,000-gate A1280XL.
Manufactured on a 0.6-micron antifuse process at Chartered, the
family can be ordered in approximately 126 speed, package, and
temperature variations.
The DX and XL families were designed to integrate system
logic previously implemented in multiple programmable logic
circuits. The DX family also offers fast dual-port SRAM, which is
typically used for high-speed buffering.
o ACT 3
The ACT 3 family of FPGAs, which was first shipped for
revenue in 1993, consists of five products: the 3,000-gate A1415;
the 6,000-gate A1425; the 9,000-gate A1440; the 11,000-gate
A1460; and the 20,000-gate A14100. Manufactured on a 0.6-micron
antifuse process at Chartered and a 0.8-micron antifuse process
at Winbond, the family can be ordered in approximately 189 speed,
package, and temperature variations. The family was designed for
applications requiring high speed and a high number of I/Os.
o ACT 2
The ACT 2 family of FPGAs, which was first shipped for
revenue in 1991, consists of three products: the 6,000-gate
A1225; the 9,000-gate A1240; and the 16,000-gate A1280.
Manufactured on 1.0- and 0.9-micron antifuse processes at MEC,
the family can be ordered in approximately 73 speed, package, and
temperature variations. ACT 2 was our second-generation FPGA
family and featured a two-module architecture optimized for
combinatorial and sequential logic designs.
o ACT 1
The ACT 1 family of FPGAs, which was first shipped for
revenue in 1988, consists of two products: the 2,000-gate A1010
and the 4,000-gate A1020. Manufactured on 1.0- and 0.9-micron
antifuse processes at MEC, the family can be ordered in
approximately 95 speed, package, and temperature variations. ACT
1 was the original family of antifuse FPGAs.
o HiRel FPGAs
Our HiRel FPGAs include automotive products, which are offered in
plastic packages; military/avionics (Mil/Av) products, which are offered in
plastic or ceramic (hermetic) packages; and radiation tolerant (Rad
Tolerant) and radiation hardened (Rad Hard) products, which are offered in
hermetic packages. We believe that we are the leading supplier of high
reliability FPGAs. Since 1990, our FPGAs have been designed into numerous
military and aerospace applications, including command and data handling,
attitude reference and control, communication payload, and scientific
instrument interfaces. Our space-qualified FPGAs have been on board more
than 100 launches and accepted for flight-unit applications on more than
300 satellites.
o Automotive
During 2003, we announced the availability of a new line of FPGAs
targeted specifically for the automotive market. Characterized for
operation from -40(degree)C to 125(degree)C ambient temperature and up
to 150(degree)C junction temperature, the automotive offering included
our eX, SX-A, and MX antifuse families. On February 9, 2004, we
announced the availability of our flash-based ProASIC Plus FPGAs, with
densities up to 1,000,000 gates, in extended automotive temperature
range versions. Our automotive devices are appropriate for in-cab
control and interconnect functions for a range of automotive
applications, such as power train control, telematics, occupant
safety, navigation, speech recognition, control/comfort systems,
passenger monitors, and heads-up displays.
o Mil/Av
Our Mil/Av devices are offered in three packaging and screening
options: military-temperature plastic (MTP), military-temperature
hermetic (MTH), and MIL-STD 883 Class B hermetic (Class B). MTP
devices are offered in plastic packages and screened to military
temperature specifications (-55(degree)C to +125(degree)C). MTH
devices are offered in hermetic packages and screened to military
temperature specifications. Class B devices are offered in hermetic
packages and screened to MIL-STD 883 Class B specifications.
All members of our antifuse FPGAs families (except for the AX125
and the three eX devices) are offered in MTP packaging and screening.
We have received complete Qualified Manufacturers Listing (QML)
certification for the full line of MTP antifuse FPGAs, which can be
integrated into design applications that would otherwise require
higher-cost ceramic-packaged devices. The QML plastic certification
also permits customers to integrate commercial and military production
without compromising quality or reliability.
We offer 22 devices in MTH or Class B packaging and screening:
the 2,000-gate A1010B; the 4,000-gate A1020B; the 6,000-gate A1425A;
the 9,000-gate A1240A; the 11,000-gate A1460A; the 16,000-gate A1280A
and A1280XL; the 20,000-gate A14100A and A32100DX; the 24,000-gate
A54SX16; the 36,000-gate A32200DX; the 48,000-gate A54SX32 and
A54SX32A; the 54,000-gate A42MX36; the 108,000-gate A54SX72A; the
250,000-gate AX250; the 300,000-gate APA300; the 500,000-gate AX500;
the 600,000-gate APA600; the 1,000,000-gate APA1000 and AX1000; and
the 2,000,000-gate AX2000. Hermetic-packaged Mil/Av devices are
appropriate for avionics, munitions, harsh industrial environments,
and ground-based equipment when radiation survivability is not
critical.
During 2003, we announced the availability of our flash-based
ProASIC Plus and antifuse-based Axcelerator FPGAs tested and verified
to operate over the full military temperature range.
Military-qualified AX250, APA300, AX500, APA600, AX1000, APA1000, and
AX2000 devices are offered in MTP, MTH, and Class B packaging and
screening options. The low power consumption, high design security,
and practical immunity to firm errors of the ProASIC Plus and
Axcelerator families make these Mil/Av solutions suitable for a wide
range of military, aerospace, and avionics applications, including
ground-, air- and sea-based military systems and radar, command and
control, and navigation systems.
o Rad Tolerant
During 2003, we introduced our next-generation,
radiation-tolerant RTAX-S FPGA family. With densities up to 2,000,000
gates, RTAX-S devices will offer key features optimized for space
applications, such as hardened registers that offer practical immunity
to single-event upsets (SEUs) and usable error-corrected onboard RAM.
These features position the RTAX-S family as a radiation-tolerant
alternative to hard-wired ASICs that meets the density, performance,
and radiation-resistance requirements of many satellite applications.
RTAX-S devices will allow us to aggressively target bus and payload
applications in low-, mid-, and geosynchronous-earth orbit satellites.
On February 11, 2004, we announced the introduction of the
250,000-gate RTAX250S FPGA, extending the family to three devices.
On December 2, 2003, we introduced an advanced packaging
technology small enough to enable the assembly of tested and
programmed FPGAs into multi-chip modules (MCMs) for space
applications. Capable of delivering products with a form factor
similar to bare die, the new ceramic chip carrier land grid (CCLG)
package eliminates the handling, testing, and programming challenges
associated with using die in MCMs. We also announced the availability
of the first product based on this technology, the RT54SX32S-CC256M,
which is factory tested at both extremes of the military temperature
range and at room temperature prior to shipment.
In addition to the offerings discussed above, our Rad Tolerant
family of FPGAs consists of eight products: the 4,000-gate RT1020; the
6,000-gate RT1425A; the 11,000-gate RT1460A; the 16,000-gate RT1280A;
the 20,000-gate RT14100A; the 24,000-gate RT54SX16; the 48,000-gate
RT54SX32S; the 108,000-gate RT54SX72S. These Rad Tolerant FPGAs are
offered with Class B or Class E (extended flow/space) qualification
and total dose radiation test reports are provided on each segregated
lot of devices.
Rad Tolerant FPGAs are designed to meet the logic requirements
for all types of military, commercial, and civilian space
applications, including satellites, launch vehicles, and deep-space
probes. They provide cost-effective alternatives to radiation-hardened
devices when radiation survivability is important but not essential.
In addition, Rad Tolerant devices have design- and pin-compatible
commercial versions for prototyping.
o Rad Hard
The Rad Hard family of FPGAs, which was first shipped for revenue
in 1996, consists of two products: the 4,000-gate RH1020 and the
16,000-gate RH1280. Manufactured on a radiation-hardened 0.8-micron
antifuse process by BAE, Rad Hard devices are shipped with full QML
Class V screening. The Rad Hard family was designed to meet the
demands of applications requiring guaranteed levels of radiation
survivability. Rad Hard FPGAs are appropriate for military and
civilian satellites, deep space probes, planetary missions, and other
applications in which radiation survivability is essential.
o Supporting Products and Services
In support of our FPGAs, we offer ASIC conversion products, IP cores,
development systems, programming hardware, debugging tool kits and demonstration
boards, a Web-based Resource Center, and design and programming services.
o ASIC Conversion Products
We offer a conversion path for high-volume designs using our flash
FPGAs by remapping the functionality of the FPGA into a cost-effective
standard cell ASIC. These pin-for-pin replacements are designed from the
existing FPGA database, which reduces the risk typically associated with
ASIC design conversions.
We also offer a solution that permits customers to convert ASICs (or
other obsolete components) to FPGA designs while preserving the existing
ASIC footprint on a production board. Semiconductor device obsolescence is
a growing problem in the electronics industry. Using one of our FPGAs and a
thin adapter board, this pin-compatible component replacement solution can
significantly extend the useful life of customer designs.
o IP Cores
IP cores are an integral part of our solution offering. Our
CompanionCore Alliance Program is a cooperative effort between us and
independent third-party IP core developers to produce and provide
industry-standard synthesizable semiconductor IP cores that are optimized
for use in our FPGAs. We offer IP cores generated, verified, and supported
by us, called DirectCores, and by our alliance partners, called
CompanionCores. Our offering includes approximately 34 bus interface, 61
communications, 22 data security, four memory control, 15 multimedia and
error correction, and 25 processor and peripheral IP cores. Our DirectCore
and CompanionCore offerings are available in either RTL or netlist formats.
Targeting the aerospace, automotive, communications, consumer, industrial,
and military markets, these IP cores complement the nonvolatile, secure,
and low-power characteristics of our flash and antifuse FPGAs.
During 2003, we introduced the new Platform8051, an integrated
platform solution initially consisting of six pre-integrated and
pre-verified IP cores. Optimized for use with our FPGAs, the Platform8051
solution enables a flexible, cost-effective, highly-integrated embedded
system for the consumer, communications, and automotive market segments as
well as industrial, military, and aerospace applications. Designers may
specify any configuration of the industry-standard IP cores and within one
day receive the platform design files via a Web-based delivery system.
o DirectCores
During 2003, we announced the availability of UTOPIA CoreU1LL,
CoreU1PHY, and CoreU2PHY DirectCores targeted at asynchronous transfer
mode (ATM) communication system developers; a PCI-X IP core suitable
for high-performance applications such as servers and workstations, as
well as network and test equipment; a MIL-STD-1553B bus controller
core for space, avionics, and military applications in which
high-reliability and system redundancy are essential; and our Core8051
8-bit high-performance embedded microcontroller (MCU) IP core.
Approximately 21 DirectCore IP cores are available for evaluation or
licensing from us or through our distributors or sales
representatives. We offer evaluation, single-use, and unlimited-use
licenses for all of our IP cores.
o CompanionCores
On May 5, 2003, we announced that a new CompanionCore Alliance
Program partner, Eureka Technology, Inc. (Eureka), had optimized three
PowerPC interface IP cores for use with our ProASIC Plus, Axcelerator,
SX-A, and RTSX-S FPGAs. On July 28, 2003, we announced that another
new CompanionCore Alliance Program partner, 4i2i Communications, Ltd.
(4i2i), had optimized its Viterbi and Reed-Solomon encoder and decoder
IP cores for use with our ProASIC Plus, Axcelerator, SX-A, and RTSX-S
FPGAs. In addition, 4i2i optimized its JPEG (Joint Photographic
Experts Group) encoders and decoders for our high-performance
Axcelerator device family. During 2003, we also announced the
availability of the industry's first Gigabit FibreChannel IP cores
designed for FPGA devices operating to military temperature
specifications.
Approximately 96 CompanionCores are available from our
CompanionCore Alliance Program partners, including eight from 4i2i; 11
from Amphion Semiconductor, Inc.; six from CAST, Inc.; five from
Eureka; nine from Helion Technology Ltd.; 25 from Inicore, Inc.
(Inicore); 23 from Memec Design; and nine from MorethanIP GmbH. A
number of licensing models are available from our Alliance partners,
including evaluation licenses in most cases.
On February 9, 2004, we announced that a new CompanionCore
Alliance Program partner, Intelliga Integrated Design (Intelliga), had
optimized its local interconnect network (LIN) and controller area
network (CAN) cores to support our automotive- and
industrial-temperature grade devices. We now offer more than 30 IP
cores specifically designed and optimized for in-cab and
under-the-hood automotive applications.
o Development Systems
Our strategy is to provide design software integrated with existing
EDA software and design flows. We work closely with EDA vendors to provide
early technical information on our new releases so that our partners can
offer timely support. Our EDA partners include Aldec, Inc.; Cadence Design
Systems, Inc. (Cadence); Celoxica Limited; Magma Design Automation, Inc.
(Magma); Mentor Graphics; SynaptiCAD, Inc. (SynaptiCAD); Synopsys; and
Synplicity.
o Libero
Our Libero tool suite is a comprehensive design environment that
integrates leading design tools and streamlines the design flow;
manages all design and report files; and passes necessary design data
between tools. The Silver Edition of our Libero IDE (integrated design
environment) includes Mentor Graphics' ViewDraw schematic capture
tool; SynaptiCAD's WaveFormer Lite test bench generation system;
Synplicity's Synplify synthesis software; our Silicon Explorer
verification and logic analyzer tool; and our Designer place-and-route
software. In addition, the Gold Edition of our Libero IDE includes
Mentor Graphics' ModelSim simulation and design verification software,
the Platinum Edition includes Synplicity's Synplify AE synthesis
software, and the Platinum PS Edition includes Magma's PALACE physical
synthesis tool.
During 2003, we announced the release of three versions of our
Libero IDE. Enhancements included improvements to the Synplicity
synthesis and our Designer place-and-route tools, which enable
designers to improve the performance of our ProASIC Plus devices while
reducing design-cycle time; the addition of FlashLock support for the
Permanent Lock feature in ProASIC Plus FPGAs, which allows designers
to secure the device by disabling the ability to reprogram or reverse
engineer the device; and expanded interfaces to external tools, such
as the Precision and LeonardoSpectrum synthesis tools from Mentor
Graphics, the Synplify Pro synthesis software from Synplicity, and our
programming and debugging tools. On February 2, 2004, we announced
that our Libero IDE had again been enhanced to provide customers with
faster timing closure and performance when using our flash-based
ProASIC Plus FPGAs.
o Designer
Our Designer software is also available from us as a standalone
interactive design implementation tool. The physical design tool suite
allows designers to import a netlist generated from a third party CAE
tool, place and route (layout) the design to achieve the timing
required, and generate a programming file to program our FPGAs. Our
Designer place-and-route software supports all of the established EDA
standards and popular synthesis, schematic, and simulation tools from
the leading EDA vendors, including Cadence, Mentor Graphics, Synopsys,
and Synplicity. Several ease-of-use enhancements were made to our
Designer physical design tool suite during 2003, including user-driven
device floorplanning and a multi-view graphical interface. New
features added in 2004 include software that enables programming or
testing of ProASIC Plus FPGAs when included in a daisy chain of
devices and support for the Linux platform.
o Programming Hardware
Programmers execute instructions included in files obtained from our
Designer software to program our FPGAs. All of our FPGAs can be programmed
by the Silicon Sculptor II programmer. The Silicon Sculptor II programmer
is a compact, single-device programmer with stand-alone software for the
personal computer (PC). Silicon Sculptor II was designed to allow
concurrent programming of multiple units from the same PC. We also offer
programming adapters, which must be used with the Silicon Sculptor II
programmer; surface-mount sockets, which make it easier to prototype
designs using our antifuse FPGAs; prototyping adapter boards; and
accessories. In addition, we support programmers offered by BP Microsystems
Inc.
Our flash FPGAs can also be programmed by the FlashPro programmers,
which provide ISP for our ProASIC Plus and ProASIC FPGA families. Designers
can configure our flash-based devices using only the portable FlashPro
programmer and a cable connected to either the parallel or USB port of a
PC. The ISP feature permits devices to be programmed after they are mounted
on a PCB. During 2003, we announced the availability of a portable,
low-cost FlashPro Lite programmer for use with our ProASIC Plus family of
FPGAs. This next-generation programmer is a very compact product that
allows customers to program devices using a laptop computer at any
location.
o Debugging Tool Kits and Demonstration Boards
Our design diagnostics and debugging tool kits and accessories permit
designers to improve productivity and reduce time to market by removing the
guesswork typically associated with the process of system verification. We
offer different tools kits for our flash and antifuse products. Our
development kits and demonstration boards and accessories permit users to
evaluate particular products.
o Design Diagnostics and Debugging Tool Kits
Our antifuse FPGAs contain internal circuitry that provides
built-in access to every node in a design, enabling real-time
observation and analysis of a device's internal logic nodes. Silicon
Explorer II, an easy-to-use integrated verification and logic analysis
tool kit for the PC, accesses the probe circuitry. The tool kit allows
designers to complete the design verification process at their desks.
The FS2 CLAM (Configurable Logic Analyzer Module) System provides
logic analyzer capabilities for our flash-based FPGAs. Embedded in our
flash devices, the CLAM System provides an intuitive way to view
internal signals and debug the logic design. The FS2 CLAM hardware
probe is offered by First Silicon Solutions, Inc. (FS2). In addition,
Synplicity offers the Identify RTL Debugger with support for our
ProASIC Plus device family. This utility allows customers to debug
their hardware directly from their RTL code.
o Development Kits and Demonstration Boards
On March 17, 2003, we announced the availability of a low-cost
starter kit for our ProASIC Plus devices. The starter kit consists of
an evaluation board with an APA075 ProASIC Plus device, our Libero
Gold IDE, a FlashPro Lite programmer and programming cable, power
supply, tutorials, and support documentation. With the new starter
kit, Actel customers can efficiently evaluate the performance and
functionality of their designs for cost-sensitive ASIC-alternative
applications in the industrial, communications, networking, and
avionics markets.
During 2003, we also announced the availability of Core 1553B and
CorePCIX evaluation boards and the Platform8051 development kit. In
addition, we offer Axcelerator, CorePCI, ProASIC Plus, and ProASIC
Plus ISP evaluation boards.
On February 9, 2004, we announced the availability of the Actel
Automotive Development Kit, which enables engineers to use our FPGAs
to create designs for automotive applications. Developed by Memec
Design and distributed globally by Unique Memec, the Kit combines an
Actel FPGA-based development board with Memec Design's controller area
network (CAN) IP core.
o Resource Center
On June 9, 2003, we announced the expansion of our Resource Center to
include comprehensive information on power consumption, "green" packaging,
and neutron-induced firm errors. The Web-based Resource Center provides
customers, design engineers, and managers with information on issues that
directly affect users of FPGAs and hard-wired ASICs. Launched in 2002 to
provide information on design security issues and increase the awareness of
design theft, the Web site includes technology tutorials, frequently-asked
questions (FAQs), market overviews, application notes, white papers,
extensive glossaries of industry terms, and links to other relevant
articles and third-party resources. Additional topics and issues will be
added as appropriate.
o Services
With our acquisition of the Protocol Design Services Group from
GateField Corporation (GateField) in August 1998, we became the first FPGA
provider to offer system-level design expertise. The Design Services
organization operates out of a secure facility located in Mt. Arlington,
New Jersey, and is certified to handle government, military, and
proprietary designs. The Group provides varying levels of design services
to customers, including FPGA, ASIC, and system design; software development
and implementation; and development of prototypes, first articles, and
production units. Our Design Services team has participated in the
development of a wide range of applications, including optical networks,
routers, cellular phones, digital cameras, embedded DSP systems, automotive
electronics, navigation systems, compilers, custom processors, and avionics
systems.
We program significant volumes of FPGAs for our customers each month.
We offer high-volume programming for all device and package types in our
programming center, which is located at our factory in Mountain View,
California. We are ISO, QML, STACK, and PURE certified, permitting us to
meet customer requirements for high-quality programmed devices. As part of
the programming process, we offer ink marking for customer-specific marking
needs. Volume programming charges are based on the type of device and
quantity per order.
On November 17, 2003, we unveiled our new Solution Partners Program,
which is a cooperative effort with third-party providers of FPGA design
services, embedded software, and hardware products to help designers
accelerate their time to market for Actel-based designs. The Program
provides customers with access to additional design resources, application
expertise, and products from strategic partners worldwide that complement
our products and services. We also introduced an updated IP Web interface.
Markets and Applications
FPGAs can be used in a broad range of applications across nearly all
electronic system market segments. Most customers use FPGAs in low to medium
volumes in the final production form of their products. Some high-volume
electronic system manufacturers use FPGAs as a prototyping vehicle and convert
production to lower-cost hard-wired ASICs, while others with time-to-market
constraints use FPGAs in the initial production and then convert to lower-cost
ASICs. As product life cycles shorten, mask sets and foundry capacity become
more expensive, FPGAs become less expensive, and new chip interface standards
emerge (putting a premium on I/O flexibility), more high-volume electronic
system manufacturers are electing to retain FPGAs in volume production.
o Military and Aerospace
In 2003, military and aerospace applications accounted for an estimated 36%
of our net revenues. Rigorous quality and reliability standards, stringent
volume requirements, and the need for design security are characteristics of the
military and aerospace market. Our FPGAs have high quality and reliability and
are almost impossible to copy or reverse engineer, making them appropriate for
many military and aerospace applications. We believe we are the world's leading
supplier of military and aerospace PLDs. Our customers in the military and
aerospace market include: BAE, Raytheon, Honeywell, and Lockheed Martin.
Our antifuse FPGAs are especially well suited for space applications, due
to the high radiation tolerance of the antifuse and our FPGA architecture.
Thousands of our FPGAs have performed flight-critical functions aboard manned
space vehicles, earth observation satellites, and deep-space probes, and our
FPGAs often perform mission-critical functions on important scientific missions
in space. We participate in programs administered by the Goddard, Johnson, and
Marshall Space Flight Centers of the National Aeronautics Space Administration
(NASA), including the Space Shuttle, International Space Station, and Hubble
Space Telescope. We also participate in programs at California Institute of
Technology's Jet Propulsion Laboratory, including the Mars Pathfinder and the
Mars Spirit and Opportunity Rovers. Our FPGAs can also be found in spacecraft
launched by practically every civilian space agency around the world, including
the European Space Agency (ESA) and the Japanese National Space Development
Agency.
For example, on July 14, 2003, we announced that our RTSX-S
radiation-tolerant FPGAs had been selected for extensive use on the Herschel and
Planck space probes, which are scheduled for launch by the ESA in 2007. The
Herschel probe will study infrared radiation and the Planck probe will study
cosmic background radiation. Our RT54SX32S and RT54SX72S parts will be used for
many flight-critical functions on the space explorations, including interfacing
and control, co-processing and data handling, as well as mission-critical
functions within various scientific instruments.
o Industrial
In 2003, industrial control and instrumentation applications accounted for
an estimated 26% of our net revenues. Industrial control and instrumentation
applications often require complex electronic functions tailored to specific
needs. FPGAs offer programmability and high density, making them attractive to
this segment of the electronic equipment market. Our customers in the industrial
market include: Abbott Labs, GE Medical Systems, Siemens, and Varian.
For example, on July 21, 2003, we announced that C-Map, a leading supplier
of marine cartography, had adopted our SX-A FPGAs for use in its marine
navigation system offerings. Our A54SX32A solution will be used as a graphics
controller and display driver, allowing different resolutions, black/white or
color displays, and a variety of other features, such as animated forecasting
against vessel positioning. The SX-A FPGA was chosen for its secure and reliable
operation in the rugged and harsh environments of alternate cold and heat and
intense humidity in which the marine navigation equipment operates.
o Communications
In 2003, communications applications accounted for an estimated 26% of our
net revenues. Increasingly complex equipment must frequently be designed to fit
in the space occupied by previous product generations. In addition, the
communications environment rewards short development times and early market
entry. The high density, high performance, and low power consumption of our
antifuse FPGAs make them suitable for use in high-speed communications
equipment. The high capacity, low cost, low power consumption, and
reprogrammability of our flash FPGAs make them appropriate for use in other
communications applications. Our customers in the communications market include:
Cisco, Marconi, Nokia, and Nortel.
o Consumer and Computer
In 2003, consumer and computer applications accounted for an estimated 12%
of our net revenues. Like the communications market, the markets for consumer
and computer products place a premium on early market entry for new products and
are characterized by short product life cycles.
o Consumer
The high performance, low power consumption, and low cost of antifuse
FPGAs make them appropriate for use in products enabling the portability of
the internet, or "e-appliances," and other high-volume electronic systems
targeted for consumers. E-appliance applications include MP3
"music-off-the-internet" players, digital cable set-top boxes, DSL and
cable modems, digital cameras, digital film, multimedia products, and
smart-card readers. Our customers in the consumer market include: Channel,
Datel, Inc., IC Boss, LG, and Shinyoung Precision Co., Ltd.
For example, on November 24, 2003, we announced that X-traFun Inc. had
selected our eX FPGA device to perform control, interface, and security
functions in the X-traFun Bluetooth Wireless PDA Cartridge for Nintendo's
Game Boy Advance hand held game console. Leveraging our FuseLock antifuse
technology, the eX FPGA secures X-traFun's proprietary IP from reverse
engineering. In addition, the eX FPGA's small form factor and high
utilization enabled significant reductions in the size, weight, and total
system cost of the production version of the X-traFun cartridge, which will
allow users to enjoy next-generation interactive gaming and wireless Web,
email, and chat applications on any Game Boy Advance handheld game console.
o Computer
FPGAs reduce the time to market for computer systems and facilitate
early completion of production models so that development of hardware and
software can occur in parallel. Our customers in the computer market
include: Allied Telesis K.K., Dialogic Corporation, HP, and Sky Computer.
For example, on January 28, 2003, we announced that Dr. Kaiser
Systemhaus had selected our SX-A FPGAs for use in the construction of its
PRODASAFE, a BIOS extension produced as a PCI-compatible PC plug-in card.
The PRODASAFE card protects the operating system, application programs, and
configurations of the PC from illegal manipulation, alteration, and
viruses. Our secure, nonvolatile 54SX08A FPGA serves as an interface
between the boot-PROM and the PCI bus to provide the protection functions.
o Automotive
Today's automobiles contain miles of wiring, hundreds of circuits, and a
wide variety of other electronic content. Increasing sophistication under the
hood has required a wide range of systems in the cab to help operators monitor
performance and control a variety of diagnostic and telematic functions. In
addition, manufacturers are striving to differentiate their products with a
variety of complex digital systems for entertainment and networked information
appliances. As a result, in-car electronics content is increasing at a rapid
rate. During 2003, we announced a new line of FPGAs targeted specifically for
the automotive market. Our automotive products enable designers to realize the
time-to market advantages of programmable logic while providing a solution that
can meet the rapidly evolving diagnostic, telematic, and infotainment
requirements of the automotive industry.
For example, on November 10, 2003, we announced that Life Racing, the
electronics design arm of Advanced Engine Research Ltd., had successfully used
our ProASIC Plus FPGAs in an automotive engine control unit. Competitive race
car engine control units require complex tuning algorithms, optimized for each
individual controller device, to manage engine timing. With standard Time
Processor Unit (TPU) controllers, this critical software can require significant
rework as application requirements change. Life Racing was able to replace
off-the-shelf TPU controllers with our in-system programmable (ISP) APA450
ProASIC Plus devices. Implementing a flexible hardware solution enabled Life
Racing to shorten software development time, reduce debug requirements, and
speed overall time to market.
Sales and Distribution
We maintain a worldwide, multi-tiered selling organization that includes a
direct sales force, independent sales representatives, and electronics
distributors. Our North American sales force consists of about 47 sales and
administrative personnel and field application engineers (FAEs) operating from
about 19 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, our sales managers also oversee the activities of about 17 sales
representative firms operating from about office locations. The sales
representatives concentrate on selling to major industrial companies in North
America. To service smaller, geographically dispersed accounts in North America,
we have a distributor agreement with Unique, which has about 35 offices in North
America.
We generate a significant portion of our revenues from international sales.
Sales to European customers accounted for 25% of net revenues in 2003. Our
European sales organization consists of about 24 employees operating from four
sales offices and about 11 distributors and sales representatives having about
26 offices (including Unique, which has nine offices in Europe). Sales to Japan
and other international customers accounted for 14% of net revenues in 2003. Our
Pan-Asia and Rest of World (ROW) sales organization consists of about 12
employees operating from four sales offices and about nine distributors and
sales representatives having about 20 offices (including Unique, which has about
nine offices in Pan-Asia and ROW).
Sales made through distributors accounted for 69% of our net revenues in
2003. Our North American distributors during 2003 were Unique and
Pioneer-Standard Electronics, Inc. (Pioneer). On March 1, 2003, we consolidated
our distribution channel by terminating our agreement with Pioneer, leaving
Unique as our sole distributor in North America. As is common in the
semiconductor industry, we generally grant 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 approved price reductions on specific transactions to
meet competition. We also generally grant distributors limited rights to return
products. To date, product returns under this policy have not been material. We
maintain reserves against which these credits and returns are charged. Because
of our price protection and return policies, we do not recognize revenue on
products sold to distributors until the products are resold to end customers.
Our sales cycle for the initial sale of a design system is generally
lengthy and often requires the ongoing participation of sales, engineering, and
managerial personnel. After a sales representative or distributor evaluates a
customer's logic design requirements and determines if there is an application
suitable for our FPGAs, the next step typically is a visit to the qualified
customer by a regional sales manager or an FAE from us or one of our
distributors or sales representatives. The sales manager or FAE may then
determine that additional analysis is required by engineers based at our
headquarters.
Backlog
Our backlog was $32.3 million at January 4, 2004, compared with $17.3
million at January 5, 2003. We include in our backlog all OEM orders scheduled
for delivery over the next nine months and all distributor orders scheduled for
delivery over the next six months. We sell standard products that may be shipped
from inventory within a short time after receipt of an order. Our business, and
to a great 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, our backlog generally may be cancelled or
rescheduled by the customer on short notice without significant penalty. As a
result, our backlog may not be indicative of actual sales and therefore should
not be used as a measure of future revenues.
Customer Service and Support
We believe that premiere customer service and technical support are
essential for success in the FPGA market. We facilitate service and support
through service team meetings that address particular aspects of the overall
service strategy and support. Many of our customers regularly measure the most
significant areas of customer service and technical support. Our customer
service organization emphasizes dependable, prompt, accurate responses to
questions about product delivery and order status.
Our FAEs located in Canada, France, Germany, Hong Kong, Italy, Japan, South
Korea, Taiwan, the United Kingdom, and the United States provide technical
support to customers worldwide. This network of experts is augmented by FAEs
working for our sales representatives and distributors throughout the world.
Customers in any stage of design may also obtain assistance from our technical
support hotline or online interactive automated technical support system. In
addition, we offer technical seminars on our products and comprehensive training
classes on our software.
We generally warrant that our FPGAs will be free from defects in material
and workmanship for one year, and that our software will conform to published
specifications for 90 days. To date, we have not experienced significant
warranty returns.
Manufacturing and Assembly
Our strategy is to utilize third-party manufacturers for our wafer
requirements, which permits us to allocate our resources to product design,
development, and marketing. Our FPGAs in production are manufactured by:
Chartered in Singapore using 0.45- and 0.35-micron design rules;
Infineon in Germany using 0.25-micron design rules;
MEC in Japan using 1.0-, 0.9-, 0.8-, and 0.25-micron design rules;
UMC in Taiwan using 0.22- and 0.15-micron design rules; and
Winbond in Taiwan using 0.8- and 0.45-micron design rules.
Wafers purchased from our suppliers are assembled, tested, marked, and
inspected by us and/or our subcontractors before shipment to customers. We
assemble most of our plastic commercial products in Hong Kong, South Korea, and
Singapore. Hermetic package assembly, which is often required for military
applications, is performed at one or more subcontractor manufacturing
facilities, some of which are in the United States.
We are committed to continuous improvement in our products, processes, and
systems and to making our quality and reliability systems conform to standards
and requirements recognized worldwide. During 2003, we received ISO 9001:2000
certification after an extensive audit verifying our commitment to quality
management principles, including customer satisfaction and control of product
development and operational activities. ISO certification provides a globally
recognized benchmark for the integrity of processes and procedures. In addition,
our antifuse-based FPGAs received QML-38535 certification, which confirms that
we have control of our processes and procedures in accordance with the standards
set forth in the MIL-PRF-38535. A QML-approved quality system provides assurance
to our customers regarding the suitability of our products for use in military
and space applications that have stringent quality and reliability requirements.
Many suppliers of microelectronic components have also implemented QML as their
primary worldwide business standard. ISO and QML certification are granted by
Defense Supply Center Columbus (DSCC).
We are also STACK and PURE certified. STACK International consists of major
electronic equipment manufacturers serving the worldwide high-reliability and
communications markets. Certification as a STACK International supplier confirms
that our standard qualification procedure and product monitor program and
manufacturing process meet or exceed the required specification. PURE, which
stands for PEDs (plastic encapsulated devices) Used in Rugged Environments, is
an association of European equipment makers dedicated to quality and
reliability. Our PURE certification is for plastic quad flat pack (PQFP)
packages.
Strategic Relationships
We enjoy ongoing strategic relationships with many of our customers,
distributors, sales representatives, foundries, assembly houses, and other
suppliers of goods and services, including the following:
o Magma
On October 14, 2003, Magma, a provider of chip design solutions, announced
that Magma's PALACE (Physical And Logical Automatic Compilation Engine) physical
synthesis software supports Actel's reprogrammable, flash-based ProASIC Plus
FPGA device families. According to Magma, PALACE provides FPGA designers with
significantly higher quality of results (QoR) and much faster timing closure.
Other benefits of the software include lower design costs, and reduced design
cycles.
On December 8, 2003, we announced that our Libero IDE had been enhanced to
include Magma's PALACE physical synthesis tool. The PALACE software can provide
higher performance for ProASIC Plus FPGAs. Through a new OEM agreement with
Magma, the PALACE software is available from us as a standalone tool or bundled
with our Libero IDE.
o Memec (Unique)
On April 7, 2003, the Memec Design and Unique Memec divisions of The Memec
Group, a global semiconductor distributor, introduced the Actel Automotive
Development Kit. The Kit was created and customized by Unique Memec, a leading
global semiconductor distributor, and Memec Design, Memec's global design and
engineering division, for use with Actel's SX-A automotive devices. Memec Design
and Unique Memec engineers collaborated to meet Actel's requirements by
enhancing an Actel FPGA-based development board with a controller area network
(CAN) transceiver and a CAN core.
o Synplicity
On August 4, 2003, Synplicity, a leading supplier of FPGA software for the
design and verification of semiconductors, announced that it had enhanced its
FPGA synthesis software, Synplify, to provide optimized support for Actel's
FPGAs. The Synplify 7.3 software with added support for the ProASIC Plus family
was included within Actel's Libero IDE v5.0, aiding in the design and
development of Actel's FPGA families. According to Synplicity, customers using
the enhanced Synplify software could increase the performance of their
flash-based ProASIC Plus devices while efficiently optimizing the device for
increased area utilization. For customers requiring additional circuit
performance, the Libero IDE also featured an expanded interface to Synplicity's
Synplify Pro software, which contained additional support for ProASIC Plus
devices.
Research and Development
In 2003, we spent $39.6 million on research and development, which
represented 26.4% of net revenues. Our efforts to develop of new products based
on existing or emerging technologies include circuit design, software
development, and process technology activities. In the areas of circuit design
and process technology, our research and development activities also involve
continuing efforts to reduce the cost and improve the performance of current
products, including "shrinks" of the design rules under which such products are
manufactured. Our software research and development activities include enhancing
the functionality, usability, and availability of high-level CAE tools and IP
cores in a complete and automated desktop design environment on popular PC and
workstation platforms.
Competition
The FPGA market is highly competitive, and we expect that to increase as
the market grows. Our competitors include suppliers of standard TTLs and
custom-designed ASICs, including conventional gate arrays and standard cells,
simple PLDs, CPLDs, and FPGAs. Of these, we compete principally with suppliers
of hard-wired ASICs, CPLDs, and FPGAs.
The primary advantages of hard-wired ASICs are high capacity, high density,
high speed, and low cost in production volumes. These advantages are offset by
long design cycles and high designs costs, including mask set and nonrecurring
engineering (NRE) charges. We compete with hard-wired ASIC suppliers by offering
lower design costs (including low or no NREs), shorter design cycles, and
reduced inventory risks. Some customers elect to design and prototype with our
products and then convert to hard-wired ASICs to achieve lower costs for volume
production. For this reason, we also face competition from companies that
specialize in converting CPLDs and FPGAs, including our products, into
hard-wired ASICs.
We also compete with suppliers of CPLDs. Suppliers of these devices include
Altera Corporation (Altera), which purchased the PLD business of Intel
Corporation in 1994; Lattice Semiconductor Corporation (Lattice), which
purchased the CPLD businesses of Vantis Corporation in 1999; and Xilinx, Inc.
(Xilinx). The circuit architecture of CPLDs may give them a performance
advantage in certain lower capacity applications, although we believe that FPGAs
compete favorably with CPLDs. However, Lattice and particularly Altera are
larger than us, offer broader product lines to more extensive customer bases,
and have significantly greater financial, technical, sales, and other resources.
In addition, many newer CPLDs are reprogrammable, which permits customers to
reuse a circuit multiple times during the design process. While our flash FPGAs
are reprogrammable, antifuse FPGAs are one-time programmable, permanently
retaining their programmed configuration.
We compete most directly with established FPGA suppliers, such as Xilinx,
Altera, and Lattice, which purchased the FPGA business of Agere Systems, Inc. in
2002. We announced our intention to develop SRAM-based FPGA products in 1996 and
abandoned the development in 1999. While we believe our products and
technologies are superior to those of Xilinx (as well as Altera and Lattice) in
many applications requiring greater internal speed, lower cost, nonvolatility,
lower power, and/or greater security, Xilinx is significantly larger than us,
offers a broader product line to a more extensive customer base, and has
substantially greater financial, technical, sales, and other resources. In
addition, the FPGAs of Xilinx, Altera, and Lattice are reprogrammable. While our
flash FPGAs are reprogrammable, antifuse FPGAs are one-time programmable.
Several companies have marketed antifuse-based FPGAs, including QuickLogic
Corporation (QuickLogic). In 1995, we acquired the antifuse FPGA business of TI,
which was the only second-source supplier of our products. Xilinx, which is a
licensee of certain of our patents, introduced antifuse-based FPGAs in 1995 and
abandoned its antifuse FPGA business in 1996. Cypress Semiconductor Corporation,
which was a licensed second source of QuickLogic, sold its antifuse FPGA
business to QuickLogic in 1997. We believe that we compete favorably with
QuickLogic, which is also a licensee of certain of our patents.
To date, we are the only supplier of flash-based FPGAs. In 1998, we entered
into a strategic alliance with GateField under which we acquired the exclusive
right to market and sell standard ProASIC products in process geometries of
0.35-micron and less. In 1999, we introduced the flash-based ProASIC family of
FGPAs. In 2000, we acquired GateField in a merger.
We believe that important competitive factors in our market are price;
performance; capacity (total number of usable gates); density (concentration of
usable gates); ease of use and functionality of development tools; installed
base of development tools; reprogrammability; strength of sales organization and
channels; power consumption; reliability; security; adaptability of products to
specific applications and IP; ease, speed, cost, and consistency of programming;
length of research and development cycle (including migration to finer process
geometries); number of I/Os; reliability; wafer fabrication and assembly
capacity; availability of packages, adapters, sockets, programmers, and IP;
technical service and support; and utilization of intellectual property laws.
Our failure to compete successfully in any of these areas could have a
materially adverse effect on our business, financial condition, or results of
operations.
Patents and Licenses
As of February 9, 2004, we had 233 United States patents and applications
pending for an additional 77 United States patents. We also had 65 foreign
patents and applications pending for 41 patents outside the United States. Our
patents cover, among other things, circuit architectures, antifuse and flash
structures, and programming methods. We expect to continue filing patent
applications as appropriate to protect our proprietary technologies. We believe
that patents, along with such factors as innovation, technological expertise,
and experienced personnel, will become increasingly important.
In connection with the settlement of patent litigation in 1993, we entered
into a Patent Cross License Agreement with Xilinx (Xilinx Agreement), under
which Xilinx was granted a license under certain of our patents that permits
Xilinx to make and sell antifuse-based PLDs, and we were granted a license under
certain Xilinx patents to make and sell SRAM-based PLDs. Xilinx introduced
antifuse-based FPGAs in 1995 and abandoned its antifuse FPGA business in 1996.
We announced our intention to develop SRAM-based FPGA products in 1996 and
abandoned the development in 1999.
In 1995, we entered into a License Agreement with BTR, Inc. (BTR) pursuant
to which BTR licensed its proprietary technology to us for development and use
in FPGAs and certain multichip modules. As partial consideration for the grant
of the license, we pay to BTR non-refundable advance royalties.
In connection with the settlement of patent litigation in 1998, we entered
into a Patent Cross License Agreement with QuickLogic that protects the products
of both companies that were first offered for sale on or before September 4,
2000, or are future generations of such products.
As is typical in the semiconductor industry, we have been and expect to be
notified from time to time of claims that we may be infringing patents owned by
others. During 2003, we held discussions regarding potential patent infringement
issues with several third parties. When probable and reasonably estimable, we
have made provision for the estimated settlement costs of claims for alleged
infringement. As we sometimes have in the past, we may obtain licenses under
patents that we are alleged to infringe. While we believe that reasonable
resolution will occur, there can be no assurance that these claims will be
resolved or that the resolution of these claims will not have a materially
adverse effect on our business, financial condition, or results of operations.
In addition, our evaluation of the impact of these pending disputes could change
based upon new information learned by us. Subject to the foregoing, we do not
believe that the resolution of any pending patent dispute is likely to have a
materially adverse effect on our business, financial condition, or results of
operations.
Employees
At the end of 2003, we had 543 full-time employees, including 149 in
marketing, sales, and customer support; 200 in R&D; 156 in operations; and 38 in
administration and finance. This compares with 538 full-time employees at the
end of 2002, an increase of 1%. Net revenues were approximately $276,000 per
employee for 2003 compared with approximately $250,000 for 2002. This represents
an increase of 10%. We have no employees represented by a labor union, have not
experienced any work stoppages, and believe that our employee relations are
satisfactory.
Risk Factors
Our shareholders and prospective investors should carefully consider, along
with the other information in this Annual Report on Form 10-K, the following:
o Our future revenues and operating results are likely to fluctuate and may
fail to meet expectations, which could cause our stock price to decline.
Our quarterly revenues and operating results are subject to fluctuations
resulting from general economic conditions and a variety of risks specific to us
or characteristic of the semiconductor industry, including booking and shipment
uncertainties, supply problems, and price erosion. These and other factors make
it difficult for us to accurately project quarterly revenues and operating
results, which may fail to meet our expectations. Any failure to meet
expectations could cause our stock price to decline significantly.
o A variety of booking and shipping uncertainties may cause us to fall
short of our quarterly revenue expectations.
When we fall short of our quarterly revenue expectations, our
operating results are likely to be adversely affected because most of our
expenses are fixed and therefore do not vary with revenues.
o We derive a large percentage of our quarterly revenues from
bookings received during the quarter, making quarterly revenues
difficult to predict.
Our backlog (which generally may be cancelled or deferred by
customers on short notice without significant penalty) at the
beginning of a quarter typically accounts for about half of our
revenues during the quarter. This means that we generate about half of
our quarterly revenues from orders received during the quarter and
"turned" for shipment within the quarter, and that any shortfall in
"turns" orders will have an immediate and adverse impact on quarterly
revenues. There are many factors that can cause a shortfall in turns
orders, including declines in general economic conditions or the
businesses of our customers, excess inventory in the channel, or
conversion of our products to hard-wired ASICs or other competing
products for price or other reasons.
o We derive a significant percentage of our quarterly revenues from
shipments made in the final weeks of the quarter, making
quarterly revenues difficult to predict.
Historically, we shipped a disproportionately large percentage of
our quarterly revenues in the final weeks of the quarter, which makes
it difficult to accurately project quarterly revenues. Any failure to
effect scheduled shipments by the end of a quarter would have an
immediate and adverse impact on quarterly revenues.
o Our military and aerospace shipments tend to be large and are
subject to complex scheduling uncertainties, making quarterly
revenues difficult to predict.
Orders from the military and aerospace customers tend to be large
and irregular, which contributes to fluctuations in our net revenues
and gross margins. These sales are also subject to more extensive
governmental regulations, including greater import and export
restrictions. Historically, it has been difficult to predict if and
when export licenses will be granted, if required. In addition,
products for military and aerospace applications require processing
and testing that is more lengthy and stringent than for commercial
applications, which increases the complexity of scheduling and
forecasting as well as the risk of failure. It is often impossible to
determine before the end of processing and testing whether products
intended for military or aerospace applications will fail and, if they
do fail, it is generally not possible for replacements to be processed
and tested in time for shipment during the same quarter. All of these
factors make it difficult to accurately estimate quarterly revenues.
o We derive a majority of our quarterly revenues from products
resold by our distributors, making quarterly revenues difficult
to predict.
We typically generate more than half of our quarterly revenues
from sales made through distributors. Since we do not recognize
revenue on the sale of a product to a distributor until the
distributor resells the product, our quarterly revenues are dependent
on, and subject to fluctuations in, shipments by our distributors. We
are also highly dependent on the timeliness and accuracy of our resale
reports from our distributors. Late or inaccurate resale reports,
particularly in the last month of the quarter, contribute to our
difficulty in predicting and reporting our quarterly revenues and
results of operations.
o An unanticipated shortage of products available for sale may cause us
to fall short of expected quarterly revenues and operating results.
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. 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 and new products, such as our ProASIC
Plus and Axcelerator FPGA families, are often more complex and/or more
difficult to produce, increasing the risk of manufacturing-related defects.
In addition, we may not discover defects or other errors in new products
until after we have commenced volume production. Our failure to effect
scheduled shipments by the end of a quarter due to unexpected supply
constraints would have an immediate and adverse impact on quarterly
revenues.
o Unanticipated increases, or the failure to achieve anticipated
reductions, in the cost of our products may cause us to fall short of
expected quarterly operating results.
As is also common in the semiconductor industry, our independent wafer
suppliers from time to time experience lower than anticipated yields of
usable die. Wafer yields can decline without warning and may take
substantial time to analyze and correct, particularly for a company like us
that does not operate our own manufacturing facility, but instead utilizes
independent facilities, almost all of which are offshore. Yield problems
are most common on new processes or at new foundries, particularly when new
technologies are involved. Our FPGAs are also manufactured using customized
processing steps, which may increase the incidence of production yield
problems as well as the amount of time needed to achieve satisfactory,
sustainable wafer yields on new processes and new products. Lower than
expected yields of usable die could reduce our gross margin, which would
adversely affect our quarterly operating results. In addition, in order to
win designs, we generally must price new products on the assumption that
manufacturing cost reductions will be achieved, which often do not occur as
soon as expected. The failure to achieve expected manufacturing cost
reductions could reduce our gross margin, which would adversely affect our
quarterly operating results.
o Unanticipated reductions in the average selling prices of our products
may cause us to fall short of expected quarterly revenues and
operating results.
The semiconductor industry is characterized by intense price
competition. The average selling price of a product typically declines
significantly between introduction and maturity. We sometimes are required
by competitive pressures to reduce the prices of our new products more
quickly than cost reductions can be achieved. We also sometimes approve
price reductions on specific sales for strategic or other reasons. Declines
in the average selling prices of our products will reduce quarterly
revenues unless offset by greater unit sales or a shift in the mix of
products sold toward higher-priced products. Declines in the average
selling prices of our products will also reduce quarterly gross margin
unless offset by reductions in manufacturing costs or by a shift in the mix
of products sold toward higher-margin products.
o In preparing our financial statements, we make good faith estimates and
judgments that may change or turn out to be erroneous.
In preparing our financial statements in conformity with accounting
principles generally accepted in the United States, we must make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues, and
expenses and the related disclosure of contingent assets and liabilities. The
most difficult estimates and subjective judgments that we make concern
inventories, impairment of investments in other companies, intangible assets and
goodwill, income taxes, and legal matters. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ materially from
these estimates. In addition, if these estimates or their related assumptions
change in the future, our operating results for the periods in which we revise
our estimates or assumptions could be adversely and perhaps materially affected.
o Our gross margin may decline as we increasingly compete with hard-wired
ASICs and serve the value-based market.
The price we can charge for our products is constrained principally by our
competition. While it has always been intense, we believe that price competition
for new designs is increasing. This may be due in part to the transition toward
high-level design methodologies. Designers can now wait until later in the
design process before selecting a PLD or hard-wired ASIC and it is easier to
convert between competing PLDs or between PLDs and hard-wired ASICs. The
increased price competition may also be due in part to the increasing
penetration of PLDs into price-sensitive markets previously dominated by
hard-wired ASICs. We have strategically targeted many of our products at the
value-based marked, which is defined by low prices. If our strategy is
successful, low-price products will constitute increasingly greater percentages
of our net revenues, which may make it more difficult to maintain our gross
margin at our historic levels. Any long-term decline in our gross margin would
have an adverse effect on our operating results.
o We may not win sufficient designs, or the designs we win may not generate
sufficient revenues, for us to maintain or expand our business.
In order for us to sell an FPGA to a customer, the customer must
incorporate our FPGA into the customer's product in the design phase. We devote
substantial resources, which we may not recover through product sales, to
persuade potential customers to incorporate our FPGAs into new or updated
products and to support their design efforts (including, among other things,
providing development systems). These efforts usually precede by many months
(and often a year or more) the generation of FPGA sales, if any. The value of
any design win, moreover, depends in large part upon the ultimate success of our
customer's product in its market. Our failure to win sufficient designs, or the
failure of the designs we win to generate sufficient revenues, could have a
materially adverse effect on our business, financial condition, or results of
operations.
o Ongoing investigations regarding the reliability of our RTSX-S
space-qualified FPGAs could have a material adverse effect on our financial
results and business in both the short and long term.
Our RTSX-S family was designed specifically to address heavy ion-induced
single-event upsets in space. First shipped in 2001, the family accounted for
approximately 15% of our net revenues for 2003 and 2002. Some of the potential
risks associated with ongoing investigations regarding the reliability of our
RTSX-S space-qualified FPGAs are discussed below.
o Background
During 2003, several U.S. government contractors reported a small
percentage of functional failures in our RTSX-S and SX-A antifuse devices
manufactured on a 0.25 micron antifuse process at one of the foundries we
use.
o Actel Failure Analyses
Four of the U.S. government contractors reporting functional
failures submitted their devices to us for failure analysis. Our
failure analyses concluded that each of the submitted devices had been
damaged by electrical overstress.
o Other Actel Experiments and Conclusions to Date
In addition to the failure analyses, we have conducted numerous
experiments to (among other things) characterize the susceptibility of
programmed 0.25-micron antifuses to electrical overstress and
determine if we can detect and screen-out 0.25-micron antifuse devices
that are particularly susceptible to electrical overstress. The
experiments are ongoing, but to date we have:
observed electrical overstress damage only in 0.25-micron
antifuse RTSX-S and SX-A FPGAs that we believe were
subjected to voltages outside of our published datasheet
specifications; and
concluded that a small percentage of our 0.25-micron
antifuse RTSX-S and SX-A FPGAs are particularly susceptible
to electrical overstress damage when exposed to voltages
outside of our published datasheet specifications.
o Industry Group and Tiger Team
An ad-hoc industry group lead by The Aerospace Corporation
(Aerospace) was established to examine the electrical overstress
problem. The industry group formed a "Tiger Team" to develop and
analyze experimental data, characterize antifuse electrical overstress
damage, and identify the root cause of electrical overstress damage.
o Aerospace Closure Plan
On February 13, 2004, Aerospace presented to the industry group a
Closure Plan consisting of 12 projects to resolve the electrical
overstress issue (Closure Plan). Of the 12 proposed Closure Plan
projects, six would be performed by Aerospace, four by us, and two by
other Tiger Team members. One key project is an experiment by us to
determine the rate (if any) at which 0.25-micron antifuse devices fail
when they are not exposed to voltages outside of our published
datasheet limits. Our failure rate measurement experiment will be
performed on at least 800 RTSX-S FPGAs and is scheduled to be
completed in August 2004. Data from the Closure Plan projects will be
shared with the industry group as soon as it is available.
o A recall of our 0.25-micron antifuse FPGAs could have a materially
adverse effect on our revenues and operating results.
We think there is only a slight chance that we will determine, as
a result of conducting the experiments proposed by Aerospace as part
of its Closure Plan, that our RTSX-S devices experience antifuse
damage when operated within the maximum voltage limitation set forth
in our published datasheet specifications, and that the failure rate
exceeds the range specified in the Aerospace Closure Plan. However, if
we were to make those determinations, we may recall our RTSX-S FPGAs,
and possibly some of our 0.25-micron SX-A FPGAs. In any recall, we
would try to replace the recalled parts. If we were unable to replace
the recalled parts with acceptable parts, we would offer refunds to
our customers for the recalled parts and, in addition, would be unable
to fill new orders for these parts. This would have a materially
adverse effect on our revenues and operating results.
o While the Actel and Aerospace investigations are continuing, our
customers may defer placing new orders, defer the shipment of existing
orders, or cancel existing orders.
The electrical overstress problem has caused more anxiety among some
members of the industry group than others. While most members have
continued to order parts from us, some are behaving more cautiously. To
whatever extent our customers take a "wait-and-see" attitude while the
Actel and Aerospace investigations are continuing, our revenues and
operating results could be adversely affected. Some customers may also
explore alternatives, which might cause us to lose existing or future
orders irrespective of any conclusions reached by Actel or Aerospace
regarding the root cause of the electrical overstress problem.
o The electrical overstress problem may harm our reputation in the
industry, which could have a long-term materially adverse affect on
our business.
The questions raised by the electrical overstress problem concerning
the reliability of our space-grade RTSX-S devices may undermine our
reputation in an industry to which we have been a major supplier. To
whatever extent our customers have doubts about the reliability of our
parts, they may seek to use other suppliers, which could be harmful to our
business over time.
o We may be unsuccessful in defining, developing, or selling competitive new
or improved products at acceptable margins.
The market for our products is characterized by rapid technological change,
product obsolescence, and price erosion, making the timely introduction of new
or improved products critical to our success. Our failure to design, develop,
and sell new or improved products that satisfy customer needs, compete
effectively, and generate acceptable margins may adversely affect our business,
financial condition, and results of operations. While most of our product
development programs have achieved a level of success, some have not. For
example:
We announced our intention to develop SRAM-based FPGA products in 1996
and abandoned the development in 1999 principally because the product
would no longer have been competitive.
We introduced our VariCore embeddable reprogrammable gate array (EPGA)
logic core based on SRAM technology in 2001. Revenues from VariCore
EPGAs did not materialize and the development of a more advanced
VariCore EPGA has been cancelled. In this case, a market that we
believed would develop did not emerge.
In 2001, we also launched our BridgeFPGA initiative to address the I/O
problems created within the high-speed communications market by the
proliferation of interface standards. The adoption of these interface
standards has created the need for designers to implement bridging
functions to connect incompatible interface standards. We introduced
Axcelerator, a high-speed antifuse FPGA with dedicated high-speed I/O
circuits that can support multiple interface standards, in 2002.
However, the development of subsequent BridgeFPGA products, which were
expected to include embedded high-speed interface protocol
controllers, was postponed in 2002. This was due principally to the
prolonged downturn in the high-speed communications market. The
development was cancelled in 2003 principally because the subsequent
BridgeFPGA products would no longer have been competitive.
o Numerous factors can cause the development or introduction of new
products to fail or be delayed.
To develop and introduce a product, we must successfully accomplish
all of the following:
anticipate future customer demand and the technology that will be
available to meet the demand;
define the product and its architecture, including the
technology, silicon, programmer, IP, software, and packaging
specifications;
obtain access to advanced manufacturing process technologies;
design and verify the silicon;
develop and release evaluation software;
lay out the architecture and implement programming;
tape out the product;
generate a mask of the product and evaluate the software;
manufacture the product at the foundry;
verify the product; and
qualify the process, characterize the product, and release
production software.
Each of these steps is difficult and subject to failure or delay. In
addition, the failure or delay of any step can cause the failure or delay
of the entire development and introduction. We can offer you no assurance
that our development and introduction schedules for new products or the
supporting software or hardware will be met, that new products will gain
market acceptance, or that we will respond effectively to new technological
changes or new product announcements by others. Any failure to successfully
define, develop, market, manufacture, assemble, test, or program
competitive new products could have a materially adverse effect on our
business, financial condition, and results of operations.
o New products are subject to greater operational risks.
Our future success is highly dependent upon the timely development and
introduction of competitive new products at acceptable margins. However,
there are greater operational risks associated with new products. The
inability of our wafer suppliers to produce advanced products; delays in
commencing or maintaining volume shipments of new products; the discovery
of product, process, software, or programming defects or failures; and any
related product returns could each have a materially adverse effect on our
business, financial condition, or results of operation.
o New products are subject to greater technology risks.
As is common in the semiconductor industry, we have experienced from
time to time in the past, and expect to experience in the future,
difficulties and delays in achieving satisfactory, sustainable yields on
new products. The fabrication of antifuse and flash wafers is a complex
process that requires a high degree of technical skill, state-of-the-art
equipment, and effective cooperation between us and the foundry 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. Yield problems increase
the cost of as well as time it takes us to bring our new products to
market, which can create inventory shortages and dissatisfied customers.
Any prolonged inability to obtain adequate yields or deliveries of new
products could have a materially adverse effect on our business, financial
condition, or results of operations.
o New products generally have lower gross margins.
Our gross margin is the difference between the cost of our products
and the revenues we receive from the sale of our products. One of the most
important variables affecting the cost of our products is manufacturing
yields. With our customized antifuse and flash manufacturing process
requirements, we almost invariably experience difficulties and delays in
achieving satisfactory, sustainable yields on new products. Until
satisfactory yields are achieved, gross margins on new products are
generally lower than on mature products. Depending upon the rate at which
sales of new products ramp and the extent to which they displace mature
products, the lower gross margins typically associated with new products
could have a materially adverse effect on our operating results.
o We face intense competition and have some competitive disadvantages that we
may not be able to overcome.
The semiconductor industry is intensely competitive. Our competitors
include suppliers of hard-wired ASICs, CPLDs, and FPGAs. Our direct competitors
are Xilinx, a supplier of SRAM-based FPGAs; Altera, a supplier of CPLDs and
SRAM-based FPGAs; Lattice, a supplier of CPLDs and SRAM-based FPGAs; and
QuickLogic, a supplier of antifuse-based FPGAs. We also face competition from
companies that specialize in converting our products into hard-wired ASICs. In
addition, we may face competition from suppliers of logic products based on new
or emerging technologies. While we seek to monitor developments in existing and
emerging technologies, our technologies may not remain competitive.
o Most of our current and potential competitors are larger and have more
resources.
Many of our current competitors have broader product lines, more
extensive customer bases, and significantly greater financial, technical,
manufacturing, and marketing resources than us. Additional competition is
possible from major domestic and international semiconductor suppliers. All
such companies are larger and have broader product lines, more extensive
customer bases, and substantially greater financial and other resources
than us, including the capability to manufacture their own wafers. We may
not be able to overcome these competitive disadvantages.
o Our antifuse technology is not reprogrammable, which is a competitive
disadvantage in most cases.
All existing FPGAs not based on antifuse technology and certain CPLDs
are reprogrammable. The one-time programmability of our antifuse FPGAs is
necessary or desirable in some applications, but logic designers generally
prefer to prototype with a reprogrammable logic device. This is because the
designer can reuse the device if an error is made. The visibility
associated with discarding a one-time programmable device often causes
designers to select a reprogrammable device even when an 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. Although we now offer reprogrammable
flash devices, we may not be able to overcome this competitive
disadvantage.
o Our flash and antifuse technologies are not manufactured on standard
processes, which is a competitive disadvantage.
Our antifuse-based FPGAs and (to a lesser extent) flash-based ProASIC
FPGAs are manufactured using customized steps that are added to otherwise
standard manufacturing processes of independent wafer suppliers. There is
considerably less operating history for the customized process steps than
for the foundries' standard manufacturing processes. Our dependence on
customized processing steps means that, in contrast with competitors using
standard manufacturing processes, we generally have more difficulty
establishing relationships with independent wafer manufacturers; take
longer to qualify a new wafer manufacturer; take 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 will not obtain early access to the most advanced processes. Any of
these factors could be a material disadvantage against competitors using
standard manufacturing processes. As a result of these factors, our
products typically have been fabricated using processes one or two
generations behind the processes used by competing products. As a
consequence, we generally have not fully realized the benefits of our
technologies. Although we are attempting to accelerate the rate at which
our products are reduced to finer process geometries and obtain earlier
access to advanced processes, we may not be able to overcome these
competitive disadvantages.
o Our business and operations may be disrupted by events that are beyond our
control or the control of our business partners.
Our performance is subject to events or conditions beyond our control, and
the performance of each of our foundries, suppliers, subcontractors,
distributors, agents, and customers is subject to events or conditions beyond
their control. These events or conditions include labor disputes, acts of public
enemies or terrorists, war or other military conflicts, blockades,
insurrections, riots, epidemics, quarantine restrictions, landslides, lightning,
earthquakes, 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, and inability to
obtain transport or supplies. This type of disruption could impair our ability
to ship products in a timely manner, which may have a materially adverse effect
on our business, financial condition, and results of operations.
Our corporate offices are located in California, which was subject to power
outages and shortages during 2001 and 2002. More extensive power shortages in
the state could disrupt our operations and interrupt our research and
development activities. Our foundry partners in Japan and Taiwan and our
operations in California are located in areas that have been seismically active
in the recent past. In addition, many of the countries outside of the United
States in which our foundry partners and assembly and other subcontractors are
located have unpredictable and potentially volatile economic, social, or
political conditions, including the risks of conflict between Taiwan and the
People's Republic of China or between North Korea and South Korea. In addition,
an outbreak of Severe Acute Respiratory Syndrome (SARS) occurred in Hong Kong,
Singapore, and China in 2003. The occurrence of these or similar events or
circumstances could disrupt our operations and may have a materially adverse
effect on our business, financial condition, and results of operations.
o Our business depends on numerous independent third parties whose interests
may diverge from our interests.
We rely heavily on, but generally have little control over, our independent
foundries, suppliers, subcontractors, and distributors.
o Our independent wafer manufacturers may be unable or unwilling to
satisfy our needs in a timely manner, which could harm our business.
We do not manufacture any of the semiconductor wafers used in the
production of our FPGAs. Our wafers are currently manufactured by Chartered
in Singapore, Infineon in Germany, MEC in Japan, UMC in Taiwan, and Winbond
in Taiwan. Our reliance on independent wafer manufacturers to fabricate our
wafers involves significant risks, including lack of control over capacity
allocation, delivery schedules, the resolution of technical difficulties
limiting production or reducing yields, and the development of new
processes. Although we have supply agreements with several of our wafer
manufacturers, a shortage of raw materials or production capacity could
lead any of our wafer suppliers to allocate available capacity to other
customers, or to internal uses, which could impair our ability to meet our
product delivery obligations and may have a materially adverse effect on
our business, financial condition, and results of operations.
o Our limited volume and customized process requirements generally
make us less attractive to independent wafer manufacturers.
The semiconductor industry has from time to time experienced
shortages of manufacturing capacity, and may again be entering a
period in which capacity is constrained. When production capacity is
tight, the relatively small amount of wafers that we purchase from any
foundry and the customized process steps that are necessary for our
technologies put us at a disadvantage to foundry customers who
purchase more wafers manufactured on standard processes. To secure an
adequate supply of wafers, we may consider various transactions,
including the use of substantial nonrefundable deposits, contractual
purchase commitments, equity investments, or the formation of joint
ventures. Any of these transactions may have a materially adverse
effect on our business, financial condition, and results of
operations.
o Identifying and qualifying new independent wafer manufacturers is
difficult and might be unsuccessful.
If our current independent wafer manufacturers were unable or
unwilling to manufacture our products as required, we would have to
identify and qualify additional foundries. No additional wafer
foundries may be able or available to satisfy our requirements on a
timely basis. Even if we are able to identify a new third party
manufacturer, the costs associated with manufacturing our products may
increase. In any event, the qualification process typically takes one
year or longer, which could cause product shipment delays, and
qualification may not be successful.
o Our independent assembly subcontractors may be unable or unwilling to
meet our requirements, which could delay product shipments and result
in the loss of customers or revenues.
We rely primarily on foreign subcontractors for the assembly and
packaging of our products and, to a lesser extent, for testing of our
finished products. Our reliance on independent subcontractors involves
certain risks, including lack of control over capacity allocation and
delivery schedules. We generally rely on one or two subcontractors to
provide particular services and have from time to time experienced
difficulties with the timeliness and quality of product deliveries. We have
no long-term contracts with our subcontractors and certain of those
subcontractors sometimes operate at or near full capacity. Any significant
disruption in supplies from, or degradation in the quality of components or
services supplied by, our subcontractors could have a materially adverse
effect on our business, financial condition, and results of operations.
o Our independent software and hardware developers and suppliers may be
unable or unwilling to satisfy our needs in a timely manner, which
could impair the introduction of new products or the support of
existing products.
We are dependent on independent software and hardware developers for
the development, supply, maintenance, and support of some of our IP cores,
development systems, programming hardware, design diagnostics and debugging
tool kits, demonstration boards, and ASIC conversion products (or certain
elements of those products). Our reliance on independent software and
hardware developers involves certain risks, including lack of control over
delivery schedules and customer support. Any failure of or significant
delay by our independent developers to complete software and/or hardware
under development in a timely manner could disrupt the release of our
software and/or the introduction of our new FPGAs, which might be
detrimental to the capability of our new products to win designs. Any
failure of or significant delay by our independent suppliers to provide
updates or customer support could disrupt our ability to ship products or
provide customer support services, which might result in the loss of
revenues or customers. Any of these disruptions could have a materially
adverse effect on our business, financial condition, or results of
operations.
o Our future performance will depend in part on the effectiveness of our
independent distributors in marketing, selling, and supporting our
products.
In 2003, sales made through distributors accounted for 69% of our net
revenues. Our distributors offer products of several different companies,
so they may reduce their efforts to sell our products or give higher
priority to other products. A reduction in sales effort, termination of
relationship, failure to pay for products ordered from us, or
discontinuance of operations because of financial difficulties or for other
reasons by one or more of our current distributors could have a materially
adverse effect on our business, financial condition, and results of
operations.
o Distributor contracts generally can be terminated on short
notice.
Although we have contracts with our distributors, the agreements
are terminable by either party on short notice. On March 1, 2003, we
consolidated our distribution channel by terminating our agreement
with Pioneer, which accounted for 26% of our net revenues in 2002. We
also consolidated our distribution channel in 2001 by terminating our
agreement with Arrow, which accounted for 13% of our net revenues in
2001. Unique, which accounted for 41% of our net revenues in 2003, has
been our sole distributor in North America since March 1, 2003. The
loss of Unique as a distributor could have a materially adverse effect
on our business, financial condition, or results of operations.
o Fluctuations in inventory levels at our distributors can affect
our operating results.
Our distributors have occasionally built inventories in
anticipation of significant growth in sales and, when such growth did
not occur as rapidly as anticipated, substantially reduced the amount
of product ordered from us in subsequent quarters. Such a slowdown in
orders generally reduces our gross margin on future sales of newer
products because we are unable to take advantage of any manufacturing
cost reductions while the distributor depletes its inventory at lower
average selling prices.
o We are subject to all of the risks and uncertainties associated with the
conduct of international business.
o We depend on international operations for almost all of our products.
We purchase almost all of our wafers from foreign foundries and have
almost all of our 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, governmental regulations, currency exchange fluctuations,
reduced protection for intellectual property, war and other military
activities, terrorism, changes in social, political, or economic
conditions, and other disruptions or delays in production or shipments, any
of which could have a materially adverse effect on our business, financial
condition, or results of operations.
o We depend on international sales for a substantial portion of our
revenues.
Sales to customers outside North America accounted for 39% of net
revenues in 2003, and we expect that international sales will continue to
represent a significant portion of our total revenues. International sales
are subject to the risks described above as well as generally longer
payment cycles, greater difficulty collecting accounts receivable, and
currency restrictions. We also maintain foreign sales offices to support
our international customers, distributors, and sales representatives, which
are subject to local regulation.
In addition, international sales are subject to the export laws and
regulations of the United States and other countries. The Strom Thurmond
National Defense Authorization Act for 1999 required, among other things,
that communications satellites and related items (including components) be
controlled on the U.S. Munitions List. The effect of the Act was to
transfer jurisdiction over commercial communications satellites from the
Department of Commerce to the Department of State and to expand the scope
of export licensing applicable to commercial satellites. The need to obtain
additional export licenses has caused significant delays in the shipment of
some of our FPGAs. Any future restrictions or charges imposed by the United
States or any other country on our international sales could have a
materially adverse effect on our business, financial condition, or results
of operations.
o Our revenues and operating results have been and may again be adversely
affected by downturns or other changes in the general economy, in the
semiconductor industry, in our major markets, or at our major customers.
We have experienced substantial period-to-period fluctuations in revenues
and results of operations due to conditions in the overall economy, in the
general semiconductor industry, in our major markets, or at our major customers.
We may again experience these fluctuations, which could be adverse and may be
severe.
o Our revenues and operating results may be adversely affected by future
downturns in the semiconductor industry.
The semiconductor industry historically has been cyclical and
periodically subject to significant economic downturns, which are
characterized by diminished product demand, accelerated price erosion, and
overcapacity. Beginning in the fourth quarter of 2000, we experienced (and
the semiconductor industry in general experienced) reduced bookings and
backlog cancellations due to excess inventories at communications,
computer, and consumer equipment manufacturers and a general softening in
the overall economy. During this downturn, which was severe and prolonged,
we experienced lower revenues, which had a substantial negative effect on
our results of operations. Any future downturns in the semiconductor
industry may likewise have an adverse effect on our revenues and results of
operations.
o Our revenues and operating results may be adversely affected by future
downturns in the communications market.
We estimate that sales of our products to customers in the
communications market accounted for 26% of our net revenues for 2003 and
25% for 2002, compared with 49% for 2001 and 56% for 2000. Like the
semiconductor industry in general, the communications market has been
cyclical and periodically subject to significant downturns. Beginning with
the fourth quarter of 2000, the communications market suffered its worst
downturn in recent history. As a result, we experienced reduced revenues
and results of operations. Any future downturns in the communications
market may likewise have an adverse effect on our revenues and results of
operations.
o Our revenues and operating results may be adversely affected by future
downturns in the military and aerospace market.
We estimate that sales of our products to customers in the military
and aerospace industries, which carry higher overall gross margins than
sales of products to other customers, accounted for 36% of our net revenues
for 2003, compared with 41% for 2002 and 26% for 2001. In general, we
believe that the military and aerospace industries have accounted for a
significantly greater percentage of our net revenues since the introduction
of our Rad Hard FPGAs in 1996 and our Rad Tolerant FPGAs in 1998. Any
future downturn in the military and aerospace market may have an adverse
effect on our revenues and results of operations.
o Our revenues and operating results may be adversely affected by
changes in the military and aerospace market.
In 1994, Secretary of Defense William Perry directed the Department of
Defense to avoid government-unique requirements when making purchases and
rely more on the commercial marketplace. Under the "Perry initiative," the
Department of Defense must strive to increase access to commercial
state-of-the-art technology and facilitate the adoption by its suppliers of
business processes characteristic of world-class suppliers. Integration of
commercial and military development and manufacturing facilitates the
development of "dual-use" processes and products and contributes to an
expanded industrial base that is capable of meeting defense needs at lower
costs. To that end, many of the cost-driving specifications that had been
part of military procurements for many years were cancelled in the interest
of buying best-available commercial products. We believe that this trend
toward the use of commercial off-the-shelf products has on balance helped
our business. However, if this trend continued to the point where defense
contractors customarily purchased commercial-grade parts rather than
military-grade parts, the revenues and gross margins that we derive from
sales to customers in the military and aerospace industries would erode,
which could have a materially adverse effect on our business, financial
condition, and results of operations. On the other hand, there are some
signs that this trend toward the use of commercial off-the-shelf products
is reversing. If defense contractors were to begin using more customized
ASICs and fewer commercial off-the-shelf products, the revenues and gross
margins that we derive from sales to customers in the military and
aerospace industries may erode, which could have a materially adverse
effect on our business, financial condition, and results of operations.
o Our revenues and operating results may be adversely affected by future
downturns at any our major customers.
A relatively small number of customers are responsible for a
significant portion our net revenues. Lockheed Martin accounted for 11% of
our net revenues during 2003, compared with 3% during 2002 and 2001. We
have experienced periods in which sales to our major customers declined as
a percentage of our net revenues due to push-outs or cancellations of
orders, or delays or failures to place expected orders. For example, Nortel
accounted for 11% of our net revenues in 2000, compared with 2% in 2001. We
believe that sales to a limited number of customers will continue to
account for a substantial portion of net revenues in future periods. The
loss of a major customer, or decreases or delays in shipments to major
customers, could have a materially adverse effect on our business,
financial condition, and results of operations.
o Any acquisition we make may harm our business, financial condition, or
operating results.
We have a mixed history of success in our acquisitions. For example:
In 1999, we acquired AutoGate Logic, Inc. (AGL) for consideration
valued at $7.2 million. We acquired AGL for technology used in the
unsuccessful development of an SRAM-based FPGA.
In 2000, we acquired Prosys Technology, Inc. (Prosys) for
consideration valued at $26.2 million. We acquired Prosys for
technology used in our VariCore EPGA logic core, which was introduced
in 2001 but for which no market emerged.
Also in 2000, we completed our acquisition of GateField for
consideration valued at $45.7 million. We acquired GateField for its
flash technology and ProASIC FPGA family. We introduced the
next-generation ProASIC Plus product family in 2002 and are currently
the only company offering nonvolatile, reprogrammable FPGAs.
In pursuing our business strategy, we may acquire other products,
technologies, or businesses from third parties. Identifying and negotiating
these acquisitions may divert substantial management time away from our
operations. An acquisition could absorb substantial cash resources, require us
to incur or assume debt obligations, and/or involve the issuance of additional
our equity securities. The issuance of additional equity securities may dilute,
and could represent an interest senior to the rights of, the holders of our
Common Stock. An acquisition could involve significant write-offs (possibility
resulting in a loss for the fiscal year(s) in which taken) and would require the
amortization of any identifiable intangibles over a number of years, which would
adversely affect earnings in those years. Any acquisition would require
attention from our management to integrate the acquired entity into our
operations, may require us to develop expertise outside our existing business,
and could result in departures of management from either us or the acquired
entity. An acquired entity may have unknown liabilities, and our business may
not achieve the results anticipated at the time it is acquired by us. The
occurrence of any of these circumstances could disrupt our operations and may
have a materially adverse effect on our business, financial condition, or
results of operations.
o We may face significant business and financial risk from claims of
intellectual property infringement asserted against us, and we may be
unable to adequately enforce our intellectual property rights.
As is typical in the semiconductor industry, we are notified from time to
time of claims that we may be infringing patents owned by others. During 2003,
we held discussions regarding potential patent infringement issues with several
third parties. As we sometimes have in the past and did during 2003, we may
obtain licenses under patents that we are alleged to infringe. Although patent
holders commonly offer licenses to alleged infringers, no assurance can be given
that licenses will be offered or that we will find the terms of any offered
licenses acceptable. We cannot assure you that any claim of infringement will be
resolved or that the resolution of any claims will not have a materially adverse
effect on our business, financial condition, or results of operations.
Our failure to obtain a license for technology allegedly used by us could
result in litigation. In addition, we have agreed to defend our customers from
and indemnify them against claims that our products infringe the patent or other
intellectual rights of third parties. All litigation, whether or not determined
in favor of us, can result in significant expense and divert the efforts of our
technical and management personnel. In the event of an adverse ruling in any
litigation involving intellectual property, we could suffer significant (and
possibly treble) monetary damages, which could have a materially adverse effect
on our business, financial condition, or results of operations. We may also be
required to discontinue the use of infringing processes; cease the manufacture,
use, and sale or licensing of infringing products; expend significant resources
to develop non-infringing technology; or obtain licenses under patents that we
are infringing. In the event of a successful claim against us, our failure to
develop or license a substitute technology on commercially reasonable terms
could also have a materially adverse effect on our business, financial
condition, and results of operations.
We have devoted significant resources to research and development and
believe that the intellectual property derived from such research and
development is a valuable asset important to the success of our business. We
rely primarily on patent, trademark, and copyright laws combined with
nondisclosure agreements and other contractual provisions to protect our
proprietary rights. We cannot assure you that the steps we have taken will be
adequate to protect our proprietary rights. In addition, the laws of certain
territories in which our products are developed, manufactured, or sold,
including Asia and Europe, may not protect our products and intellectual
property rights to the same extent as the laws of the United States. Our failure
to enforce our patents, trademarks, or copyrights or to protect our trade
secrets could have a materially adverse effect on our business, financial
condition, or results of operations.
o We may be unable to retain or attract the personnel necessary to
successfully operate, manage, or grow our business.
Our success is dependent in large part on the continued service of our key
managerial, engineering, marketing, sales, and support employees. Particularly
important are highly skilled design, process, software, and test engineers
involved in the manufacture of existing products and the development of new
products and processes. The loss of our key employees could have a materially
adverse effect on our business, financial condition, or results of operations.
In the past we have experienced growth in the number of our employees and the
scope of our operations, resulting in increased responsibilities for management
personnel. To manage future growth effectively, we will need to attract, hire,
train, motivate, manage, and retain a growing number of employees. During strong
business cycles, we expect to experience difficulty in filling our needs for
qualified engineers and other personnel. Any failure to attract and retain
qualified employees, or to manage our growth effectively, could delay product
development and introductions or otherwise have a materially adverse effect on
our business, financial condition, or results of operations.
o We have some arrangements that may not be neutral toward a potential change
of control and our Board of Directors could adopt others.
We have adopted an Employee Retention Plan that provides for payment of a
benefit to our employees who hold unvested stock options in the event of a
change of control. Payment is contingent upon the employee remaining employed
for six months after the change of control (unless the employee is terminated
without cause during the six months). Each of our executive officers has also
entered into a Management Continuity Agreement, which provides for the
acceleration of stock options unvested at the time of a change of control in the
event the executive officer's employment is actually or constructively
terminated other than for cause following the change of control. While these
arrangements are intended to make executive officers and other employees neutral
towards a potential change of control, they could have the effect of biasing
some or all executive officers or employees in favor of a change of control.
Our Articles of Incorporation authorize the issuance of up to 5,000,000
shares of "blank check" Preferred Stock with designations, rights, and
preferences determined by our Board of Directors. Accordingly, our Board is
empowered, without approval by holders of our 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 our Common Stock. Issuance of Preferred Stock could be used to
discourage, delay, or prevent a change in control. In addition, issuance of
Preferred Stock could adversely affect the market price of our Common Stock.
On October 17, 2003, we announced that our Board of Directors adopted a
Shareholder Rights Plan. Under the Plan, we issued a dividend of one right for
each share of Common Stock held by shareholders of record as of the close of
business on November 10, 2003. The provisions of the Plan can be triggered only
in certain limited circumstances following the tenth day after a person or group
announces acquisitions of, or tender offers for, 15% or more of our Common
Stock. The Shareholder Rights Plan is designed to guard against partial tender
offers and other coercive tactics to gain control of Actel without offering a
fair and adequate price and terms to all shareholders. Nevertheless, the Plan
could make it more difficult for a third party to acquire us, even if our
shareholders support the acquisition.
o Our stock price may decline significantly, possibly for reasons unrelated
to our operating performance.
The stock markets broadly, technology companies generally, and our Common
Stock in particular have experienced extreme price and volume volatility in
recent years. Our Common Stock may continue to fluctuate substantially on the
basis of many factors, including:
quarterly fluctuations in our financial results or the financial
results of our competitors or other semiconductor companies;
changes in the expectations of analysts regarding our financial
results or the financial results of our competitors or other
semiconductor companies;
announcements of new products or technical innovations by us or by our
competitors; and
general conditions in the semiconductor industry, financial markets,
or economy.
ITEM 2. PROPERTIES
In 2003, we relocated our worldwide headquarters to a larger facility to
better accommodate our existing employees and position ourselves for future
growth. Our principal facilities and executive offices are located in Mountain
View, California, in two buildings that comprise approximately 158,000 square
feet. These buildings are leased through June 2013. We have a renewal option for
an additional ten-year term.
We also lease sales offices in the vicinity of Atlanta, Boston, Chicago,
Dallas, Denver, Hong Kong, London, Los Angeles, Milan, Minneapolis/St. Paul,
Munich, New York, Orlando, Paris, Ottawa (Ontario), Philadelphia, Raleigh,
Seattle, Seoul, Taipei, Tokyo, and Washington D.C., as well as the facilities of
the Design Services Group in Mt. Arlington, New Jersey. We believe our
facilities will be adequate for our needs in 2004.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings of a material nature to which we are
a party or of which any of our property is the subject. We know of no legal
proceeding contemplated by any governmental authority.
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.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our Common Stock has been traded on the Nasdaq National Market under the
symbol "ACTL" since our initial public offering on August 2, 1993. On February
16, 2004, there were 150 shareholders of record. Since many shareholders have
their shares held of record in the names of their brokerage firms, we estimate
the actual number of shareholders to be about 9,000. The following table sets
forth, for the fiscal years and quarters indicated, the high and low sale prices
per share of our Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
2003 2002
-------------------------- --------------------------
High Low High Low
------------ ------------ ------------ ------------
<S> <C>
First Quarter............................................. $ 19.84 $ 14.26 $ 22.40 $ 17.32
Second Quarter............................................ 23.00 16.80 28.61 17.45
Third Quarter............................................. 29.35 22.23 21.75 9.85
Fourth Quarter............................................ 28.60 22.40 21.43 9.87
</TABLE>
On March 12, 2004, the reported last sale of our Common Stock on the Nasdaq
National Market was $22.00.
We have never declared or paid a cash dividend on our Common Stock and do
not anticipate paying any cash dividends in the foreseeable future. Any future
declaration of dividends is within the discretion of our Board of Directors and
will be dependent on our earnings, financial condition, and capital requirements
as well as any other factors deemed relevant by our Board of Directors.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
ACTEL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Net revenues................................ $ 149,910 $ 134,368 $ 145,559 $ 226,419 $ 171,661
Costs and expenses:
Cost of revenues......................... 59,734 52,935 62,210 84,680 66,387
Research and development................. 39,602 39,349 38,172 36,599 32,338
Selling, general, and administrative..... 44,650 43,033 41,464 47,960 45,903
Amortization of goodwill and other
acquisition-related intangibles (1).... 2,670 2,724 14,757 8,056 2,226
Restructuring charge (2)................. - - - - 1,963
Purchased in-process research and
development (3)........................ - - - 10,646 600
------------ ------------ ------------ ------------ ------------
Total costs and expenses........... 146,656 138,041 156,603 187,941 149,417
------------ ------------ ------------ ------------ ------------
Income (loss) from operations............... 3,254 (3,673) (11,044) 38,478 22,244
Interest income and other, net of expense... 3,210 5,530 7,280 8,310 3,642
Gain (loss) on sales and write-downs of
equity investments (4) (5)............... 91 (3,707) - 28,329 -
------------ ------------ ------------ ------------ ------------
Income (loss) before tax (benefit) provision
and equity interest in net (loss) of
equity method investee................... 6,555 (1,850) (3,764) 75,117 25,886
Equity interest in net (loss) of equity method
investee (6)............................. - - - (2,445) (193)
Tax (benefit) provision..................... 327 (1,925) 937 31,227 8,055
------------ ------------ ------------ ------------ ------------
Net income (loss)........................... $ 6,228 $ 75 $ (4,701) $ 41,445 $ 17,638
============ ============ ============ ============ ============
Net income (loss) per share:
Basic.................................... $ 0.25 $ 0.00 $ (0.20) $ 1.77 $ 0.81
============ ============ ============ ============ ============
Diluted.................................. $ 0.24 $ 0.00 $ (0.20) $ 1.58 $ 0.76
============ ============ ============ ============ ============
Shares used in computing net income (loss) per share:
Basic.................................... 24,808 24,302 23,743 23,447 21,664
============ ============ ============ ============ ============
Diluted.................................. 26,300 25,252 23,743 26,233 23,058
============ ============ ============ ============ ============
</TABLE>
<PAGE>
ACTEL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA (Continued)
(in thousands)
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital............................ $ 191,078 $ 169,939 $ 161,246 $ 146,952 $ 108,818
Total assets............................... 316,757 293,321 290,082 312,434 259,211
Total shareholders' equity................. 264,433 242,314 237,680 230,101 178,630
</TABLE>
- ------------------------------------------------------------
(1) Beginning in 2002, we ceased to amortize goodwill in accordance with
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets." Instead, goodwill is subject to annual
impairment tests and written down only when identified as impaired.
Non-goodwill intangible assets with definite lives continue to be
amortized under SFAS No. 141 and 142. See Notes 1 and 2 of Notes to
Consolidated Financial Statements for further information.
(2) During the second quarter of 1999, we completed a restructuring plan
that resulted in a reduction in force along with the elimination of
certain projects and non-critical activities.
(3) The 2000 expenses represent charges for in-process research and
development arising from our acquisitions of Prosys Technology, Inc.
($5.6 million) and GateField Corporation (GateField) ($5.0 million).
The 1999 expense represents a charge for in-process research and
development incurred in the fourth quarter of 1999 in connection with
our acquisition of AutoGate Logic, Inc.
(4) During 2002, we realized losses on sales and write downs of our
strategic equity investments. See Note 3 of Notes to Consolidated
Financial Statements for further information.
(5) During the second quarter of 2000, we sold all of our shares of
Chartered Semiconductor Manufacturing Ltd. common stock for proceeds
of $39.0 million, resulting in a one-time gain of $28.3 million.
(6) Represents our equity share of net losses of GateField in accordance
with the equity method of accounting prior to our acquisition of
GateField, which was completed on November 15, 2000.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The purpose of this overview is to provide context for the discussion and
analysis of our financial statements that follows by briefly summarizing the
most important known trends and uncertainties, as well as the key performance
indicators, on which our executives are primarily focused for both the short and
long term.
We design, develop, and market field programmable gate arrays (FPGAs) and
supporting products and services. FPGAs are integrated circuits (ICs) that adapt
the processing and memory capabilities of electronic systems to specific
applications. FPGAs are used by designers of communications, computer, consumer,
industrial, military and aerospace, and other electronic systems to
differentiate their products and get them to market faster. We are the leading
supplier of FPGAs based on flash and antifuse technologies.
o Semiconductors
According to the Semiconductor Industry Association (SIA), worldwide sales
of semiconductors rose to $166 billion in 2003, up 18% from $141 billion in
2002. However, the industry reached its peak of $204 billion in 2000 before
falling 32% to $139 billion in 2001. Thus, the semiconductor industry (which has
always been cyclical) appears to have resumed a pattern of growth after a
setback of historic proportions. It is possible, though, that the industry has
matured to the point where it will no longer be able to achieve the long-term
growth rates it has experienced in the past.
o Logic
According to SIA, worldwide sales of digital logic ICs were $24 billion in
2002, of which application specific ICs (ASICs) accounted for $9 billion. ASICs
include conventional gate arrays, standard cells, and programmable logic devices
(PLDs). As they have gotten faster and cheaper over the last decade, PLDs have
gained a sizeable share of the ASIC market. We believe that this long-term trend
will continue because customers are willing to forego some of the price and
performance advantages of "hard-wired" ASICs in order to obtain the "time to
market" as well as the design and manufacturing flexibility benefits of PLDs.
o PLDs
PLDs include simple PLDs, complex PLDs (CPLDs), and FPGAs. FPGAs have
gained share in the PLD market because they generally offer greater capacity,
lower total cost per usable logic gate, and lower power consumption than simple
PLDs and CPLDs. We believe that this long-term trend will continue. Our three
larger competitors, Xilinx Corporation (Xilinx), Altera Corporation (Altera),
and Lattice Semiconductor Corporation (Lattice), offer CPLDs as well as FPGAs.
o Strategy
As the fourth biggest vendor in our market, we do not believe that we can
compete across the board, but must choose technologies and markets in which to
differentiate ourselves. Our strategy involves considerable risk. Unique
technologies and products can take years to develop, if at all, and markets that
we target may fail to emerge. We have in fact sometimes faltered in these areas.
Still, we believe that our strategic positioning is the best it has ever been in
our history.
o Technologies
Our flash and antifuse technologies are non-volatile, so they retain their
circuit configuration even in the absence of power. In contrast to the SRAM and
other memory technologies used by our larger competitors, our FPGAs don't need a
separate boot device, are "live at power up," generally require less power, and
offer practically unbreakable design security.
o Antifuse
The one-time programmability of our antifuse FPGAs is desirable in
certain military and aerospace applications, but commercial customers
generally prefer to use reprogrammable FPGAs, and FPGAs based on all other
types of technologies are reprogrammable. In addition, we are the only
sizeable company that uses antifuse technology, which means that we bear
the entire burden of developing and proving antifuse processes (including
yields and reliability) and products (including switching elements and
architectures). It also means that our FGPAs using antifuse technology are
one or more generations behind the FPGAs of our competitors using SRAM and
other technologies manufactured on standard processes.
o Flash
We believe that our long-term future lies with flash technology, which
permits us to make FPGAs that are both non-volatile and reprogrammable.
While our flash technology is unique, the process is very similar to the
standard flash memory process, so we will be able to share with others most
of the burden of developing and proving the process. Since flash technology
has trailed SRAM technology by about half a generation, our flash FPGAs are
still the better part of one generation behind the SRAM FPGAs of our
competitors.
o Markets
The inherent advantages of our non-volatile technologies give us a big
advantage with some groups of customers, but are of little or no value to
others.
o Value-Based
We think that this market, which is all about cost, will grow the most
and is the best fit for our technologies. Xilinx and Altera are also
aggressively offering low-priced products, so we might not gain share even
in this segment of the FPGA market, but we're optimistic because we think
these customers most value the advantages of our technologies. Selling more
low-price products may make it more difficult to maintain our gross
margins, although we think it can be done.
o High-Reliability
We believe that we are the world's leading supplier of military,
avionics, and space-grade FPGAs, but we are seeing increased competition
from Xilinx and Aeroflex Incorporated. This is a market in which the
customers are extremely conscientious and demand the very highest levels of
quality and reliability. To that end, we have conducted analysis of and
experiments on the reliability of our RTSX-S space-qualified FPGAs for the
last six months at the behest of an ad-hoc industry group, and we
anticipate that those investigations will continue for at least several
more months. See the Risk Factors set forth at the end of Part I of this
Annual Report on Form 10-K for more information.
o High-Speed
Speed has historically been a strength of our antifuse technology, but
the high-speed FPGA market is dominated by telecommunications and the SRAM
technology offered by our larger competitors is a better fit for many of
these applications. Yet our technologies are a better fit than SRAM in
certain subsets of this very large market, so we continue to believe that
we can develop and maintain a business in this area based on our
differentiation.
o Key Indicators
Although we measure the condition and performance of our business in
numerous ways, the key quantitative indicators that we generally use to manage
the business are bookings, design wins, margins, yields, and backlog. We also
carefully monitor the progress of our product development efforts. Of these, we
think that bookings and backlog are the best indicators of short-term
performance and that designs wins and product development progress are the best
indicators of long-term performance. Our bookings (measured as end-customer
orders placed on us and our distributors) were higher during 2003 than during
2002, and our backlog was higher at the end of 2003 than at the end of 2002. Our
design wins were higher in 2003 than in 2002, with most of the growth coming in
flash. Our product development progress was mixed.
Results of Operations
The following table sets forth certain financial data from the Consolidated
Statements of Operations expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
2003 2002 2001
-------- -------- --------
<S> <C> <C> <C>
Net revenues............................................................ 100.0% 100.0% 100.0%
Cost of revenues........................................................ 39.8 39.4 42.7
-------- -------- --------
Gross margin............................................................ 60.2 60.6 57.3
Research and development................................................ 26.4 29.3 26.2
Selling, general, and administrative.................................... 29.8 32.0 28.6
Amortization of goodwill and other acquisition-related intangibles...... 1.8 2.0 10.1
-------- -------- --------
Income (loss) from operations........................................... 2.2 (2.7) (7.6)
Interest income and other, net of expense............................... 2.1 4.1 5.0
Gain (loss) on sales and write-downs of equity investments.............. 0.1 (2.8) -
-------- -------- --------
Income (loss) before tax (benefit) provision............................ 4.4 (1.4) (2.6)
Tax (benefit) provision................................................. 0.2 (1.5) 0.6
-------- -------- --------
Net income (loss)....................................................... 4.2% 0.1% (3.2)%
======== ======== ========
</TABLE>
Our fiscal year ends on the first Sunday after December 30. Fiscal 2003
ended on January 4, 2004; fiscal 2002 ended on January 5, 2003; and fiscal 2001
ended on January 6, 2002. Fiscal 2001 was a 53 week fiscal year, rather than a
normal 52 week fiscal year. For ease of presentation, December 31 has been
indicated as the year end for all fiscal years.
o Net Revenues
We derive our revenues primarily from the sale of FPGAs, which accounted
for 96% of net revenues in 2003, 2002, and 2001. Non-FPGA revenues are derived
from our Protocol Design Services organization, royalties, and the licensing of
software and sale of hardware used to design and program our FPGAs. We believe
that we derived more than 60% of our revenues in 2003, 2002, and 2001 from sales
of FPGAs to customers serving the military and aerospace and the communications
markets. We have experienced, and may again in the future experience,
substantial period-to-period fluctuations in operating results due to conditions
in each of these markets as well as in the general economy.
Net revenues in 2003 were $149.9 million, a 12% increase over 2002. This
increase was due primarily to a 15% increase in the number of FPGA units
shipped, which was partially offset by a 3% decrease in the overall average
selling price (ASP) of FPGAs. The increase in unit shipments was broad-based,
with increases in both our new and mature groups of product families. The new
product group includes our ProASIC Plus, ProASIC, RTSX-S, SX-A, eX, and ASIC
conversion product families. The overall ASP declined principally because we
derived a lower percentage of our revenues from FPGA shipments to our military
and aerospace customers, which we estimate accounted for 36% of our revenues in
2003 compared with 41% in 2002. FPGAs shipped to military and aerospace
customers tend to be higher cost to produce, on average, and have higher ASPs
than FPGAs shipped to our other customers.
Net revenues in 2002 were 8% less than in 2001. This decline was due
primarily to an 8% decrease in the overall ASP of FPGAs. The overall ASP
declined principally because we derived a higher percentage of our revenues from
FPGA shipments to customers serving the consumer/e-appliance and computing
markets, which we estimate accounted for 17% of net revenues in 2002 compared
with 6% in 2001. FPGAs shipped to customers serving the consumer/e-appliance and
computing markets tend to have lower ASPs.
We shipped approximately 69% of our net revenues through the distribution
sales channel in 2003, compared with 65% in 2002 and 68% in 2001. Our North
American distributors during 2003 were Unique Technologies, Inc. (Unique) and
Pioneer-Standard Electronics, Inc. (Pioneer). On March 1, 2003, we consolidated
our distribution channel by terminating our agreement with Pioneer, leaving
Unique as our sole distributor in North America. We also consolidated our
distribution channel during 2001, when we terminated our agreement with Arrow
Electronics, Inc. (Arrow). The following table sets forth the percentage of
revenues derived from each customer that accounted for 10% or more of our net
revenues in any of the last three years:
<TABLE>
<CAPTION>
2003 2002 2001
------ ------ ------
<S> <C> <C> <C>
Pioneer................................................................. 6% 26% 20%
Unique.................................................................. 41 22 19
Arrow................................................................... - - 13
Lockheed Martin......................................................... 11 3 3
</TABLE>
We do 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 accounted for 39% of net
revenues in 2003, 38% in 2002, and 38% in 2001. The largest portion of export
sales was to European customers, which accounted for 25% of net revenues in
2003, 23% in 2002, and 28% in 2001.
o Gross Margin
Gross margin was 60% of revenues in 2003 compared with 61% in 2002 and 57%
in 2001. Gross margin was favorably impacted in 2003 by the sell through of $4.1
million of inventory that was reserved in previous periods, a benefit of 2.7% to
gross margin, and in 2002 by the sell through of $3.2 million of inventory, a
benefit of 2.4% to gross margin. Gross margin was lower in 2001 than in 2003 and
2002 primarily because of higher than normal inventory write-offs that resulted
from higher inventory levels coupled with lower forecasted customer demand.
We seek to reduce costs by improving wafer yields, negotiating price
reductions with suppliers, increasing the level and efficiency of our testing
and packaging operations, achieving economies of scale by means of higher
production levels, and increasing the number of die produced per wafer,
principally by shrinking the die size of our products. No assurance can be given
that these efforts will be successful. Our capability to shrink the die size of
our FPGAs is dependent on the availability of more advanced manufacturing
processes. Due to the custom steps involved in manufacturing antifuse and (to a
lesser extent) flash FPGAs, we typically obtain access to new manufacturing
processes later than our competitors using standard manufacturing processes.
o Research and Development (R&D)
R&D expenditures were $39.6 million, or 26% of net revenues, in 2003
compared with $39.3 million, or 29% of net revenues, in 2002 and $38.2 million,
or 26% of net revenues, in 2001. R&D expenditures have experienced slight annual
increases over each of the past three years as a result of our efforts to
concurrently research and develop future generations of flash- and
antifuse-based product families as well as radiation tolerant versions of both
flash and antifuse product families. As a percent of revenues, R&D expenditures
were a lower percentage of revenues in 2003 than in 2002 due to the 12% increase
in revenues in 2003 combined with our efforts to hold spending as flat as
possible while still achieving our R&D goals.
Our R&D consists of circuit design, software development, and process
technology activities. We believe that continued substantial investment in R&D
is critical to maintaining a strong technological position in the industry.
Since our antifuse and flash FPGAs are manufactured using customized processes,
our R&D expenditures will probably always be higher as a percentage of net
revenues than that of our major competitors using standard manufacturing
processes.
o Selling, General, and Administrative (SG&A)
SG&A expenses in 2003 were $44.7 million, or 30% of net revenues, compared
with $43.0 million, or 32% of net revenues in 2002 and $41.5 million, or 28% of
net revenues, in 2001. SG&A expenses in 2003 increased by $1.7 million compared
with 2002 primarily as a result of higher sales bonuses associated with
increased net revenues. SG&A was favorably impacted by a $0.6 million reduction
in accruals for estimated legal liabilities in the third quarter of 2003. SG&A
expenses in 2002 increased by 4% compared with 2001 primarily due to an increase
in SG&A headcount during 2002 and the full effect of additional headcount added
over the course of the year in 2001. The introduction and rollout of our ProASIC
Plus and Axcelerator product families in 2002 also increased our sales and
marketing costs. These increases in 2002 were partially offset by lower selling
expenses (primarily sales bonuses and outside sales commissions) associated with
the 8% decrease in net revenues for 2002 compared with 2001.
o Amortization of Goodwill and Other Acquisition-Related Intangibles
Amortization of goodwill and other acquisition-related intangibles was $2.7
million in both 2003 and 2002, compared with $14.8 million in 2001. The
reduction of amortization from 2001 to 2002 and 2003 was due to the
implementation of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," at the beginning of fiscal 2002, which
eliminated the amortization of goodwill. See Notes 1 and 2 of Notes to
Consolidated Financial Statements for further information regarding the impact
of SFAS No. 142. In 2001, the portion of the amortization expense that related
to goodwill was $11.7 million.
o Interest Income and Other, Net of Expense
Interest income and other, net of expense, was $3.2 million in 2003, $5.5
million in 2002, and $7.3 million in 2001. The decrease in interest and other
income experienced in both 2003 and 2002 compared with preceding years was
primarily a result of lower interest rates available in the market and lower
gains realized on our short-term investments, which were partially offset by
higher cash balances. For 2003, our average investment portfolio return on
investment was 2.5% compared with 4.7% in 2002 and 5.3% in 2001. Our average
investment portfolio balance was $135.0 million in 2003 compared with $121.5
million in 2002 and $126.3 million in 2001. We invest excess liquidity in
investment portfolios consisting primarily of corporate bonds, floating rate
notes, and federal and municipal obligations. In periods where market interest
rates are falling, and for some time after rates stabilize, we typically
experience declines in interest income and other as our older debt investments
at higher interest rates mature and are replaced by new investments at the lower
rates available in the market.
o Losses on Sales and Write-Downs of Equity Investments
We occasionally make equity investments in public or private companies for
the promotion of business and strategic objectives. During 2002, we realized
losses and recorded impairment write-downs totaling $3.7 million in connection
with our strategic equity investments, which consisted of $1.6 million related
to an equity investment in a publicly traded company and $2.1 million related to
an equity investment in a private company. The $1.6 million of losses related to
the investment in a publicly traded company was comprised of $0.7 million of
realized losses on shares sold during the first and second quarters of 2002 and
$0.9 million of impairment write-downs recorded in the second and fourth
quarters of 2002. These impairment write-downs were recorded as a result of
declines in the market value of shares still held by us. The $2.1 million loss
related to the equity investment in a private company consisted entirely of an
impairment write-down that was recorded when the estimated fair value of the
private company was determined to be below its carrying value after the private
company received new financing in the fourth quarter of 2002 at a per share
price significantly less than our initial investment. We sold all of our
remaining strategic equity investment in a publicly traded company in 2003,
realizing a gain of $0.1 million from the sale. As of December 31, 2003, we had
$0.1 million of strategic equity investments remaining on the balance sheet.
o Tax (Benefit)/Provision
Significant components affecting the effective tax rate include pre-tax net
income or loss, federal R&D tax credits, income from tax-exempt securities, the
state composite tax rate, and recognition of certain deferred tax assets subject
to valuation allowances. Our tax provision for 2003 was $0.3 million, which
represents an effective tax rate of 5% for the year. Our $1.9 million tax
benefit for 2002 was based on the combined effects of a pre-tax loss and R&D tax
credits. Excluding the effect of non-deductible goodwill amortization, our
effective tax rate was 8.9% for 2001. The exclusion of non-deductible goodwill
amortization from tax calculations resulted in a net income for tax purposes and
a net tax expense for 2001.
Financial Condition, Liquidity, and Capital Resources
Our total assets were $316.8 million at the end of 2003 compared with
$293.3 million at the end of 2002. The increase in total assets was attributable
principally to increases in cash, cash equivalents, and short-term investments.
The following table sets forth certain financial data from the consolidated
balance sheets expressed as a percentage change from December 31, 2002, to
December 31, 2003:
<TABLE>
<CAPTION>
<S> <C>
Cash, cash equivalents, and short-term investments................................................... 18.4%
Accounts receivable, net............................................................................. 16.6
Inventories.......................................................................................... 11.8
Current deferred income taxes........................................................................ (33.0)
Prepaid expenses and other current assets............................................................ (28.3)
Property and equipment, net.......................................................................... 23.0
Other assets, net (primarily deferred income taxes and purchased intangible assets other than
goodwill) ........................................................................................ (4.6)
Total assets......................................................................................... 8.0
Total current liabilities............................................................................ (0.5)
Total liabilities.................................................................................... 2.6
Shareholders' equity................................................................................. 9.1
</TABLE>
o Cash, Cash Equivalents, and Short-Term Investments
Our cash, cash equivalents, and short-term investments were $158.4 million
at the end of 2003 compared with $133.8 million at the end of 2002. This
increase of $24.6 million from the end of 2002 was due primarily to $19.9
million of net cash provided by operating activities and $16.2 million from the
issuance of Common Stock under employee stock plans. These increases were
partially offset by $11.2 million of property and equipment purchases.
The significant components within operating activities that provided cash
during 2003 included $12.4 million of net tax refunds received during the year
and $16.5 million from the net results for the year adjusted for non-cash items
($10.2 million of which relates to depreciation and amortization). The
significant components within operating activities that resulted in a reduction
of cash from operations in 2003 included $4.1 million in cash used to increase
inventories and a $3.9 million decrease in deferred income on shipments to
distributors.
Spending on property and equipment amounted to $11.2 million in 2003,
compared with $8.8 million in 2002 and $9.5 million in 2001. The increase in
spending on property and equipment in 2003 related primarily to leasehold
improvements on our new worldwide headquarters which we moved into in August of
2003. Our capital budget for 2004 is $21.4 million.
Cash from the issuance of Common Stock under employee stock plans amounted
to $16.2 million in 2003, $9.4 million in 2002, and $7.7 million in 2001. The
increase in employee stock plan activity that occurred in 2003 was mostly driven
by the increase in the market price of our Common Stock, which had an average
closing price per share of $21.95 in 2003, $18.25 in 2002, and $21.63 in 2001.
Employee stock activity was especially heavy during the last six months of 2003,
when the average closing price was $25.50 per share.
We meet all of our funding needs for ongoing operations with internally
generated cash flows from operations and with existing cash and short-term
investment balances. We believe that existing cash, cash equivalents, and
short-term investments, together with cash generated from operations, will be
sufficient to meet our cash requirements for 2004. A portion of available cash
may be used for investment in or acquisition of complementary businesses,
products, or technologies. Wafer manufacturers have at times demanded financial
support from customers in the form of equity investments and advance purchase
price deposits, which in some cases have been substantial. Should we require
additional capacity, we may be required to incur significant expenditures to
secure such capacity.
The following represents contractual commitments not accrued on the balance
sheet associated with operating leases and royalty and licensing agreements as
of December 31, 2003:
<TABLE>
<CAPTION>
Payments Due by Period
----------------------------------------------------------------------------------------------
2009
Total 2004 2005 2006 2007 2008 and later
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating leases... $ 28,160 $ 2,884 $ 2,695 $ 2,761 $ 2,795 $ 2,644 $ 14,381
Royalty/
licensing
agreements...... 14,428 6,296 7,019 1,113 - - -
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total.............. $ 42,588 $ 9,180 $ 9,714 $ 3,874 $ 2,795 $ 2,644 $ 14,381
========== ========== ========== ========== ========== ========== ==========
</TABLE>
Purchase orders or contracts for the purchase of raw materials and other goods
and services are not included in the table above. We are not able to determine
the aggregate amount of such purchase orders that represent contractual
obligations as purchase orders may represent authorizations to purchase rather
than binding agreements. For the purposes of this table, contractual obligations
for purchase of goods or services are defined as agreements that are enforceable
and legally binding on us and that specify all significant terms, including:
fixed or minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Our purchase orders
are based on our current manufacturing needs and fulfilled by our vendors within
short time horizons. We do not have significant agreements for the purchase of
raw materials or other goods specifying minimum quantities or set prices that
exceed our expected requirements for three months. We also enter into contracts
for outsourced services; however, the obligations under these contracts were not
significant and the contracts generally contain clauses allowing for
cancellation without significant penalty.
We believe 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 when they occur, it may
become prudent or necessary for us to raise additional capital. No assurance can
be given that additional capital would become available on acceptable terms if
needed.
o Accounts Receivable
Our net accounts receivable was $20.5 million at the end of 2003 compared
with $17.6 million at the end of 2002. This increase was due primarily to the
19% increase in revenues in the fourth quarter of 2003, compared with the fourth
quarter of 2002. Revenue was $40.6 million in the fourth quarter of 2003
compared with $34.1 million in the fourth quarter of 2002. Net accounts
receivable represented 44 days of sales outstanding (DSOs) at the end of both
2003 and 2002.
o Inventories
Our net inventories were $38.7 million at the end of 2003 compared with
$34.6 million at the end of 2002. The growth in inventory was primarily the
result of last time inventory purchases from two wafer manufacturers for some of
our mature product families. Last time buys occur when a wafer supplier is about
to shut down the manufacturing line used to make a product and current
inventories are insufficient to meet foreseeable future demand. Inventory
purchased in last time buy transactions will be evaluated on an ongoing basis
for indications of excess or obsolescence based on rates of actual sell through,
expected future demand for those products, and any other qualitative factors
that may indicate the existence of excess or obsolete inventory. Inventory at
December 31, 2003, included $5.4 million of inventory purchased under last time
buy type purchases. Inventory days of supply decreased from 234 days at the end
of 2002 to 230 days at the end of 2003 due to the higher cost of sales
associated with increased revenues. Excluding the impact of inventory purchased
under last time buy type purchases, inventory days of supply were 198 days at
the end of 2003. Our FPGAs are manufactured using customized steps that are
added to the standard manufacturing processes of our independent wafer
suppliers, so our manufacturing cycle is generally longer and more difficult to
adjust in response to changing demands or delivery schedules. Accordingly, our
inventory model will probably always be higher than that of our major
competitors using standard processes.
o Property and Equipment
Our net property and equipment was $19.9 million at the end of 2003,
compared with $16.2 million at the end of 2002. We invested $11.2 million in
property and equipment in 2003 compared with $8.8 million in 2002. The increase
in capital expenditures was related primarily to $2.3 million of leasehold
improvements at our new principal facilities and executive offices in Mountain
View, California, which we relocated to in August 2003. Other capital
expenditures during the past two years have been primarily for engineering,
manufacturing, and office equipment. Depreciation of property and equipment was
$7.5 million in 2003 compared with $7.3 million in 2002. Our capital budget for
2004 is $21.4 million.
o Goodwill
Our net goodwill was $32.1 million at the end of both 2003 and 2002.
Goodwill is recorded when consideration paid in an acquisition exceeds the fair
value of the net tangible and intangible assets acquired. At the beginning of
2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which
addresses the financial accounting and reporting standards for goodwill and
other intangible assets subsequent to their acquisition. Following our adoption
of SFAS No. 142, we no longer amortize goodwill, but instead test for impairment
annually or more frequently if certain events or changes in circumstances
indicate that the carrying value may not be recoverable. We completed our annual
goodwill impairments tests during the fourth quarter of 2003, and noted no
indicators of impairment.
o Other Assets
Our other assets were $24.7 million at the end of 2003 compared with $25.9
million at the end of 2002. The decrease was due primarily to $2.7 million
amortization of identified intangible assets, which was partially offset by a
$1.2 million increase in our non-current deferred tax asset that was the result
of a reclassification between current and non-current deferred tax assets.
o Current Liabilities
Our total current liabilities were $48.9 million at the end of 2003
compared with $49.1 million at the end of 2002. The decrease was due in part to
a reduction of $3.9 million in deferred income on shipments to distributors.
During 2003, we consolidated our distribution channel, leaving Unique as our
sole distributor in North America, which had the effect of reducing the amount
of product being held in the distribution channel as a single distributor is
more efficient in inventory management and does not need to hold as much
inventory to meet customer demand as two or more distributors would. The
decrease in deferred income on shipments to distributors was partially offset by
an increase in income taxes payable of $2.7 million in 2003 as there were no
income taxes payable in 2002.
o Shareholders' Equity
Shareholders' equity was $264.4 million at the end of 2003 compared with
$242.3 million at the end of 2002. The increase included retained earnings from
2003 net income of $6.2 million and an increase to additional paid-in capital of
$16.2 million from the sale of Common Stock under employee stock plans.
Impact of Recently Issued Accounting Standards
In May, 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." SFAS No. 150 requires certain financial
instruments to be accounted for as liabilities that previously were accounted
for as equity. The financial instruments affected include mandatory redeemable
stock; certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets; and certain
obligations that can be settled with shares of stock. SFAS No. 150 is effective
for all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. We do not currently have any financial instruments that are
subject to the provisions of SFAS No. 150, so the adoption of SFAS No. 150 had
no impact on our consolidated financial position or results of operations.
In January 2003, the FASB issued Financial Standards Accounting Board
Interpretation (FIN) No. 46 (FIN 46), "Consolidation of Variable Interest
Entities," an interpretation of Accounting Research Bulletin (ARB) No. 51,
"Consolidated Financial Statements." FIN 46, which amended the interpretation in
December 2003, establishes accounting guidance for consolidation of a variable
interest entity (VIE). FIN 46 requires an investor with a majority of the
variable interests (primary beneficiary) in a variable interest entity (VIE) to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A VIE is an entity in which
the equity investors do not have a controlling interest or the equity investment
at risk is insufficient to finance the entity's activities without receiving
additional subordinated financial support from the other parties.
Development-stage entities that have sufficient equity invested to finance the
activities they are currently engaged in and entities that are businesses as
defined in the Interpretation are not considered VIEs. The provisions of FIN 46
were effective immediately for all arrangements entered into with new VIEs
created after January 31, 2003. We do not currently have any contractual
relationship or other business relationship with a VIE, so the adoption of FIN
46 had no impact on our consolidated financial position or results of
operations.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP). The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses and the related disclosure of contingent
assets and liabilities. The U.S. Securities and Exchange Commission has defined
the most critical accounting policies as those that are most important to the
portrayal of our financial condition and results and also require us to make the
most difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based upon this definition,
our most critical policies include inventories, intangible assets and goodwill,
income taxes, and legal matters. These policies, as well as the estimates and
judgments involved, are discussed below. We also have other key accounting
policies that either do not generally require us to make estimates and judgments
that are as difficult or as subjective or they are less likely to have a
material impact on our reported results of operations for a given period. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ materially from these estimates. In addition, if these estimates or their
related assumptions change in the future, it could result in material expenses
being recognized on the income statement.
o Inventories
We believe that a certain level of inventory must be carried to maintain an
adequate supply of product for customers. This inventory level may vary based
upon orders received from customers or internal forecasts of demand for these
products. Other considerations in determining inventory levels include the stage
of products in the product life cycle, design win activity, manufacturing lead
times, customer demands, strategic relationships with foundries, and competitive
situations in the marketplace. Should any of these factors develop other than
anticipated, inventory levels may be materially and adversely affected.
We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated realizable value based upon assumptions about future demand and market
conditions. To address this difficult, subjective, and complex area of judgment,
we apply a methodology that includes assumptions and estimates to arrive at the
net realizable value. First, we identify any inventory that has been previously
written down in prior periods. This inventory remains written down until sold,
destroyed, or otherwise dispositioned. Second, our quality assurance personnel
examine inventory line items that may have some form of obsolescence due to
non-conformance with electrical and mechanical standards. Third, we assess the
inventory not otherwise identified to be written down against product history
and forecasted demand (typically for the next six months). Finally, we analyze
the result of this methodology in light of the product life cycle, design win
activity, and competitive situation in the marketplace to derive an outlook for
consumption of the inventory and the appropriateness of the resulting inventory
levels. If actual future demand or market conditions are less favorable than
those we have projected, additional inventory write-downs may be required.
During 2001, we had significant write-downs of inventory due to a sharp decrease
in forecasted demand related to the general economic slowdown.
During 2003, we modified our inventory valuation policies to properly
account for "last time buy" inventory purchases. Last time buys occur when a
wafer supplier is about to shut down the manufacturing line used to make a
product and current inventories are insufficient to meet foreseeable future
demand. We made last time buys of certain products from our wafer suppliers in
2003. Since this inventory was not acquired to meet current demand, we did not
believe the application of our existing inventory write down policy was
appropriate, so a discrete write down policy was established for inventory
purchased in last time buy transactions. As a consequence, these transactions
and the related inventory are excluded from the standard excess and obsolescence
write down policy. Inventory purchased in last time buy transactions will be
evaluated on an ongoing basis for indications of excess or obsolescence based on
rates of actual sell through; expected future demand for those products over a
longer time horizon; and any other qualitative factors that may indicate the
existence of excess or obsolete inventory. In the event that actual sell through
does not meet expectations and estimations of expected future demand decrease,
last time buy inventory could be written down in the future. Evaluations of last
time buy inventory in 2003 did not result in any write downs.
o Intangible Assets and Goodwill
In past years we made business acquisitions that resulted in the recording
of a significant amount of goodwill and identified intangible assets.
Historically and through the end of 2001, goodwill was amortized on a
straight-line basis over its useful life. At the beginning of 2002, we adopted
SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses the
financial accounting and reporting standards for goodwill and other intangible
assets subsequent to their acquisition. In accordance with SFAS No. 142, we
ceased to amortize goodwill and instead test for impairment annually or more
frequently if certain events or changes in circumstances indicate that the
carrying value may not be recoverable. We completed our annual goodwill
impairment tests during the fourth quarter of 2003 and noted no impairment. The
initial test of goodwill impairment requires us to compare our fair value with
our book value, including goodwill. We are a single reporting unit as defined by
SFAS 142 and use the entity wide approach to compare fair value to book value.
Based on our total market capitalization, which we believe represents the best
indicator of our fair value, we determined that our fair value was in excess of
our book value. Since we found no indication of impairment, we did not proceed
with step 2 of the annual impairment analysis.
At December 31, 2003, we had identified intangible assets arising from
prior business acquisitions which are being amortized on a straight line basis
over their estimated lives. In accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," we recognize impairment losses on
identified intangible assets when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the net book value of those assets. The impairment loss is measured by comparing
the fair value of the asset to its carrying value. Fair value is based on
discounted cash flows using present value techniques identified in SFAS No. 144.
We assessed our identified intangible assets for impairment in accordance with
SFAS No. 144 as of December 31, 2003, and noted no impairment. If these
estimates or their related assumptions change in the future, it could result in
lower estimated future cash flows that may not support the current carrying
value of these assets, which would require us to record impairment charges for
these assets.
o Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes," which requires that deferred tax assets and liabilities be
recognized using enacted tax rates for the effect of temporary differences
between the book and tax bases of recorded assets and liabilities. SFAS No. 109
also requires that deferred tax assets be reduced by a valuation allowance if it
is more likely than not that some or all of the deferred tax assets will not be
realized. We evaluate annually the realizability of our deferred tax assets by
assessing our valuation allowance and, if necessary, we adjust the amount of
such allowance. The factors used to assess the likelihood of realization include
our forecast of future taxable income and available tax planning strategies that
could be implemented to realize the net deferred tax assets.
o Legal Matters
As is typical in the semiconductor industry, we have been and expect to be
notified from time to time of claims, including claims that we may be infringing
patents owned by others. During 2003, we held settlement discussions with
several third parties. When probable and reasonably estimable, we make provision
for estimated liabilities. As we sometimes have in the past, we may settle
disputes and/or obtain licenses under patents that we are alleged to infringe.
During 2003, we settled a threatened patent infringement claim and obtained
licenses under the patents that we were alleged to infringe. As a result of the
settlement, we reduced our accruals for estimated legal liabilities by $0.6
million, which had a favorable impact on SG&A spending in the third quarter of
2003,. We can offer no assurance that any pending or threatened claim will be
resolved or that the resolution of any such claims will not have a materially
adverse effect on our business, financial condition, or results of operations.
In addition, our evaluation of the impact of these pending and threatened claims
could change based upon new information learned by us. Subject to the foregoing,
we do not believe that the resolution of any pending or threatened legal claim
is likely to have a materially adverse effect on our business, financial
condition, or results of operations.
Risks
Our operating results are subject to general economic conditions and a
variety of risks characteristic of the semiconductor industry or specific to us,
including booking and shipment uncertainties, wafer supply fluctuations, and
price erosion, any of which could cause our operating results to differ
materially from past results. See the Risk Factors set forth at the end of Part
I of this Annual Report on Form 10-K.
Quarterly Information
The table on the next page presents certain unaudited quarterly results for
each of the eight quarters in the period ended December 31, 2003. In our
opinion, this information has been presented on the same basis as the audited
consolidated financial statements appearing elsewhere in this Annual Report on
Form 10-K 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 our audited
consolidated financial statements and notes thereto. However, these quarterly
operating results are not indicative of the results for any future period.
<PAGE>
<TABLE>
<CAPTION>
Quarterly Operating Results
Three Months Ended
---------------------------------------------------------------------------------------------
Dec. 31, Sep. 30, Jun. 30, Mar. 31, Dec. 31, Sep. 30, Jun. 30, Mar. 31,
2003 2003 2003 2003 2002 (2) 2002 2002 (2) 2002 (2)
--------- --------- --------- --------- --------- --------- --------- ---------
(unaudited, in thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net revenues....................... $ 40,555 $ 38,405 $ 36,609 $ 34,341 $ 34,103 $ 32,912 $ 34,293 $ 33,060
Gross profit....................... 25,220 23,319 22,025 19,612 20,591 19,229 21,337 20,276
Income (loss) from operations...... 2,462 1,965 441 (1,614) (951) (1,587) (282) (853)
Net income (loss).................. 2,328 2,283 1,386 231 (1,831) 1,107 404 395
Net income (loss) per share:
Basic........................... $ 0.09 $ 0.09 $ 0.06 $ 0.01 $ (0.08) $ 0.05 $ 0.02 $ 0.02
========= ========= ========= ========= ========= ========= ========= =========
Diluted (1)..................... $ 0.09 $ 0.08 $ 0.05 $ 0.01 $ (0.08) $ 0.04 $ 0.02 $ 0.02
========= ========= ========= ========= ========= ========= ========= =========
Shares used in computing net income
(loss) per share:
Basic........................... 25,339 25,005 24,550 24,338 24,126 24,531 24,382 24,170
========= ========= ========= ========= ========= ========= ========= =========
Diluted (1)..................... 27,235 27,101 25,776 25,087 24,126 24,959 26,036 25,388
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
- --------------------------------------------------
(1) For the fourth quarter of 2002, we incurred a quarterly net loss and the
inclusion of stock options in the shares used for computing diluted
earnings per share would have been anti-dilutive and reduced the loss per
share. Accordingly, all Common Stock equivalents (such as stock options)
have been excluded from the shares used to calculate diluted earnings per
share for that period.
(2) During the first, second, and fourth quarters of 2002, we realized losses
on sales and write downs of our strategic equity investments amounting to
$0.1 million in the first quarter, $1.0 million in the second quarter, and
$2.6 million in the fourth quarter. See Note 3 of Notes to Consolidated
Financial Statements for further information.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------------
Dec. 31, Sep. 30, Jun. 30, Mar. 31, Dec. 31, Sep. 30, Jun. 30, Mar. 31,
2003 2003 2003 2003 2002 2002 2002 2002
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of Net Revenues:
Net revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit....................... 62.2 60.7 60.2 57.1 60.4 58.4 62.2 61.3
Income (loss) from operations...... 6.1 5.1 1.2 (4.7) (2.8) (4.8) (0.8) (2.6)
Net income (loss).................. 5.7 5.9 3.8 0.7 (5.4) 3.4 1.2 1.2
</TABLE>
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2003, our investment portfolio consisted primarily of
corporate bonds, floating rate notes, and federal and municipal obligations. The
principal objectives of our investment activities are to preserve principal,
meet liquidity needs, and maximize yields. To meet these objectives, we invest
excess liquidity only in high credit quality debt securities with average
maturities of less than two years. We also limit 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 our investment portfolio.
Our debt security investments, which totaled $144.8 million at December 31,
2003, are subject to interest rate risk. An increase in interest rates could
subject us to a decline in the market value of our investments. These risks are
mitigated by our ability to hold these investments to maturity. A hypothetical
100 basis point increase in interest rates compared with interest rates at
December 31, 2003, and December 31, 2002, would result in a reduction of
approximately $1.4 million in the fair value of our available-for-sale debt
securities held at December 31, 2003, and $1.1 million in the fair value of our
available-for-sale debt securities held at December 31, 2002
The potential changes noted above are based upon sensitivity analyses
performed on our financial position and expected operating levels at December
31, 2003. Actual results may differ materially.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ACTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------------
2003 2002
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 13,648 $ 18,207
Short-term investments.............................................................. 144,765 115,622
Accounts receivable, net............................................................ 20,537 17,615
Inventories, net.................................................................... 38,664 34,591
Deferred income taxes............................................................... 18,786 28,054
Prepaid expenses and other current assets........................................... 3,561 4,968
------------ ------------
Total current assets.......................................................... 239,961 219,057
Property and equipment, net............................................................ 19,935 16,204
Goodwill, net.......................................................................... 32,142 32,142
Other assets, net...................................................................... 24,719 25,918
------------ ------------
$ 316,757 $ 293,321
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 13,140 $ 11,500
Accrued salaries and employee benefits.............................................. 7,081 7,280
Other accrued liabilities........................................................... 6,117 3,879
Deferred income on shipments to distributors........................................ 22,545 26,459
------------ ------------
Total current liabilities..................................................... 48,883 49,118
Deferred compensation plan liability................................................... 2,658 1,889
Deferred rent liability................................................................ 783 -
------------ ------------
Total liabilities............................................................. 52,324 51,007
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value; 4,500,000 shares authorized; 1,000,000 issued and
converted to common stock; and none outstanding................................... - -
Series A Preferred stock, $.001 par value; 500,000 shares authorized; none issued
or outstanding.................................................................... - -
Common stock, $.001 par value; 55,000,000 shares authorized; 25,388,746 and
24,176,540 shares issued and outstanding at December 31, 2003 and 2002,
respectively...................................................................... 25 24
Additional paid-in capital.......................................................... 184,674 168,428
Retained earnings .................................................................. 79,518 73,290
Unearned compensation cost ......................................................... (44) (179)
Accumulated other comprehensive income ............................................. 260 751
------------ ------------
Total shareholders' equity.................................................... 264,433 242,314
------------ ------------
$ 316,757 $ 293,321
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ACTEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues............................................................ $ 149,910 $ 134,368 $ 145,559
Costs and expenses:
Cost of revenues..................................................... 59,734 52,935 62,210
Research and development............................................. 39,602 39,349 38,172
Selling, general, and administrative................................. 44,650 43,033 41,464
Amortization of goodwill and other acquisition-related intangibles... 2,670 2,724 14,757
------------ ------------ ------------
Total costs and expenses....................................... 146,656 138,041 156,603
------------ ------------ ------------
Income (loss) from operations........................................... 3,254 (3,673) (11,044)
Interest income and other, net of expense............................... 3,210 5,530 7,280
Gain (loss) on sales and write-downs of equity investments.............. 91 (3,707) -
------------ ------------ ------------
Income (loss) before tax (benefit) provision............................ 6,555 (1,850) (3,764)
Tax (benefit) provision................................................. 327 (1,925) 937
------------ ------------ ------------
Net income (loss)....................................................... $ 6,228 $ 75 $ (4,701)
============ ============ ============
Net income (loss) per share:
Basic................................................................ $ 0.25 $ 0.00 $ (0.20)
============ ============ ============
Diluted.............................................................. $ 0.24 $ 0.00 $ (0.20)
============ ============ ============
Shares used in computing net income (loss) per share:
Basic................................................................ 24,808 24,302 23,743
============ ============ ============
Diluted.............................................................. 26,300 25,252 23,743
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ACTEL CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME/(LOSS)
(in thousands, except share amounts)
Notes Accumulated
Additional Receivable Unearned Other Total
Common Paid-In Retained From Compensation Comprehensive Shareholders'
Stock Capital Earnings Officer Cost Income Equity
------- ---------- --------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 2000................ $ 23 $ 150,709 $ 79,908 $ (368) $ (922) $ 751 $ 230,101
======= ========== ========= ========== =========== ============ ===========
Net loss.................................... - - (4,701) - - - (4,701)
Other comprehensive income (loss):
Change in unrealized gain (loss)
on investments......................... - - - - - 56 56
-----------
Comprehensive income (loss)............ (4,645)
Issuance of 670,499 shares of common stock
under employee stock plans, net of
repurchases.............................. 1 7,675 - - - - 7,676
Issuance of 54,290 shares to Prosys security
holders in connection with achievement
of technological milestones.............. - 1,132 - - - - 1,132
Issuance of stock options to consultant..... - 116 - - - - 116
Amortization of unearned compensation cost.. - - - - 225 - 225
Purchase price adjustment related to
GateField employees' unvested stock
options originally assumed in connection
with the GateField acquisition........... - - - - 383 - 383
Tax benefit from exercise of stock options.. - 2,692 - - - - 2,692
-------- ---------- --------- ---------- ----------- ------------ -----------
Balance at December 31, 2001................ $ 24 $ 162,324 $ 75,207 $ (368) $ (314) $ 807 $ 237,680
======== ========== ========= ========== =========== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ACTEL CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME/(LOSS) (Continued)
(in thousands, except share amounts)
Notes Accumulated
Additional Receivable Unearned Other Total
Common Paid-In Retained From Compensation Comprehensive Shareholders'
Stock Capital Earnings Officer Cost Income Equity
-------- ---------- --------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 2001................ $ 24 $ 162,324 $ 75,207 $ (368)$ (314) $ 807 $ 237,680
======== ========== ========= ========== =========== ============ ============
Net income.................................. - - 75 - - - 75
Other comprehensive income (loss):
Change in unrealized gain (loss)
on investments......................... - - - - - (56) (56)
------------
Comprehensive income (loss)............ 19
Repayment of note-receivable from officer... - - - 368 - - 368
Issuance of 784,073 shares of common stock
under employee stock plans.............. - 9,430 - - - - 9,430
Repurchase of 663,482 shares of common
stock................................... - (5,907) (1,992) - - - (7,899)
Amortization of unearned compensation cost.. - - - - 135 - 135
Tax benefit from exercise of stock options.. - 2,581 - - - - 2,581
-------- ---------- --------- ---------- ------------ ------------ -----------
Balance at December 31, 2002................ $ 24 $ 168,428 $ 73,290 $ - $ (179) $ 751 $ 242,314
======== ========== ========= ========== =========== ============ ============
Net income.................................. - - 6,228 - - - 6,228
Other comprehensive income (loss):
Change in unrealized gain (loss) on
investments............................ - - - - - (491) (491)
-----------
Comprehensive income (loss)............ 5,737
Issuance of 1,212,206 shares of common stock
under employee stock plans.............. 1 16,246 - - - - 16,247
Amortization of unearned compensation cost.. - - - - 135 - 135
-------- ---------- --------- ---------- ------------ ------------ -----------
Balance at December 31, 2003................ $ 25 $ 184,674 $ 79,518 $ - $ (44) $ 260 $ 264,433
======== ========== ========= ========== =========== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ACTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income (loss).................................................... $ 6,228 $ 75 $ (4,701)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization...................................... 10,168 10,012 21,755
Stock compensation cost recognized................................. 135 135 341
Impairment of equity investments................................... - 3,041 -
Changes in operating assets and liabilities:
Accounts receivable.............................................. (2,922) (856) 12,497
Inventories...................................................... (4,073) 1,747 (10,835)
Deferred income taxes............................................ 8,363 104 (47)
Prepaid expenses and other current assets........................ 1,407 246 237
Accounts payable, accrued salaries and employee benefits, and
other accrued liabilities...................................... 4,512 (4,002) (14,109)
Tax benefits from exercise of stock options...................... -- 2,581 2,692
Deferred income on shipments to distributors..................... (3,914) (299) (18,100)
------------ ------------ ------------
Net cash provided by (used in) operating activities.................. 19,904 12,784 (10,270)
Investing activities:
Purchases of property and equipment.................................. (11,229) (8,827) (9,526)
Purchases of available-for-sale securities........................... (179,276) (177,473) (135,016)
Sales and maturities of available for sale securities................ 149,315 181,763 145,878
Changes in other long term assets.................................... 480 149 (96)
------------ ------------ ------------
Net cash provided by (used in) investing activities.................. (40,710) (4,388) 1,240
Financing activities:
Repayment of note-receivable from officer............................ - 368 -
Issuance of common stock under employee stock plans.................. 16,247 9,430 7,676
Repurchase of common stock........................................... - (7,899) -
------------ ------------ ------------
Net cash provided by financing activities............................ 16,247 1,899 7,676
Net increase (decrease) in cash and cash equivalents.................... (4,559) 10,295 (1,354)
Cash and cash equivalents, beginning of year............................ 18,207 7,912 9,266
------------ ------------ ------------
Cash and cash equivalents, end of year.................................. $ 13,648 $ 18,207 $ 7,912
============ ============ ============
Supplemental disclosures of cash flow information and non-cash investing
and financing activities:
Cash (received)/paid during the year for income taxes................... $ (12,367) $ (157) $ 473
Issuance of common stock for acquisitions............................... - - 1,132
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ACTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Actel Corporation (Actel or us, we, or our) was incorporated under the laws
of California on October 16, 1985. We design, develop, and market field
programmable gate arrays (FPGAs) and supporting products and services. Net
revenues from the sale of FPGAs accounted for 96% of our net revenues in 2003,
2002, and 2001. Our Protocol Design Services organization accounted for 1% of
our net revenues in 2003, 2002, and 2001. Royalties and the licensing of
software and sale of hardware that are used to design and program FPGAs
accounted for 3% of our net revenues in 2003, 2002, and 2001.
FPGAs are integrated circuits that adapt the processing and memory
capabilities of electronic systems to specific applications. FPGAs are used by
designers of communications, computer, consumer, industrial, military and
aerospace, and other electronic systems to differentiate their products and get
them to market faster. We are the leading supplier of FPGAs based on flash and
antifuse technologies. See Note 9 for information on our sales by geographic
area.
o Advertising and Promotion Costs
Our policy is to expense advertising and promotion costs as they are
incurred. Our advertising and promotion expenses were approximately $3.3 million
in 2003, $3.7 million in 2002, and $3.8 million in 2001.
o Basis of Presentation
The consolidated financial statements include the accounts of Actel
Corporation and our wholly owned subsidiaries. We use the U.S. Dollar as the
functional currency in our foreign operations. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Our fiscal year ends on the first Sunday after December 30. Fiscal 2003
ended on January 4, 2004; fiscal 2002 ended on January 5, 2003; and fiscal 2001
ended on January 6, 2002. Fiscal 2001 was a 53 week fiscal year, rather than the
normal 52 week fiscal year. For ease of presentation, December 31 has been
indicated as the year end for all fiscal years.
o Cash Equivalents and Investments
For financial statement purposes, we consider all highly liquid debt
instruments with insignificant interest rate risk and 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
corporate, federal, state, and local municipal obligations. See Note 3 for
further information regarding short-term investments.
<PAGE>
We account for our investments in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." We determine the appropriate
classification of debt securities at the time of purchase and re-evaluate such
designation as of each balance sheet date. At December 31, 2003, all debt
securities are designated as available-for-sale. We also make equity investments
for the promotion of business and strategic objectives. We monitor our equity
investments for impairment on a periodic basis. In the event that the carrying
value of the equity investment exceeds its fair value and the decline in value
is determined to be other than temporary, the carrying value is reduced to its
current fair market value. Non-marketable equity investments valued at $0.1
million are included in other assets. See Note 3 for further information
regarding investments.
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 and accretion is included in interest and other income, net of
expense. 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.
In accordance with SFAS No. 115, if a decline in value below cost is
determined to be other than temporary, the unrealized losses will be recorded as
expense on the income statement in the period when that determination is made.
In the absence of other overriding factors, we consider a decline in market
value to be other than temporary when a publicly traded stock has traded below
book value for a consecutive six-month period. If an investment continues to
trade below book value for more than six months, and mitigating factors such as
general economic and industry specific trends are not present, this investment
would be evaluated for impairment and written down to a balance equal to the
estimated fair value at the time of impairment, with the amount of the
write-down realized as expense on the income statement. During 2002, we held an
investment in a publicly traded company that had traded below book value. Based
on our assessment of industry trends, as well as the volatility and trading
volumes of this equity security, we concluded that the declines in value at the
end of the second and fourth quarters of 2002 were other than temporary.
Accordingly, we recorded as expense, in accordance with SFAS No. 115, impairment
write-downs of $0.5 million in the second quarter and $0.4 million in the fourth
quarter. At December 31, 2002, we held an investment in the publicly-traded
equity security with a market value of $0.2 million in short-term investments.
During 2003, this publicly-traded equity security was sold for a gain of $0.1
million.
At December 31, 2001, we held a strategic equity investment of $2.2 million
in a private company located in the United Kingdom. Under our accounting policy,
the carrying value of a cost method non-marketable investment is the amount paid
for the investment unless it has been determined to be other than temporarily
impaired, in which case we write the investment down to its impaired value. We
review all of our investments periodically for impairment; however, for
non-marketable equity securities, the impairment analysis requires significant
judgment. This analysis includes assessment of the investee's financial
condition, the business outlook for its products and technology, its projected
results and cash flows, the likelihood of obtaining subsequent rounds of
financing, and the impact of any relevant contractual equity preferences held by
us or others. If an investee obtains additional funding at a valuation lower
than our carrying amount, we presume that the investment is other than
temporarily impaired, unless specific facts and circumstances indicate otherwise
(for example, if we hold contractual rights that give us a preference over the
rights of other investors). During 2002, a sufficient market for the U.K.
company's technology did not develop and additional financing was raised from an
existing shareholder during the fourth quarter to enable the company to continue
operations. The market value of the company implied in the 2002 financing
indicated significant impairment of our investment in the company. In accordance
with our accounting policy, we wrote the investment down to $0.1 million, a
balance equal to the estimated fair value of our investment in the company at
the time of the financing. The $0.1 million balance is included on the December
31, 2003 and 2002, balance sheets in other assets. The impairment write-down of
$2.1 million was realized as an expense on the income statement in the fourth
quarter of 2002.
We maintain trading assets to generate returns that offset changes in
liabilities related to our deferred compensation plan. The trading assets
consist of insurance contracts and our Common Stock contributed to the plan by
participants and are stated at fair value. Recognized gains and losses are
included in interest income and other, net of expense, and generally offset the
change in the deferred compensation liability, which is also included in
interest income and other, net of expense. Net gains (losses) on the trading
asset portfolio were not significant for 2003, 2002, and 2001. The deferred
compensation assets were $2.5 million, and the deferred compensation liabilities
were $2.7 million, at December 31, 2003.
o Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of
credit risk consist principally of cash investments and trade receivables. We
limit our exposure to credit risk by investing excess liquidity only in
securities of A, A1, or P1 grade. We are 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.
We sell our products to customers in diversified industries. We are exposed
to credit risks in the event of non-payment by customers to the extent of
amounts recorded on the balance sheet. We limit our exposure to credit risk by
performing ongoing credit evaluations of our customers' financial condition and
generally require no collateral. We are exposed to credit risks in the event of
insolvency by our customers and manage such exposure to accounting losses by
limiting the amount of credit extended whenever deemed necessary. Our
distributors accounted for approximately 69% of our revenues in 2003, 65% in
2002, and 68% in 2001. During 2001, we consolidated our distribution channel by
terminating our agreement with Arrow Electronics, Inc. (Arrow). During 2003, we
further consolidated our distribution channel by terminating our agreement with
Pioneer-Standard Electronics, Inc. (Pioneer), leaving Unique Technologies, Inc.
(Unique) as our sole distributor in North America. The loss of Unique as a
distributor could have a materially adverse effect on our business, financial
condition, or results of operations. Lockheed Martin accounted for 11% of
revenues in 2003. See Note 9 for further information regarding our 10%
customers.
As of December 31, 2003, we had an accounts receivable balance of $21.6
million, net of an allowance for doubtful accounts of $1.1 million. If sales
levels were to increase, it is likely that the level of receivables would also
increase. In the event that customers delay their payments to us, the levels of
accounts receivable would also increase. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. The allowance for doubtful accounts is based on past
payment history with the customer, analysis of the customer's current financial
condition, outstanding invoices older than 90 days, and other known factors. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
o Fair Value of Financial Instruments
We use the following methods and assumptions in estimating our fair value
disclosures for financial instruments:
o Accounts Payable
The carrying amount reported in the balance sheets for accounts
payable approximates fair value.
o Cash and Cash Equivalents
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
o Insurance Contracts
The fair value of our insurance contracts (entered into in connection
with our deferred compensation plan) is based upon cash surrender value.
o Investment Securities
The fair values for marketable debt and equity securities are based on
quoted market prices. Strategic equity investments in non-public companies
with no readily available market value are carried on the balance sheet at
cost as adjusted for impairment. If reductions in the market value of
marketable equity securities to an amount that is below cost are deemed by
us to be other than temporary, the reduction in market value will be
realized, with the resulting loss in market value reflected on the income
statement.
o Goodwill and other Acquisition-Related Intangibles
In past years we made business acquisitions that resulted in the recording
of a significant amount of goodwill and identified intangible assets. At
December 31, 2003, we had $32.1 million of remaining net book value assigned to
goodwill from those acquisitions and $4.6 million of remaining net book value
assigned to identified intangible assets, such as patents and completed
technology.
Historically and through the end of 2001, goodwill was amortized on a
straight-line basis over its useful life. At the beginning of 2002, we adopted
SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses the
financial accounting and reporting standards for goodwill and other intangible
assets subsequent to their acquisition. In accordance with SFAS No. 142, we
ceased to amortize goodwill and instead test for impairment annually or more
frequently if certain events or changes in circumstances indicate that the
carrying value may not be recoverable. We completed our annual goodwill
impairment tests during the fourth quarter of 2003, and noted no impairment. The
initial test of goodwill impairment requires us to compare our fair value with
our book value, including goodwill. Based on our total market capitalization,
which we believe represents the best indicator of our fair value, we determined
that our fair value was in excess of our book value. Since we found no
indication of impairment, no further testing was necessary.
At December 31, 2003, we had identified intangible assets arising from
prior business acquisitions with a net book value of $4.6 million, which are
being amortized on a straight line basis over their estimated lives. In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," we recognize impairment losses on identified intangible
assets when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the net book value of
those assets. The impairment loss is measured by comparing the fair value of the
asset to its carrying value. Fair value is based on discounted cash flows using
present value techniques identified in SFAS No. 144. We assessed our identified
intangible assets for impairment in accordance with SFAS No. 144 as of December
31, 2003, and noted no impairment. If these estimates or their related
assumptions change in the future, it could result in lower estimated future cash
flows that may not support the current carrying value of these assets, which
would require us to record impairment charges for these assets.
o Impact of Recently Issued Accounting Standards
In May, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 requires certain financial instruments to be accounted for as
liabilities that previously were accounted for as equity. The financial
instruments affected include mandatory redeemable stock; certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets; and certain obligations that can be
settled with shares of stock. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. We do not currently have any financial instruments that are subject to the
provisions of SFAS No. 150, so the adoption of SFAS No. 150 had no impact on our
consolidated financial position or results of operations.
In January 2003, the FASB issued Financial Standards Accounting Board
Interpretation (FIN) No. 46 (FIN 46), "Consolidation of Variable Interest
Entities," an interpretation of Accounting Research Bulletin (ARB) No. 51,
"Consolidated Financial Statements." FIN 46, which amended the interpretation in
December 2003, establishes accounting guidance for consolidation of a variable
interest entity (VIE). FIN 46 requires an investor with a majority of the
variable interests (primary beneficiary) in a variable interest entity (VIE) to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A VIE is an entity in which
the equity investors do not have a controlling interest or the equity investment
at risk is insufficient to finance the entity's activities without receiving
additional subordinated financial support from the other parties.
Development-stage entities that have sufficient equity invested to finance the
activities they are currently engaged in and entities that are businesses as
defined in the Interpretation are not considered VIEs. The provisions of FIN 46
were effective immediately for all arrangements entered into with new VIEs
created after January 31, 2003. We do not currently have any contractual
relationship or other business relationship with a VIE, so the adoption of FIN
46 had no impact on our consolidated financial position or results of
operations.
o Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes," which requires that deferred tax assets and liabilities be
recognized using enacted tax rates for the effect of temporary differences
between the book and tax bases of recorded assets and liabilities. Under SFAS
No. 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. SFAS No. 109 also requires that deferred
tax assets be reduced by a valuation allowance if it is more likely than not
that some or all of the deferred tax asset will not be realized. We evaluate
annually the realizability of our deferred tax assets by assessing our valuation
allowance and by adjusting the amount of such allowance, if necessary. The
factors used to assess the likelihood of realization include our forecast of
future taxable income and available tax planning strategies that could be
implemented to realize the net deferred tax assets.
At December 31, 2003, we had $61.7 million of gross deferred tax assets in
excess of deferred tax liabilities. Based on the factors cited above, including
our forecast of future taxable income and limitations under Section 382 of the
Internal Revenue Code, we determined at December 31, 2003, that it is more
likely than not that $34.2 million of deferred tax assets will be realized. This
resulted in a valuation allowance of $27.5 million. In order to fully utilize
the $34.2 million of net deferred tax assets, taxable income in the amount of
approximately $89 million must be earned in future periods. Factors that may
affect our ability to achieve sufficient future taxable income include, but are
not limited to, increased competition, a decline in sales or margins, loss of
market share, delays in product availability, and technological obsolescence.
o Inventories
As of December 31, 2003, we had a net inventory balance of $38.7 million,
stated at the lower of cost (first-in, first-out) or market (net realizable
value). We believe that a certain level of inventory must be carried to maintain
an adequate supply of product for customers. This inventory level may vary based
upon orders received from customers or internal forecasts of demand for these
products. Other considerations in determining inventory levels include the stage
of products in the product life cycle, design win activity, manufacturing lead
times, customer demands, strategic relationships with foundries, and competitive
situations in the marketplace. Should any of these factors develop other than
anticipated, inventory levels may be materially and adversely affected.
We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated realizable value based upon assumptions about future demand and market
conditions. To address this difficult, subjective, and complex area of judgment,
we apply a methodology that includes assumptions and estimates to arrive at the
net realizable value. First, we identify any inventory that has been previously
written down in prior periods. This inventory remains written down until sold,
destroyed, or otherwise dispositioned. Second, our quality assurance personnel
examine inventory line items that may have some form of obsolescence due to
non-conformance with electrical and mechanical standards. Third, we assess the
inventory not otherwise identified to be written down against product history
and forecasted demand (typically for the next six months). Finally, we analyze
the result of this methodology in light of the product life cycle, design win
activity, and competitive situation in the marketplace to derive an outlook for
consumption of the inventory and the appropriateness of the resulting inventory
levels. If actual future demand or market conditions are less favorable than
those we have projected, additional inventory write-downs may be required.
During 2003, we modified our inventory valuation policies to properly
account for "last time buy" inventory purchases. Last time buys occur when a
wafer supplier is about to shut down the manufacturing line used to make a
product and current inventories are insufficient to meet foreseeable future
demand. We made last time buys of certain products from our wafer suppliers in
2003. Since this inventory was not acquired to meet current demand, we did not
believe the application of our existing inventory write down policy was
appropriate, so a discrete write down policy was established for inventory
purchased in last time buy transactions. As a consequence, these transactions
and the related inventory are excluded from the standard excess and obsolescence
write down policy. Inventory purchased in last time buy transactions will be
evaluated on an ongoing basis for indications of excess or obsolescence based on
rates of actual sell through; expected future demand for those products over a
longer time horizon; and any other qualitative factors that may indicate the
existence of excess or obsolete inventory. In the event that actual sell through
does not meet expectations and estimations of expected future demand decrease,
last time buy inventory could be written down in the future. Evaluations of last
time buy inventory in 2003 did not result in any write downs. At December 31,
2003, $5.4 million related to last time buy type purchases was included in
inventory on the balance sheet. See Note 2 for information on inventory amounts.
o Legal Matters
As is typical in the semiconductor industry, we have been and expect to be
notified from time to time of claims, including claims that we may be infringing
patents owned by others. During 2003, we held settlement discussions with
several third parties. When probable and reasonably estimable, we make provision
for estimated liabilities. As we sometimes have in the past, we may settle
disputes and/or obtain licenses under patents that we are alleged to infringe.
During 2003, we settled a threatened patent infringement claim and obtained
licenses under the patents that we were alleged to infringe. As a result of the
settlement, we reduced our accruals for estimated legal liabilities by $0.6
million, which had a favorable impact on SG&A spending in the third quarter of
2003,. We can offer no assurance that any pending or threatened claim will be
resolved or that the resolution of any such claims will not have a materially
adverse effect on our business, financial condition, or results of operations.
In addition, our evaluation of the impact of these pending and threatened claims
could change based upon new information learned by us. Subject to the foregoing,
we do not believe that the resolution of any pending or threatened legal claim
is likely to have a materially adverse effect on our business, financial
condition, or results of operations.
o Product Warranty
Our product warranty accrual includes specific accruals for known product
issues and an accrual for an estimate of incurred but unidentified product
issues based on historical activity. Due to effective product testing and the
short time between product shipment and the detection and correction of product
failures, the warranty accrual based on historical activity and the related
expense for known product issues were not significant in 2003, 2002, or 2001.
o Property and Equipment
Property and equipment is carried at cost less accumulated depreciation and
amortization. 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............................ Remaining term of lease
See Note 2 for information on property and equipment amounts.
o Revenue Recognition
In accordance with SEC Staff Accounting Bulletin No. 101, revenue is
recognized when there is evidence of an arrangement, delivery has occurred or
services have been completed, the price is fixed or determinable, and
collectability is reasonably assured. Revenue from product shipped to end
customers is recorded when all of the foregoing conditions are met and risk of
loss and title passes to the customer. 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, we defer recognition of
revenues and related cost of revenues on sales of products to distributors until
such products are sold by the distributor and title transfers to the end user.
Royalty income is recognized upon notice to us of the sale by others of products
subject to royalties. Revenues generated by the Protocol Design Services
organization are recognized as the services are performed.
We record a provision for price adjustments on unsold merchandise shipped
to distributors in the same period as the related revenues are recorded. If
market conditions were to decline, we may need to take action with our
distributors to ensure the sell-through of inventory already in the channel.
These actions during a market downturn could result in incrementally greater
reductions to net revenues than otherwise would be expected. We also record a
provision for estimated sales returns on products shipped directly to end
customers in the same period as the related revenues are recorded. The provision
for sales returns is based on historical sales returns, analysis of credit memo
data, and other factors. If our calculation of these estimates does not properly
reflect future return patterns, future net revenues could be materially
different.
o Stock-Based Compensation
We have employee stock plans that are described more fully in Note 6. We
account for our stock options and equity awards in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations and have elected to
follow the "disclosure only" alternative prescribed by SFAS No. 123, "Accounting
for Stock-Based Compensation."
We account for stock-based awards to employees using the intrinsic value
method in accordance with APB Opinion No. 25 and FIN No. 44 (FIN 44),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB Opinion No. 25." Accordingly, no compensation cost has
been recognized for our fixed-cost stock option plans because stock-based awards
are issued at fair market value on the date of grant for our stock option plans
or 85% of fair market value at the date of grant for our employee stock purchase
plan. Options and warrants granted to consultants and vendors are accounted for
at fair value determined by using the Black-Scholes method in accordance with
EITF Issue No. 96-18, "Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
Pro forma information regarding net income and net income per share is
required by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure an Amendment of FASB Statement No. 123," which also requires that
the information be determined as if we had accounted for our stock-based awards
to employees granted under the fair value method. Our stock based awards consist
of options and employee stock purchase rights. 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:
<TABLE>
<CAPTION>
Stock Options Stock Purchase Plan Rights
----------------------------- -----------------------------
Years ended December 31, 2003 2002 2001 2003 2002 2001
- -------------------------------------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Expected life of options (years)............ 4.29 4.14 3.46 1.26 1.14 0.50
Expected stock price volatility............. 0.62 0.66 0.67 0.62 0.66 0.67
Risk-free interest rate..................... 2.3% 3.7% 4.1% 1.8% 2.2% 3.0%
</TABLE>
The weighted-average fair value of options granted during 2003 was $9.05, during
2002 was $10.19, and during 2001 was $10.49. The weighted-average fair value of
ESPP rights granted during 2003 was $6.38, during 2002 was $6.27, and during
2001 was $8.14.
For purposes of pro forma disclosures, the estimated fair value of our
stock-based awards to employees is amortized to expense using the graded method
for options and during the purchase periods for employee stock purchase rights.
Our pro forma information is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net income (loss) applicable to common stockholders, as reported........ $ 6,228 $ 75 $ (4,701)
Add back:
Stock-based employee compensation included in reported net
income (loss)........................................................ 135 135 341
Less:
Total stock-based employee compensation expense determined under
the fair value method for all awards, net of tax..................... (12,094) (17,827) (12,466)
------------ ------------ ------------
Pro forma net loss applicable to common stockholders.................... $ (5,731) $ (17,617) $ (16,826)
------------ ------------ ------------
Earnings (loss) per share as reported:
Basic................................................................ $ 0.25 $ 0.00 $ (0.20)
============ ============ ============
Diluted.............................................................. $ 0.24 $ 0.00 $ (0.20)
============ ============ ============
Pro forma earnings (loss) per share:
Basic................................................................ $ (0.23) $ (0.72) $ (0.71)
============ ============ ============
Diluted.............................................................. $ (0.23) $ (0.72) $ (0.71)
============ ============ ============
</TABLE>
During the fourth quarter of 2003, a review of our financial reporting
procedures revealed errors in the process by which we had calculated pro forma
compensation expense for the purpose of providing the pro forma footnote
disclosure required by SFAS Nos. 123 and 148. The errors were limited to
footnote disclosure under SFAS Nos. 123 and 148 of non-cash pro forma
compensation expense and did not change or have any impact on our historically
reported statements of income, balance sheets, or statements of cash flows. We
corrected the process by which such pro forma footnote disclosure is prepared
and instituted additional internal controls to ensure that the correct process
is followed.
Although we believe that the errors were immaterial, we have adjusted the
pro forma information for the quarters ended July 6 and April 6, 2003, and years
ended December 31, 2002 and 2001, to reflect the correction of previously
calculated pro forma tax benefits from non qualified stock options and pro forma
compensation cost related to our employee stock purchase plan. The adjusted pro
forma information for all fiscal years and interim periods that required
adjustment is as follows:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
-------------------------- --------------------------
Jun. 30, Mar. 31, Dec. 31, Dec. 31,
2003 2003 2002 2001
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Pro Forma amounts under fair value method:
Pro Forma stock based employee compensation cost, net of
related tax............................................... $ 3,466 $ 3,579 $ 17,692 $ 12,125
Pro forma net income (loss).................................. $ (2,080) $ (3,348) $ (17,617) $ (16,826)
Pro forma earnings (loss) per share:
Basic................................................... $ (0.08) $ (0.14) $ (0.72) $ (0.71)
Diluted................................................. $ (0.08) $ (0.14) $ (0.72) $ (0.71)
</TABLE>
Our originally reported pro forma information was as follows:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
-------------------------- --------------------------
Jun. 30, Mar. 31, Dec. 31, Dec. 31,
2003 2003 2002 2001
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Pro Forma amounts under fair value method:
Pro Forma stock based employee compensation cost, net of
related tax............................................... $ 4,091 $ 3,865 $ 19,610 $ 15,011
Pro forma net income (loss).................................. $ (2,705) $ (3,634) $ (19,535) $ (19,712)
Pro forma earnings (loss) per share:
Basic................................................... $ (0.11) $ (0.15) $ (0.80) $ (0.83)
Diluted................................................. $ (0.11) $ (0.15) $ (0.80) $ (0.83)
</TABLE>
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 our 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
our opinion the existing models do not necessarily provide a reliable single
measure of the fair value of our stock-based awards to employees. In addition,
the effects on pro forma disclosures of applying SFAS Nos. 123 and 148 are not
likely to be representative of the effects on pro forma disclosures in future
years. See Note 6 for further information regarding our stock option plans.
o Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues,
and expenses and the related disclosure of contingent assets and liabilities. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ materially from these estimates. In addition, if these estimates or their
related assumptions change in the future, there could be a materially adverse
effect on our operating results.
2. Balance Sheet Detail
<TABLE>
<CAPTION>
December 31,
--------------------------
2003 2002
------------ ------------
(in thousands)
<S> <C> <C>
Accounts receivable:
Trade accounts receivable........................................................... $ 20,457 $ 17,421
Interest receivable................................................................. 1,158 1,272
Allowance for doubtful accounts..................................................... (1,078) (1,078)
------------ ------------
$ 20,537 $ 17,615
============ ============
Inventories:
Purchased parts and raw materials................................................... $ 5,243 $ 4,066
Work-in-process..................................................................... 29,243 26,484
Finished goods...................................................................... 4,178 4,041
------------ ------------
$ 38,664 $ 34,591
============ ============
Property and equipment:
Equipment........................................................................... $ 63,377 $ 56,529
Furniture and fixtures.............................................................. 2,521 2,409
Leasehold improvements.............................................................. 2,346 5,662
------------ ------------
68,244 64,600
Accumulated depreciation and amortization........................................... (48,309) (48,396)
------------ ------------
$ 19,935 $ 16,204
============ ============
</TABLE>
Depreciation expense was approximately $7.5 million in 2003, $7.3 million
in 2002, and $7.0 million in 2001, and is included with amortization expense in
the Consolidated Statement of Cash Flows.
During 2003, we removed certain fully depreciated assets with a cost of
$7.5 million that were no longer being utilized, which had no impact on the
income statement.
<TABLE>
<CAPTION>
December 31,
--------------------------
2003 2002
------------ ------------
(in thousands)
<S> <C> <C>
Goodwill:
Goodwill............................................................................ $ 48,575 $ 48,575
Less accumulated amortization....................................................... (16,433) (16,433)
------------ ------------
$ 32,142 $ 32,142
============ ============
Other Assets:
Prepaid long-term license fees...................................................... $ 1,215 $ 1,500
Deferred compensation plan assets................................................... 2,476 1,830
Identifiable intangible assets from acquisitions.................................... 12,728 12,728
Acquired patents.................................................................... 1,842 1,842
Non-current deferred tax asset (net of related deferred tax liability of $1,603 in
2003 and $2,764 in 2002).......................................................... 15,429 14,247
Other............................................................................... 1,025 1,097
------------ ------------
Subtotal...................................................................... 34,715 33,244
Accumulated amortization expenses................................................... (9,996) (7,326)
------------ ------------
$ 24,719 $ 25,918
============ ============
</TABLE>
Historically and through the end of 2001, goodwill was amortized on a
straight-line basis over its useful life. At the beginning of 2002, we adopted
SFAS No. 142, "Goodwill and Other Intangible Assets," and ceased to amortize
goodwill. Instead, we test for impairment annually or more frequently if certain
events or changes in circumstances indicate that the carrying value may not be
recoverable. We completed our annual goodwill impairment tests during the fourth
quarter of 2003, and noted no impairment. A reconciliation of previously
reported net income and earnings per share to the amounts adjusted for the
exclusion of goodwill amortization, net of the related income tax effect, is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Reported net income/(loss).............................................. $ 6,228 $ 75 $ (4,701)
Amortization of goodwill................................................ - - 11,691
------------ ------------ ------------
Adjusted net income excluding amortization of goodwill.................. $ 6,228 $ 75 $ 6,990
============ ============ ============
Reported net income/(loss) per share:
Basic................................................................ $ 0.25 $ 0.00 $ (0.20)
============ ============ ============
Diluted.............................................................. $ 0.24 $ 0.00 $ (0.20)
============ ============ ============
Adjusted net income per share:
Basic................................................................ $ 0.25 $ 0.00 $ 0.29
============ ============ ============
Diluted.............................................................. $ 0.24 $ 0.00 $ 0.28
============ ============ ============
Shares used in computing adjusted net income per share:
Basic................................................................ 24,808 24,302 23,743
============ ============ ============
Diluted.............................................................. 26,300 25,252 25,125
============ ============ ============
</TABLE>
Goodwill was adjusted during the three years ended December 31, 2003,
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Balance at January 1.................................................... $ 32,142 $ 37,180 $ 46,820
============ ============ ============
Additions............................................................ - - 2,051
Amortization......................................................... - - (11,691)
Adjustment for recognition of deferred tax asset..................... - (5,038) -
------------ ------------ ------------
Balance at December 31.................................................. $ 32,142 $ 32,142 $ 37,180
============ ============ ============
</TABLE>
The reduction in goodwill in 2002 was due primarily to a balance sheet
reclassification of $5.0 million from goodwill to deferred tax assets. The
goodwill was reclassified because we believe (based on a number of factors,
including our estimate of future taxable income) that a portion of the net
operating losses generated by GateField Corporation (GateField) and valued at
zero when we acquired GateField in 2000 will be used by us to reduce taxes
payable in the future. During 2003 and 2002, no goodwill was acquired or
impaired. During 2001, additional consideration of $1.7 million was issued to
Prosys Technology (Prosys) shareholders pursuant to the achievement of
technological milestones specified in the agreement under which we acquired
Prosys in 2000.
We assess identified intangible assets for impairment in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
and recognize impairment losses when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the net book value of those assets. We assessed our identified intangible
assets for impairment in accordance with SFAS No. 144 as of December 31, 2003,
and noted no impairment. Identified intangible assets as of December 31, 2003,
consisted of the following:
<TABLE>
<CAPTION>
Accumulated
Gross Assets Amortization Net
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Acquisition-related developed technology................................ $ 11,454 $ (7,543) $ 3,911
Other acquisition-related intangibles................................... 2,600 (2,012) 588
Acquired patents........................................................ 516 (441) 75
------------ ------------ ------------
Total identified intangible assets............................. $ 14,570 $ (9,996) $ 4,574
============ ============ ============
</TABLE>
Identified intangible assets as of December 31, 2002, consisted of the
following:
<TABLE>
<CAPTION>
Accumulated
Gross Assets Amortization Net
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Acquisition-related developed technology................................ $ 11,454 $ (5,253) $ 6,201
Other acquisition-related intangibles................................... 2,600 (1,681) 919
Acquired patents........................................................ 516 (392) 124
------------ ------------ ------------
Total identified intangible assets............................. $ 14,570 $ (7,326) $ 7,244
============ ============ ============
</TABLE>
All of our identified intangible assets are subject to amortization.
Amortization of identified intangibles included the following:
<TABLE>
<CAPTION>
2003 2002 2001
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Acquisition-related developed technology................................ $ 2,291 $ 2,291 $ 2,291
Other acquisition-related intangibles................................... 331 330 687
Acquired patents........................................................ 48 103 88
------------ ------------ ------------
Total amortization expense..................................... $ 2,670 $ 2,724 $ 3,066
============ ============ ============
</TABLE>
Based on the carrying value of identified intangible assets recorded at December
31, 2003, and assuming no subsequent impairment of the underlying assets, the
annual amortization expense is expected to be $2.6 million for 2004, $1.9
million for 2005, less than $0.1 million in 2006, and none thereafter.
3. Available-for-Sale Securities
The following is a summary of available-for-sale securities at December 31,
2003 and 2002:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Values
----------- ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
December 31, 2003
Auction Market Preferred.................................. $ 4,800 $ - $ - $ 4,800
Corporate bonds........................................... 49,168 396 (47) 49,517
U.S. government securities................................ 63,529 76 (53) 63,552
Floating rate notes....................................... 17,750 13 - 17,763
Municipal obligations..................................... 9,085 48 - 9,133
----------- ------------ ------------ ------------
Total available-for-sale securities....................... 144,332 533 (100) 144,765
=========== ============ ============ ============
December 31, 2002
Certificate of deposit.................................... $ 1,999 $ 11 $ - $ 2,010
Commercial paper.......................................... 5,865 1 (2) 5,864
Corporate bonds........................................... 43,010 537 (92) 43,455
U.S. government securities................................ 47,962 570 - 48,532
Floating rate notes....................................... 5,800 - - 5,800
Municipal obligations..................................... 12,866 226 - 13,092
----------- ------------ ------------ ------------
Total available-for-sale securities....................... 117,502 1,345 (94) 118,753
Less amounts classified as cash equivalents............... (3,363) - - (3,363)
----------- ------------ ------------ ------------
Total short-term available-for-sale debt securities....... 114,139 1,345 (94) 115,390
Short-term marketable strategic equity investments........ 232 - - 232
----------- ------------ ------------ ------------
Total available-for-sale securities....................... $ 114,371 $ 1,345 $ (94) $ 115,622
=========== ============ ============ ============
</TABLE>
Available-for-sale securities that were in an unrealized loss position as
of December 31, 2003, have all been in an unrealized loss position for less than
twelve months.
The adjustments to unrealized gains and (losses) on investments, net of
taxes, included as a separate component of shareholders' equity totaled
approximately ($0.5 million) for the year ended December 31, 2003, ($0.1
million) for the year ended December 31, 2002, and $0.1 million for the year
ended December 31, 2001. See Note 7 for information regarding other
comprehensive income/(loss). Realized gains were $0.5 million during 2003, $0.2
million during 2002, and $0.4 million during 2001.
We occasionally make equity investments in public or private companies for
the promotion of business and strategic objectives. During 2002, we recognized
losses and recorded impairment write-downs totaling $3.7 million in connection
with our strategic equity investments, which consisted of $1.6 million related
to an equity investment in a publicly traded company and $2.1 million related to
an equity investment in a private company. The $1.6 million loss related to the
investment in a publicly traded company was comprised of $0.7 million of
realized losses on shares sold during the first and second quarters of 2002 and
$0.9 million of impairment write-downs recorded in the second and fourth
quarters of 2002. These impairment write-downs were recorded as a result of
declines in the market value of shares still held by us. The $2.1 million loss
related to the equity investment in a private company consisted entirely of an
impairment write-down that was recorded when the estimated fair value of the
private company was determined to be below its carrying value after the private
company received new financing in the fourth quarter of 2002 at a per share
price significantly less than our initial investment. We sold all of our
remaining strategic equity investment in a publicly traded company in 2003,
realizing a gain of $0.1 million from the sale. As of December 31, 2003, we had
$0.1 million of strategic equity investments remaining on the balance sheet. See
Note 1 for further information regarding our policy on accounting for
investments and the manner in which fair values were determined.
The expected maturities of our investments in debt securities at December
31, 2003, are shown below. Expected maturities can differ from contractual
maturities because the issuers of the securities may have the right to prepay
obligations without prepayment penalties.
<TABLE>
<CAPTION>
<S> <C>
Available-for-sale debt securities: (in thousands)
Due in less than one year......................................................................... $ 8,957
Due in one to five years.......................................................................... 121,158
Due in five to ten years.......................................................................... --
Due after ten years............................................................................... 14,650
------------
$ 144,765
============
</TABLE>
A portion of our securities represents investments in floating rate
municipal bonds with contractual maturities greater than one year with some
greater than ten years. However, the interest rates on these debt securities
generally reset every ninety days, at which time we have the option to sell the
security or roll over the investment at the new interest rate. Since it is not
our intention to hold these floating rate municipal bonds until their
contractual maturities, these amounts have been classified as short-term
investments.
4. Commitments and Contingencies
o Commitments
We lease our facilities under non-cancelable lease agreements. The current
primary facilities lease agreement expires in January 2014 and includes an
annual increase in lease payments of three percent per year. Facilities lease
expense is recorded on a straight-line basis over the term of the lease. As cash
payments in 2003 were less than rent expense recognized on a straight line basis
we recorded a deferred rent liability of $0.8 million in 2003. The equipment
lease terms are month-to-month. Our facilities and equipment leases are
accounted for as operating leases and require us to pay property taxes,
insurance and maintenance, and repair costs. At December 31, 2003 and 2002, we
had no capital lease obligations.
We have entered into non-cancelable licensing agreements with external
software developers to enable us to include their proprietary technology in our
design and programming software. The following represents contractual
commitments associated with operating leases and royalty and licensing
agreements:
<TABLE>
<CAPTION>
Payments Due by Period
----------------------------------------------------------------------------------------------
2009
Total 2004 2005 2006 2007 2008 and later
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating leases... $ 28,160 $ 2,884 $ 2,695 $ 2,761 $ 2,795 $ 2,644 $ 14,381
Royalty/
licensing
agreements...... 14,428 6,296 7,019 1,113 - - -
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total.............. $ 42,588 $ 9,180 $ 9,714 $ 3,874 $ 2,795 $ 2,644 $ 14,381
========== ========== ========== ========== ========== ========== ==========
</TABLE>
Purchase orders or contracts for the purchase of raw materials and other goods
and services are not included in the table above. We are not able to determine
the aggregate amount of such purchase orders that represent contractual
obligations as purchase orders may represent authorizations to purchase rather
than binding agreements. For the purposes of this table, contractual obligations
for purchase of goods or services are defined as agreements that are enforceable
and legally binding on us and that specify all significant terms, including:
fixed or minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Our purchase orders
are based on our current manufacturing needs and fulfilled by our vendors within
short time horizons. We do not have significant agreements for the purchase of
raw materials or other goods specifying minimum quantities or set prices that
exceed our expected requirements for three months. We also enter into contracts
for outsourced services; however, the obligations under these contracts were not
significant and the contracts generally contain clauses allowing for
cancellation without significant penalty.
Rental expense under operating leases was approximately $4.2 million for
2003, $4.2 million for 2002, and $4.4 million for 2001. Amounts purchased under
royalty/licensing agreements was approximately $5.5 million in 2003, $4.1
million in 2002, and $3.7 million in 2001.
o Contingencies
From time to time we are notified of claims, including claims that we may
be infringing patents owned by others, or otherwise become aware of conditions,
situations, or circumstances involving uncertainty as to the existence of
liability or the amount of the loss. When probable and reasonably estimable, we
make provision for estimated liabilities. During 2003, we held settlement
discussions with several third parties. As we sometimes have in the past, we may
settle disputes and/or obtain licenses under patents that we are alleged to
infringe. During 2003, we settled a threatened patent infringement claim and
obtained licenses under the patents that we were alleged to infringe. As a
result of the settlement, we reduced our accruals for estimated legal
liabilities by $0.6 million, which had a favorable impact on SG&A spending in
the third quarter of 2003. We can offer no assurance that any pending or
threatened claim or other loss contingency will be resolved or that the
resolution of any such claim or contingency will not have a materially adverse
effect on our business, financial condition, or results of operations. In
addition, our evaluation of the impact of these claims and contingencies could
change based upon new information learned by us. Subject to the foregoing, we do
not believe that the resolution of any pending or threatened legal claim or loss
contingency is likely to have a materially adverse effect on our business,
financial condition, or results of operations.
5. Retirement Plan
Effective December 10, 1987, we 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.
We may make contributions to the plan at the discretion of the Board of
Directors. We made no contributions to the plan for 2003, 2002, or 2001. There
is no guarantee we will make any contributions to the plan in the future,
regardless of our financial performance.
6. Shareholders' Equity
o Stock Repurchase
Our Board of Directors authorized a stock repurchase program in September
1998 whereby shares of our Common Stock may be purchased from time to time in
the open market at the discretion of management. Additional shares were
authorized for repurchase in each of 1999 and 2002. In 2002, we repurchased
663,482 shares of Common Stock for $7.9 million. No shares were repurchased in
2003. We reissue repurchased shares through our employee stock option and
purchase plans. As of December 31, 2003, we have remaining authorization to
repurchase up to 900,000 shares.
o Shareholder Rights Plan
Our Board of Directors adopted a Shareholder Rights Plan in October 2003.
Under the Plan, we issued a dividend of one right for each share of our Common
Stock held by shareholders of record as of the close of business on November 10,
2003. Each right will entitles the shareholder to purchase a fractional share of
our Preferred Stock for $220.00. However, the rights will become exercisable
only if a person or group acquires, or announces a tender or exchange offer that
would result in the acquisition of, 15% or more of our Common Stock while the
Plan remains in place. Then, unless we redeem the rights for $0.001 per right,
the rights will become exercisable by all rights holders (except the acquiring
person or group) for shares of Actel (or shares of the third party acquirer)
having a value equal to twice the right's then-current exercise price.
o Stock Option Plans
We have adopted stock option plans under which officers, employees, and
consultants may be granted incentive stock options or nonqualified options to
purchase shares of our Common Stock. In connection with our acquisitions of
AutoGate Logic, Inc. (AutoGateLogic) in 1999 and Prosys and GateField in 2000,
we assumed the stock option plans of AutoGate Logic, Prosys, and GateField and
the related options are incorporated in the amounts below. At December 31, 2003,
17,722,566 shares of Common Stock were reserved for issuance under these plans,
of which 2,680,730 were available for grant. There were no options granted to
consultants in 2003 or 2002 and options granted to consultants in 2001 were
recorded at fair value of $0.1 million using the Black-Scholes model in
accordance with EITF 96-18 and FIN No. 44.
We also adopted a new Directors' Stock Option Plan in 2003, under which
directors who are not employees of Actel may be granted nonqualified options to
purchase shares of our Common Stock. The new Directors' Stock Option Plan
replaced a 1993 plan that expired in 2003. At December 31, 2003, 500,000 shares
of Common Stock were reserved for issuance under such plan, of which 500,000
were available for grant.
We grant stock options under our plans at a price equal to the fair value
of our 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 our stock option activity and related
information for the three years ended December 31, 2003:
<TABLE>
<CAPTION>
2003 2002 2001
------------------------ ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
---------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1...... 8,327,898 $ 19.26 7,508,292 $ 18.70 6,840,991 $ 19.08
Granted....................... 1,215,180 18.26 1,492,076 19.15 2,472,715 21.21
Exercised..................... (889,048) 14.28 (514,727) 10.57 (514,574) 9.86
Cancelled..................... (309,090) 21.79 (157,743) 20.02 (1,290,840) 29.00
---------- ---------- ----------
Outstanding at December 31.... 8,344,940 $ 19.55 8,327,898 $ 19.26 7,508,292 $ 18.70
========== ========== ==========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 2003:
<TABLE>
<CAPTION>
December 31, 2003
-----------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Contract Average Average
Number of Life Exercise Number of Exercise
Range of Exercise Prices Shares (in years) Price Shares Price
- --------------------------------------------- ----------- ---------- ---------- ---------- ----------
<C> <C> <C> <C> <C> <C>
$ 0.07 - 11.75............................ 1,032,472 3.00 10.84 1,005,252 10.85
11.88 - 14.81............................ 873,132 5.72 13.53 790,384 13.57
14.88 - 15.15............................ 862,480 8.80 15.13 53,579 15.02
16.00 - 19.50............................ 398,254 6.64 17.06 229,669 16.89
19.73 - 19.73............................ 990,551 8.19 19.73 6,562 19.73
19.91 - 20.56............................ 874,451 7.53 20.16 607,973 20.15
20.66 - 21.30............................ 202,264 7.75 21.08 87,861 21.06
21.75 - 21.90............................ 933,925 7.53 21.90 422,738 21.90
21.93 - 25.00............................ 858,144 7.43 23.70 375,874 23.67
25.56 - 54.45............................ 1,319,267 6.90 28.87 882,452 28.41
--------- ---------
8,344,940 6.84 19.55 4,462,344 18.77
========= =========
</TABLE>
At December 31, 2002, 4,028,287 outstanding options were exercisable; and at
December 31, 2001, 2,634,531 outstanding options were exercisable.
o Employee Stock Purchase Plan
We have adopted an Employee Stock Purchase Plan (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 each year). The ESPP is administered in
consecutive, overlapping offering periods of up to 24 months each, with each
offering period divided into four consecutive six-month purchase periods
beginning August 1 and February 1 of each year. On the last business day of each
purchase period, shares of Common Stock are purchased with employees' payroll
deductions accumulated during the prior 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. At
December 31, 2003, 3,519,680 shares of Common Stock were authorized for issuance
under the ESPP. There were 361,688 shares issued in 2003 under the ESPP, 269,346
shares in 2002, and 223,311 shares in 2001. 862,559 shares remained available
for issuance under the ESPP at December 31, 2003.
7. Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Net income (loss)....................................................... $ 6,228 $ 75 $ (4,701)
Change in gain on available-for-sale securities, net of tax of $1 in
2003, $(38) in 2002, and $185 in 2001............................... (2) 189 276
Less reclassification adjustment for gains included in net income
(loss)............................................................... (489) (245) (220)
------------ ------------ ------------
Other comprehensive income (loss)....................................... (491) (56) 56
------------ ------------ ------------
Total comprehensive income (loss)....................................... $ 5,737 $ 19 $ (4,645)
============ ============ ============
</TABLE>
Accumulated other comprehensive income for 2003 and 2002 is presented on the
accompanying consolidated balance sheets and consists solely of the accumulated
net unrealized gain on available-for-sale securities.
8. Tax Provision
The tax provision (benefit) consists of:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Federal - current....................................................... $ (8,454) $ (177) $ (146)
Federal - deferred...................................................... 9,396 (1,052) 1,917
State - current......................................................... 10 10 (84)
State - deferred........................................................ (1,033) (914) (1,045)
Foreign - current....................................................... 408 208 295
------------ ------------ ------------
$ 327 $ (1,925) $ 937
============ ============ ============
</TABLE>
The tax provision (benefit) reconciles to the amount computed by
multiplying income before tax by the U.S. statutory rate as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Provision/(benefit) at federal statutory rate........................... $ 2,294 $ (648) $ (1,317)
Change in valuation allowance........................................... (445) 625 (440)
Tax exempt interest income.............................................. (122) (455) (910)
Federal research credits................................................ (843) (989) (1,100)
State taxes, net of federal benefit..................................... (664) (588) (420)
Write-down of deferred tax asset due to state tax rate reduction........ -- -- 1,044
Non-deductible impact of amortization of intangibles/investments........ -- -- 4,092
Other................................................................... 107 130 (12)
------------ ------------ ------------
Tax provision........................................................... $ 327 $ (1,925) $ 937
============ ============ ============
</TABLE>
Significant components of our deferred tax assets and liabilities for
federal and state income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
2003 2002
------------ ------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Depreciation........................................................................ $ 1,333 $ 2,524
Deferred income on shipments to distributors........................................ 8,569 10,417
Intangible assets................................................................... 3,444 4,035
Inventories......................................................................... 5,534 6,357
Net operating losses................................................................ 30,750 36,007
Capitalized research and development expenses....................................... 4,823 4,078
Research and development tax credit................................................. 5,584 2,864
Other, net.......................................................................... 3,276 2,609
------------ ------------
63,313 68,891
Valuation allowance................................................................. (27,496) (23,826)
------------ ------------
Net deferred tax assets....................................................... $ 35,817 $ 45,065
============ ============
Deferred tax liabilities:
Intangible assets................................................................... $ 1,603 $ 2,764
============ ============
</TABLE>
The valuation allowance increased by approximately $3.7 million in 2003 and
decreased by $4.2 million in 2002. The valuation allowance in 2003 includes a
$4.1 million tax benefit associated with stock option deductions. The amount
will be credited to additional paid-in capital when the benefit is realized. The
valuation allowance decreased in 2002 due to a $5.0 million reclassification
adjustment to reduce goodwill as a result of the realization of previously
reserved deferred tax assets associated with the net operating losses acquired
from GateField. This reduction in the valuation allowance was offset by an
increase to the valuation allowance of $0.6 million which was primarily related
to impairments on equity investments for which we believe it is more likely than
not such impairments will be realized for tax purposes. Approximately $21.8
million of the valuation allowance at December 31, 2003, will be allocated to
reduce goodwill or other non-current intangible assets from the acquisition of
GateField when realized.
We have a federal operating loss carryforward of approximately $83.7
million, which will expire at various times beginning in 2006 and ending in
2023. We also have federal research and development credits of approximately
$3.0 million, which will expire at various times beginning in 2013 and ending in
2023. In addition, we have California research and development and
manufacturer's investment credits of approximately $4.8 million that will expire
beginning in 2006. Pre-tax income from foreign subsidiaries is immaterial.
9. Segment Disclosures
We operate in a single operating segment: designing, developing, and
marketing FPGAs. FPGA sales accounted for 96% of net revenues for 2003, 2002,
and 2001. We derive non-FPGA revenues from our Protocol Design Services
organization, royalties, and the licensing of software and sale of hardware that
is used to design and program our FPGAs. The Protocol Design Services
organization, which we acquired from GateField in the third quarter of 1998,
accounted for 1% of our net revenues for 2003, 2002 and 2001.
We market our products in the United States and in foreign countries
through our sales personnel, independent sales representatives, and
distributors. Our geographic sales are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------
2003 2002 2001
----------------------- ----------------------- -----------------------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
United States................. $ 91,652 61% $ 83,276 62% $ 89,847 62%
Export:
Europe........................ 37,521 25% 30,716 23 40,652 28
Japan......................... 6,489 4% 8,398 6 6,630 4
Other international........... 14,248 10% 11,978 9 8,430 6
----------------------- ----------------------- -----------------------
$ 149,910 100% $ 134,368 100% $ 145,559 100%
======================= ======================= =======================
</TABLE>
We generate a majority of our revenues from the sale of our products
through distributors. As of December 31, 2003, our principal distributor is
Unique. The following table sets forth the percentage of revenues derived from
each customer that accounted for 10% or more of our net revenues in any of the
last three years:
<TABLE>
<CAPTION>
2003 2002 2001
------ ------ ------
<S> <C> <C> <C>
Pioneer................................................................. 6% 26% 20%
Unique.................................................................. 41 22 19
Arrow................................................................... - - 13
Lockheed Martin......................................................... 11 3 3
</TABLE>
Our property and equipment is located primarily in the United States.
Property, plant, and equipment information is based on the physical location of
the assets at the end of each of the fiscal years. Net property, plant, and
equipment by geographic region was as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
2003 2002
------------ ------------
(in thousands)
<S> <C> <C>
United States.......................................................................... $ 17,031 $ 14,138
Europe................................................................................. 535 805
Japan.................................................................................. 187 14
Other international.................................................................... 2,182 1,247
------------ ------------
$ 19,935 $ 16,204
============ ============
</TABLE>
10. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands,
except per share amounts)
Basic:
<S> <C> <C> <C>
Weighted-average common shares outstanding........................... 24,808 24,302 23,743
============ ============ ============
Net income (loss).................................................... $ 6,228 $ 75 $ (4,701)
============ ============ ============
Net income (loss) per share.......................................... $ 0.25 $ 0.00 $ (0.20)
============ ============ ============
Diluted:
Weighted-average common shares outstanding........................... 24,808 24,302 23,743
Net effect of dilutive stock options, warrants, and convertible
preferred stock - based on the treasury stock method............... 1,492 950 -
------------ ------------ ------------
Shares used in computing net income per share........................ 26,300 25,252 23,743
============ ============ ============
Net income (loss).................................................... $ 6,228 $ 75 $ (4,701)
============ ============ ============
Net income (loss) per share.......................................... $ 0.24 $ 0.00 $ (0.20)
============ ============ ============
</TABLE>
For 2003, options outstanding under our stock option plans to purchase
approximately 1,913,000 shares of our Common Stock were excluded from the
calculation to derive diluted income per share because their inclusion would
have had an anti-dilutive effect.
For 2002, options outstanding under our stock option plans to purchase
approximately 5,160,000 shares of our Common Stock were excluded from the
calculation to derive diluted income per share because their inclusion would
have had an anti-dilutive effect.
For 2001, we were in a net loss position and the inclusion of any stock
options in the shares used for computing diluted net loss per share would have
been anti-dilutive (reduced the loss per share). Therefore, approximately
4,016,000 options were excluded from the calculation of net less per share in
2001 because their inclusion would have had an anti-dilutive effect.
<PAGE>
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, 2003 and 2002, and the related consolidated
statements of operations, shareholders' equity and other comprehensive income,
and cash flows for each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of Actel's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Actel
Corporation at December, 31 2003 and 2002 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 1 and Note 2 to the consolidated financial statements,
effective January 1, 2002, the company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ ERNST & YOUNG LLP
San Jose, California
January 21, 2004
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive
Officer and our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Annual
Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and
our Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in the SEC's rules and forms.
Changes in Internal Control over Financial Reporting
As discussed in Note 1 of Notes to Consolidated Financial Statements under
the caption to "Stock-Based Compensation," pro forma information regarding net
income and net income per share is required by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure an Amendment of FASB
Statement No. 123," which also requires that the information be determined as if
we had accounted for our stock-based awards to employees granted under the fair
value method. Our stock based awards consist of options and employee stock
purchase rights. 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:
<TABLE>
<CAPTION>
Stock Options Stock Purchase Plan Rights
----------------------------- -----------------------------
Years ended December 31, 2003 2002 2001 2003 2002 2001
- -------------------------------------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Expected life of options (years)............ 4.29 4.14 3.46 1.26 1.14 0.50
Expected stock price volatility............. 0.62 0.66 0.67 0.62 0.66 0.67
Risk-free interest rate..................... 2.3% 3.7% 4.1% 1.8% 2.2% 3.0%
</TABLE>
The weighted-average fair value of options granted during 2003 was $9.05, during
2002 was $10.19, and during 2001 was $10.49. The weighted-average fair value of
ESPP rights granted during 2003 was $6.38, during 2002 was $6.27, and during
2001 was $8.14.
For purposes of pro forma disclosures, the estimated fair value of our
stock-based awards to employees is amortized to expense using the graded method
for options and during the purchase periods for employee stock purchase rights.
Our originally reported pro forma information was as follows:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
------------------------- -------------------------
Jun. 30, Mar. 31, Dec. 31, Dec. 31,
2003 2003 2002 2001
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Pro Forma amounts under fair value method:
Pro Forma stock based employee compensation cost, net of
related tax............................................... $ 4,091 $ 3,865 $ 19,610 $ 15,011
Pro forma net income (loss).................................. $ (2,705) $ (3,634) $ (19,535) $ (19,712)
Pro forma earnings (loss) per share:
Basic................................................... $ (0.11) $ (0.15) $ (0.80) $ (0.83)
Diluted................................................. $ (0.11) $ (0.15) $ (0.80) $ (0.83)
</TABLE>
During the fourth quarter of 2003, a review of our financial reporting
procedures revealed errors in the process by which we had calculated pro forma
compensation expense for the purpose of providing the pro forma footnote
disclosure required by SFAS Nos. 123 and 148. The errors were limited to
footnote disclosure under SFAS Nos. 123 and 148 of non-cash pro forma
compensation expense and did not change or have any impact on our historically
reported statements of income, balance sheets, or statements of cash flows. We
corrected the process by which such pro forma footnote disclosure is prepared
and instituted additional internal controls to ensure that the correct process
is followed.
Although we believe that the errors were immaterial, we have adjusted the
pro forma information for the quarters ended July 6 and April 6, 2003, and years
ended December 31, 2002 and 2001, to reflect the correction of previously
calculated pro forma tax benefits from non qualified stock options and pro forma
compensation cost related to our employee stock purchase plan. The adjusted pro
forma information is as follows:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
------------------------- -------------------------
Jun. 30, Mar. 31, Dec. 31, Dec. 31,
2003 2003 2002 2001
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Pro Forma amounts under fair value method:
Pro Forma stock based employee compensation cost, net of
related tax............................................... $ 3,466 $ 3,579 $ 17,692 $ 12,125
Pro forma net income (loss).................................. $ (2,080) $ (3,348) $ (17,617) $ (16,826)
Pro forma earnings (loss) per share:
Basic................................................... $ (0.08) $ (0.14) $ (0.72) $ (0.71)
Diluted................................................. $ (0.08) $ (0.14) $ (0.72) $ (0.71)
</TABLE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The following table identifies each of our directors as of March 1, 2004:
<TABLE>
<CAPTION>
Director
Name of Nominee Age Principal Occupation Since
- -------------------------------------------- ------ ---------------------------------------------- --------
<S> <C> <C> <C>
John C. East ............................... 59 President and Chief Executive Officer 1988
Actel Corporation
James R. Fiebiger (1)(2).................... 62 Chairman and Chief Executive Officer 2000
Lovoltech, Inc.
Jacob S. Jacobsson (1)(3)................... 50 President and Chief Executive Officer 1998
Forte Design Systems
Henry L. Perret (2)......................... 58 President and Chief Financial Officer and 2003
Acting Chief Financial Officer
Legerity, Inc.
Robert G. Spencer (2)(3).................... 60 Principal 1989
The Spencer Group
</TABLE>
- -----------------------------------------------------
(1)......Member of Nominating Committee.
(2)......Member of Audit Committee.
(3)......Member of Compensation Committee.
Mr. East has served as our President, Chief Executive Officer, and a
director since December 1988.
Mr. Fiebiger has been a director since December 2000. Since December 1999,
he has been Chairman and Chief Executive Officer of Lovoltech, Inc., a privately
held semiconductor company specializing in low voltage devices. He also serves
as a director of Mentor Graphics Corporation, QLogic Corporation, and a private
company. Mr. Fiebiger was Vice Chairman and Managing Director of Technology
Licensing of GateField Corporation, a semiconductor company that we purchased in
November 2000, from 1998 to 2000, and President, Chief Executive Officer, and a
director of GateField from 1996 to 1998.
Mr. Jacobsson has been a director since May 1998. Since November 2000, he
has been President, Chief Executive Officer, and a director of Cynapps, Inc. and
its successor by merger, Forte Design Systems, a privately-held company that
offers products and services for the hierarchical design and verification of
large, complex systems and integrated circuits. For the five years before that,
he was President and Chief Executive Officer of SCS Corporation, a privately
held semiconductor company in the Radio Frequency Identification area. Mr.
Jacobsson also serves as a director of various private companies.
Mr. Perret has been a director since January 2003. Since November 2003, he
has been a director and President and Chief Executive Officer and acting Chief
Financial Officer of Legerity, Inc. Before that, he had been Vice President of
Finance, Chief Financial Officer, and General Manager of the Voice Network
Access product line at Legerity since August 2001. Before joining Legerity, Mr.
Perret was our Vice President of Finance and Chief Financial Officer from June
1997 and our Controller from January 1996. From April 1992 until joining us, he
was the Site Controller for the manufacturing division of Applied Materials, a
maker of semiconductor manufacturing equipment, in Austin, Texas. From 1978 to
1991, Mr. Perret held various financial positions with National Semiconductor, a
semiconductor manufacturer.
Mr. Spencer has been a director since February 1989. He has been the
principal of The Spencer Group, a consulting firm, for the past five years.
Jos C. Henkens, a director since April 1988, died unexpectedly in 2003. The
Nominating Committee is in the process of searching for a director to fill the
vacancy.
There is no family relationship between any of our directors and executive
officers.
Executive Officers
The following table identifies each of our executive officers as of March
1, 2004:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------- --- -------------------------------------------------------
<S> <C> <C>
John C. East......................... 59 President and Chief Executive Officer
Esmat Z. Hamdy....................... 54 Senior Vice President of Technology & Operations
Jon A. Anderson...................... 45 Vice President of Finance and Chief Financial Officer
Anthony Farinaro..................... 41 Vice President & General Manager of Design Services
Paul V. Indaco....................... 53 Vice President of Worldwide Sales
Dennis G. Kish....................... 40 Vice President of Marketing
Barbara L. McArthur.................. 53 Vice President of Human Resources
Fares N. Mubarak..................... 42 Vice President of Engineering
David L. Van De Hey.................. 48 Vice President & General Counsel and Secretary
</TABLE>
Mr. East has served as our President and Chief Executive Officer since
December 1988. From April 1979 until joining us, Mr. East served in various
positions with Advanced Micro Devices, a semiconductor manufacturer, including
Senior Vice President of Logic Products from November 1986 to November 1988.
From December 1976 to March 1979, he served as Operations Manager for Raytheon
Semiconductor. From September 1968 to December 1976, Mr. East served in various
marketing, manufacturing, and engineering positions for Fairchild Camera and
Instrument Corporation, a semiconductor manufacturer.
Dr. Hamdy is one of our founders, was our 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 our Senior Vice President of Technology and
Operations since September 1996. From November 1985 to July 1991, he held a
number of management positions with our 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. Anderson joined us in March 1998 as Controller and has been our Vice
President of Finance and Chief Financial Officer since August 2001. From 1987
until joining us, he held various financial positions at National Semiconductor,
a semiconductor company, with the most recent position of Director of Finance,
Local Area Networks Division. From 1982 to 1986, he was an auditor with Touche
Ross & Co., a public accounting firm.
Mr. Farinaro joined us in August 1998 as Vice President & General Manager
of Design Services. From February 1990 until joining us, 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 its spin-off, Plessey Electronic Systems Corporation.
Mr. Indaco joined us in March 1999 as Vice President of Worldwide Sales.
From January 1996 until joining us, he served as Vice President of Sales for
Chip Express, a semiconductor manufacturer. From September 1994 to January 1996,
Mr. Indaco was Vice President of Sales for Redwood Microsystems, a semiconductor
manufacturer. From February 1984 to September 1994, he held senior sales
management positions with LSI Logic, a semiconductor manufacturer. From June
1978 to February 1984, Mr. Indaco held various field engineering sales and
marketing positions with Intel Corporation, a semiconductor manufacturer. From
June 1976 to June 1978, he held various marketing positions with Texas
Instruments, a semiconductor manufacturer.
Mr. Kish joined us in December 1999 as Vice President of Strategic Product
Marketing and became our Vice President of Marketing in July 2000. Prior to
joining us, he held senior management positions at Synopsys, an EDA company, and
Atmel, a semiconductor manufacturer. Before that, Mr. Kish held sales and
engineering positions with Texas Instruments, a semiconductor manufacturer.
Ms. McArthur joined us in July of 2000 as Vice President of Human
Resources. From 1997 until joining us, she was Vice President of Human Resources
at Talus Solutions. Before that, Ms. McArthur held senior human resource
positions at Applied Materials from 1993 to 1997, at 3Com Corporation from 1987
to 1993, and at Saga Corporation from 1978 to 1986.
Mr. Mubarak joined us in November 1992, was our Director of Product and
Test Engineering until October 1997, and has been our Vice President of
Engineering since October 1997. From 1989 until joining us, he held various
engineering and engineering management positions with Samsung Semiconductor
Inc., a semiconductor manufacturer, and its spin-off, IC Works, Inc. From 1984
to 1989, Mr. Mubarak held various engineering, product planning, and engineering
management positions with Advanced Micro Devices, a semiconductor manufacturer.
Mr. Van De Hey joined us in July 1993 as Corporate Counsel, became our
Secretary in May 1994, and has been our 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 our outside legal counsel. From August 1985 until October
1988, he was an associate with the Cleveland office of Jones Day, a law firm.
Subject to their rights under any contract of employment or other
agreement, executive officers serve at the discretion of the Board of Directors.
Audit Committee and Audit Committee Financial Expert
Our Board of Directors has a separately-designated standing Audit Committee
for the purpose of overseeing our accounting and financial reporting processes
and audits of our financial statements. The Audit Committee currently consists
of Messrs. Spencer (Chairman), Fiebiger, and Perret.
Mr. Perret was added to our Board of Directors on January 17, 2003, and
appointed to the Audit Committee to serve as the Audit Committee Financial
Expert. Mr. Perret was employed by Actel from January 1996 until August 2001,
last serving as Vice President of Finance and Chief Financial Officer. At the
time of Mr. Perret's appointment, the Board of Directors determined that he
qualified as an audit committee financial expert; was "independent" as defined
in Section 10A(m)(3) of the Sarbanes Oxley Act; and was not "independent" as
defined in NASD Rules 4200 and 4350 (Rules) proposed by The Nasdaq Stock Market,
Inc. (Nasdaq). Relying on an exception to the independence requirements in the
proposed Rules, the Board of Directors also determined that Mr. Perret's
membership on the Audit Committee was in the best interests of Actel and its
shareholders because of his experience and sophistication in accounting and
financial matters and his familiarity with Actel and its financial statements.
As the result of an amendment to the Rules proposed by Nasdaq on October 9,
2003, the exception relied upon by the Board was not included in the final Rules
approved by the SEC on November 3, 2003. However, the Rules are not effective
until the earlier of October 31, 2004, and our 2004 Annual Meeting of
Shareholders, which the Board has scheduled for October 14, 2004. The Board
determined at its meeting on January 16, 2004, that Mr. Perret was not currently
"independent" under the final Rules, but that he would be "independent" under
the final Rules before the 2004 Annual Meeting of Shareholders.
Section 16(a) Beneficial Ownership Reporting Compliance
To our knowledge, based solely on our review of the copies of reports
furnished to us, all of our directors, officers, beneficial owners of more than
ten percent of our Common Stock, and other persons subject to Section 16 of the
Exchange Act with respect to our Common Stock filed with the SEC on a timely
basis all reports required by Section 16(a) of the Exchange Act during our most
recent fiscal year.
Code of Ethics
We have adopted a Code of Ethics that applies to our Chief Executive
Officer, Chief Financial Officer, and Controller. A copy of the Code of Ethics
is filed as an exhibit to this Annual Report on Form 10-K.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
o Summary of Officer Compensation
The following table sets forth information concerning the compensation of
the five mostly highly compensated executive officers who were serving as
executive officers of the Company at the end of the last completed fiscal year:
<TABLE>
<CAPTION>
Long Term
Compensation
-------------
Annual Compensation Awards
--------------------------------------------- -------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary Bonus (2) Compensation Options
- ----------------------------------------- ------- ------------- ----------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
John C. East........................... 2003 $ 364,391 $ 63,929 $ 0 107,000
President and Chief Executive 2002 381,894 0 0 120,000
Officer 2001 362,800 0 0 125,000
Esmat Z. Hamdy......................... 2003 280,957 31,355 0 40,000
Senior Vice President of 2002 280,957 0 0 45,000
Technology & Operations 2001 280,957 0 0 50,000
Paul Indaco............................ 2003 259,064 28,911 8,700 (3) 40,000
Vice President of Sales 2002 259,064 0 8,700 (3) 45,000
2001 259,064 0 8,700 (3) 50,000
Dennis G. Kish ....................... 2003 235,000 26,226 0 40,000
Vice President of Marketing 2002 233,257 0 0 45,000
2001 235,000 0 0 50,000
Fares Mubarak.......................... 2003 273,420 30,514 0 40,000
Vice President of Engineering 2002 273,505 0 0 45,000
2001 283,936 0 0 50,000
</TABLE>
- ----------------------------------------
(1) Except as set forth in this table, there was no reportable compensation
awarded to, earned by, or paid to the named executive officers in 2003.
(2) The Company pays bonuses in the year following that in which the bonuses
were earned.
(3) Other compensation related to car allowance.
o Option Grants
The following table sets forth certain information with respect to stock
options granted during 2003 to each of the executive officers named in the
Summary Compensation Table:
<TABLE>
<CAPTION>
Options Grants in Last Fiscal Year
Potential Realizable Value at
Assumed Annual Rates of Stock Price
Individual Grants (1) Appreciation for Option Term (2)
--------------------------------------------------- ------------------------------------
% of Total
Options
Number of Granted to Per
Securities Employees Share
Underlying in Fiscal Exercise Expiration
Name Options (3) Year Price Date 0% 5% 10%
- ----------------------- -------------- ---------- --------- ---------- ----- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
John C. East........... 107,000 (4) 9.07% $ 15.15 01/28/13 $ 0 $ 1,019,470 $ 2,583,536
Esmat Z. Hamdy......... 40,000 (4) 3.39% 15.15 01/28/13 0 381,110 965,808
Paul V. Indaco......... 40,000 (4) 3.39% 15.15 01/28/13 0 381,110 965,808
Dennis G. Kish......... 40,000 (4) 3.39% 15.15 01/28/13 0 381,110 965,808
Fares N. Mubarak....... 40,000 (4) 3.39% 15.15 01/28/13 0 381,110 965,808
</TABLE>
- ----------------------------------------
(1) The exercise price of these options is equal to the fair market value of
our Common Stock on the date of grant, as determined by our Board of
Directors. The options expire ten years from the date of grant, are not
transferable by the optionee (other than by will or the laws of descent and
distribution), and are exercisable during the optionee's lifetime only by
the optionee. To the extent exercisable at the time of termination, options
may be exercised within six months following termination of the optionee's
employment, unless termination is the result of death, in which case the
options become fully vested and may be exercised at any time within 12
months following death by the optionee's estate or a person who acquired
the right to exercise the option by bequest or inheritance.
(2) The 0%, 5%, and 10% assumed annual rates of appreciation are mandated by
the rules of the SEC and do not represent our estimate or projection of
future Common Stock prices. The "potential realizable value" was calculated
at the assumed rates of appreciation using the applicable exercise price as
the base.
(3) Options vest and are fully exercisable upon an involuntary termination
other than "for cause," or a voluntary termination "for good reason,"
following a "change of control."
(4) Option begins vesting August 1, 2003, and vests 50% on August 1, 2005, then
quarterly at a rate of 6.25% until August 1, 2007.
o Option Values
The following table sets forth certain information concerning the number of
options exercised during 2003 by the executive officers named in the Summary
Compensation Table, as well as the number and aggregate value of shares covered
by both exercisable and unexercisable stock options held by such executive
officers as of January 4, 2004, the end of the fiscal year.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at Fiscal Year-End Fiscal Year-End (1)
----------------------------- --------------------------
Shares
Acquired Value Not Not
Name On Exercise Realized (2) Exercisable Exercisable Exercisable Exercisable
- --------------------------- ----------- ------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
John C. East............... 98,542 $ 1,109,975 273,429 302,625 $ 989,916 $ 1,576,423
Esmat Z. Hamdy............. 26,700 224,437 80,061 117,939 146,835 603,800
Paul Indaco................ 0 0 216,811 115,189 1,672,299 594,841
Dennis G. Kish............. 10,000 78,344 146,561 118,439 375,647 605,428
Fares Mubarak.............. 41,146 565,043 142,609 118,439 715,327 605,428
</TABLE>
- ----------------------------------------
(1) Calculated on the basis of the difference between the closing sale price at
the fiscal year end ($23.82) and the exercise price.
(2) Calculated on the basis of the difference between the exercise price and
(i) the sale price when the exercised option is sold on the same day or
(ii) the closing sale price on the exercise date.
Director Compensation
o Cash Compensation
As compensation for their services, directors who are not employees receive
an annual retainer of $18,000. The chairs of the Audit, Compensation, and
Nominating Committees and the Audit Committee Financial Expert receive an
additional $5,000 annual retainer. Directors also receive $2,000 for each Board
meeting attended in person, $1,000 for each committee meeting attended in
person, and $750 for each Board and committee meeting attended by telephone.
Directors are also reimbursed for reasonable out-of-pocket expenses incurred in
the performance of their duties.
o 2003 Director Stock Option Plan
Our 2003 Directors' Stock Option Plan (Director Plan) provides for the
grant of nonstatutory stock options to nonemployee directors. Under the Director
Plan, each eligible director is granted an initial option to purchase 12,500
shares of our Common Stock on the date on which such person first becomes an
eligible director and an additional option to purchase 12,500 shares on each
subsequent date that such person is elected as a director at an annual meeting
of our shareholders. The exercise price is the closing sales price of our Common
Stock quoted on the Nasdaq National Market on the date of grant. All options
become exercisable on the date of the first annual meeting of shareholders
following the date of grant, subject to the optionee remaining a director until
that annual meeting. Vested options are exercisable within four years after the
date an optionee ceases to serve as a director, provided that no option may be
exercised after its expiration date (which is ten years from the date of grant).
Change-in-Control Arrangements
We have entered into Management Continuity Agreements with our executive
officers, which are designed to ensure continued service in the event of a
"change of control." Each Agreement provides for accelerated vesting of an
officer's stock options outstanding at the time of a change in control if the
officer dies or in the event of an "involuntary termination" of the officer's
employment other than for "cause" following the change of control.
We also have an Employee Retention Plan, which provides that all employees
who hold unvested stock options as of the date of any "change of control" shall
receive, upon remaining in our employ for six months following the date of such
change of control (or earlier, if terminated other than for "cause"), an amount
equal to one-third of the aggregate "spread" on their unvested options as of the
date of such change of control. "Spread" is defined as the difference between
the change-of-control price and the option exercise price. Payment may be made
in cash, common stock, or a combination of cash and common stock.
"Change of control" is defined as (i) acquisition by any person of
beneficial ownership of more than 30% of the combined voting power of our
outstanding securities; (ii) a change of the majority of our Board of Directors
within a two-year period; (iii) our merger or consolidation with any other
corporation that has been approved by our shareholders, other than a merger or
consolidation that would result in our voting securities outstanding immediately
prior the merger or consolidation continuing to represent at least 50% of the
total voting power of the surviving entity outstanding immediately after such
merger or consolidation; or (iv) approval by our shareholders of a plan of
complete liquidation or an agreement for the sale or disposition of all or
substantially all of our assets.
Compensation Committee Interlocks and Insider Participation
Prior to our Annual Meeting of Shareholders on May 23, 2003, the
Compensation Committee consisted of Jos C. Henkens, Jacob S. Jacobsson, and
Frederic N. Schwettmann. Following our 2003 Annual Meeting, the Compensation
Committee consisted of Messrs. Henkens (Chairman), Jacobsson, and Robert G.
Spencer. Since the unexpected death of Mr. Henkens on July 8, 2003, the
Compensation Committee has consisted of Messrs. Jacobsson (Chairman) and
Spencer. None of the members of the Compensation Committee during 2003 was an
officer or employee or former officer or employee of Actel or any of its
subsidiaries, or had any other relationship requiring disclosure.
Compensation Committee Report
The following report is provided to shareholders by the Compensation
Committee of the Board of Directors. This report shall not be deemed to be
"filed" with the Securities and Exchange Commission or subject to Regulations
14A or 14C or to the liabilities of Section 18 of the Securities Exchange Act of
1934.
o Background
The Compensation Committee is a standing committee of the Board of
Directors with the same authority as the Board to act on all compensation
matters, except for actions requiring shareholder approval or related to the
compensation of directors. Since Actel's incorporation in 1986, the Compensation
Committee has been primarily responsible for establishing and reviewing Actel's
management compensation policies. Since Actel's initial public offering in
August 1993, the Compensation Committee has formally administered Actel's
management compensation policies and plans, including our 1986 Incentive Stock
Option Plan, 1995 Employee and Consultant Stock Plan, and 1993 Employee Stock
Purchase Plan.
No member of the Compensation Committee is a former or current officer or
employee of Actel. The current members of the Compensation Committee are Jacob
S. Jacobsson and Robert G. Spencer. Mr. Jacobsson has been a member of the
Compensation Committee since 1998, and Mr. Spencer since 2003. Meetings of the
Compensation Committee are attended by Actel's Vice President of Human
Resources, who provides background and market information and makes executive
compensation recommendations but does not vote on any matter before the
Compensation Committee. Other executive officers, including Actel's Chief
Executive Officer and Chief Financial Officer, may attend portions of meetings
of the Compensation Committee at the request of the Committee. The Committee
meets in private at the end of each meeting.
o Compensation Policy
There are three major elements of Actel's executive compensation program.
The first element is annual cash compensation in the form of base salary and
incentive bonuses. The second element is long-term incentive stock options,
which are designed to align compensation incentives with shareholder goals. The
third element is compensation and employee benefits generally available to all
employees of Actel, such as the 1993 Employee Stock Purchase Plan, health
insurance, and a 401(k) plan.
The Compensation Committee establishes the compensation of each officer
principally by considering the average compensation for officers in similar
positions with 30 companies in the semiconductor, software, and CAE industries
that have annual revenues between $100 million and $999 million (Reference
Group). The purpose of monitoring the Reference Group is to provide a stable and
continuing frame of reference for compensation decisions. Most of the companies
in the Reference Group are included in the Nasdaq Electronic Component Stocks
index (see "Company Stock Performance" below). The composition of the Reference
Group is subject to change from year to year based on the Committee's assessment
of comparability, including the extent to which the Reference Group reflects
changes occurring within Actel and in the industry as a whole. Actel's policy is
to have officer compensation near the average of the Reference Group.
After analyzing Reference Group base salaries and comparing them with the
base salaries of Actel's officers, the Compensation Committee determines an
annual salary increase budget. In January 2003, the Committee approved no
changes to base salary.
Under Actel's Executive Bonus Plan for 2003, incentive cash payments were
based on Actel's profitability (pro-forma profit before tax). The profitability
objective was established in the Executive Bonus Plan on a sliding scale, so
that the percentage achievement was determinable objectively at the end of the
year. In 2003, Actel achieved profitability above the minimum level required by
the Executive Bonus Plan's profitability objective. The measure of performance
was then multiplied by the target bonus under the Plan, which was 60% of base
salary for each Executive officer (other than the Chief Executive Officer). The
result was bonus payments to Executive officers (other than the Chief Executive
Officer) for 2003 that averaged approximately 11.2 % of base salary. Bonuses
were paid under the Executive Bonus Plan in January 2004. The Compensation
Committee believes that the payment of bonuses for 2003 was appropriate in light
of Actel's operating results.
Actel believes that executive officers should hold substantial, long-term
equity stakes in Actel so that the interests of executive officers will
correspond with the interests of the shareholders. As a result, stock or stock
options constitute a significant portion of the compensation paid by Actel to
its officers. After analyzing the practices of the Reference Group, the
Compensation Committee determines an annual budget for option grants to Actel's
employees and officers. In granting stock options to officers, the Compensation
Committee considers a number of factors, such as the officer's position,
responsibility, and equity interest in Actel, and evaluates the officer's past
performance and future potential to influence the long-term growth and
profitability of Actel. After taking these considerations into account, the
Compensation Committee granted to Messrs. East, Hamdy, Indaco, Kish, and Mubarak
in 2003 the options to purchase shares of Common Stock shown on the "Option
Grants" table. All of such options were granted at the value of Actel's Common
Stock on the date of grant.
o Compensation of Chief Executive Officer
The Compensation Committee generally uses the same factors and criteria
described above in making compensation decisions regarding the Chief Executive
Officer. In 2003, Mr. East's annual base salary remained at $381,894. Mr. East's
2003 bonus was determined under Actel's Executive Bonus Plan in the manner
described above (except that his target bonus was 90% of his base salary) and
resulted in a payment of $63,929, or approximately 16.7% of his base salary.
o Deductibility of Executive Compensation
Beginning in 1994, the Internal Revenue Code limited the federal income tax
deductibility of compensation paid to Actel's chief executive and to each of the
other four most highly compensated executive officers. For this purpose,
compensation can include, in addition to cash compensation, the difference
between the exercise price of stock options and the value of the underlying
stock on the date of exercise. Actel may deduct compensation with respect to any
of these individuals only to the extent that during any fiscal year such
compensation does not exceed $1 million or meets certain other conditions (such
as shareholder approval). Considering Actel's current compensation plans and
policy, Actel and the Compensation Committee believe that, for the near future,
there is little risk that Actel will lose any significant tax deduction relating
to executive compensation. If the deductibility of executive compensation
becomes a significant issue, Actel's compensation plans and policy will be
modified to maximize deductibility if the Compensation Committee determines that
such action is in the best interests of Actel.
Jacob S. Jacobsson
Robert G. Spencer
<PAGE>
Company Stock Performance
The following graph shows a comparison of cumulative total return for our
Common Stock, The Nasdaq Stock Market (US), and Nasdaq Electronic Component
Stocks. In preparing the graph, it was assumed that (i) $100 was invested on
December 31, 1998, in our Common Stock, The Nasdaq Stock Market (US), and Nasdaq
Electronic Component Stocks and (ii) all dividends were reinvested. This
information shall not be deemed to be "filed" with the Securities and Exchange
Commission or subject to Regulations 14A or 14C or to the liabilities of Section
18 of the Securities Exchange Act of 1934.
Comparison of Cumulative Total Return
[OBJECT OMITTED]
<TABLE>
<CAPTION>
12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Nasdaq Stock Market.................. $100 185 112 89 61 92
Nasdaq Electronic Components Stocks.. $100 186 153 104 56 108
Actel Corporation.................... $100 120 121 100 81 120
</TABLE>
The closing sale price of our Common Stock on December 31, 2003, was $23.82. The
closing sale price of our Common Stock on March 12, 2004, was $22.00.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes as of January 4, 2004, the number of
securities to be issued upon the exercise of outstanding derivative securities
(options, warrants, and rights); the weighted-average exercise price of the
outstanding derivative securities; and the number of securities remaining
available for future issuance under our equity compensation plans.
<TABLE>
<CAPTION>
Equity Compensation Plan Information
(a) (b) (c)
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
Plan Category warrants and rights rights reflected in column (a)
- ------------------------------ -------------------------- ------------------------- --------------------------
<S> <C> <C> <C>
Equity compensation plans
approved by security holders.. 6,809,830 $ 19.93 1,672,484 (1)(2)
Equity compensation plans not
approved by security holders
(3)........................... 1,446,673 $ 17.79 2,277,565
-------------------------- ------------------------- --------------------------
Total......................... 8,344,940 (4) $ 19.55 (4) 3,950,049 (2)
</TABLE>
- ----------------------------------------
(1) Consists of 309,925 shares available for issuance under our 1986 Incentive
Stock Option Plan, 500,000 shares available for issuance under our 2003
Director Stock Option Plan, and 862,559 shares available for issuance under
our ESPP. On January 31, 2004, 216,537 shares were issued under our ESPP,
leaving 646,022 shares available for issuance.
(2) Does not include 959,512 shares added to our 1986 Incentive Stock Option on
January 5, 2004, under the annual replenishment provisions of the Plan.
(3) Consists of options granted and available for issuance under our 1995
Employee and Consultant Stock Plan.
(4) Includes information for options assumed in connection with mergers and
acquisitions. As of January 5, 2004, a total of 88,437 shares of Common
Stock with a weighted-average exercise price of $19.60 were issuable upon
exercise of such outstanding options.
Summary of 1995 Employee and Consultant Stock Plan
The 1995 Employee and Consultant Stock Plan (1995 Plan) was adopted by our
Board of Directors on March 6, 1995. The purposes of the 1995 Plan are to
attract and retain the best available personnel for employee and consultant
positions, to provide additional incentive to such persons, and to thereby
promote the success of our business. Options granted under the 1995 Plan are
nonstatutory stock options. The 1995 Plan is not a qualified deferred
compensation plan under Section 401(a) of the Code nor is it subject to ERISA.
o Administration; Eligibility; Terms of Options; Exercise of Options
The 1995 Plan is administered by the Compensation Committee of the Board
(Administrator). Options under the 1995 Plan may be granted as the Administrator
determines, in its discretion, only to employees or consultants who are not
directors or officers. Each option granted under the 1995 Plan is subject to a
written stock option agreement. The agreement sets forth the terms and
conditions of such grants, including the schedule under which the option becomes
exercisable and the exercise price of the option. An option is exercised when
the optionee gives written notice specifying the number of full shares of Common
Stock to be purchased and tenders payment of the purchase price. Funds received
by us upon exercise of an option are used for general corporate purposes.
o Termination of Status as Employee or Consultant
If the optionee's status as an employee or consultant terminates for any
reason (other than as a result of death), the optionee may, within the period of
time set forth in the stock option agreement, exercise any option granted under
the 1995 Plan, but only to the extent such option was exercisable on the date of
such termination. To the extent that the option is not exercised within such
period, the option terminates. If the optionee's status as an employee or
consultant terminates as a result of death, the optionee's legal representative
may exercise the entire option at any time within 12 months following the date
of death. To the extent that the option is not exercised within such 12-month
period, the option terminates. An option is not transferable by the optionee,
other than by will or the laws of descent and distribution, and is exercisable
during the optionee's lifetime only by the optionee.
o Adjustments; Dissolution; Mergers and Asset Sales
In the event any change, such as a stock split or dividend, is made in our
capitalization that results in an increase or decrease in the number of
outstanding shares of our Common Stock without receipt of consideration, an
appropriate adjustment will be made in the number of shares under the 1995 Plan
and the price per share covered by each outstanding option. In the event of a
dissolution or liquidation, all outstanding options will terminate immediately
prior to the consummation of such action. In the event of a merger with or into
another corporation or a sale of all or substantially all of our assets, each
outstanding option will be assumed or an equivalent option substituted by the
successor corporation. If the successor corporation refuses to assume such
options or to substitute equivalent options, each outstanding option will become
fully vested and exercisable.
o Amendment and Termination
The Board may amend or terminate the 1995 Plan at any time, but any such
action will not adversely affect any stock option then outstanding under the
1995 Plan without the consent of the holder of the option. The 1995 Plan will
terminate on July 19, 2012, unless earlier terminated as described above.
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information regarding the beneficial
ownership of our Common Stock by each person who we believe owned beneficially
more than 5% of our outstanding shares as of December 31, 2003:
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Name and Address of Beneficial Owner Ownership Class (1)
- ----------------------------------------------------------------------------------- ------------- ----------
<S> <C> <C> <C>
Franklin Resources, Inc............................................................ 1,411,250 (2) 5.6%
One Franklin Parkway
San Mateo, California 94403-1906
Mellon Financial Corporation....................................................... 1,271,538 (3) 5.0%
One Mellon Center
Pittsburgh, Pennsylvania 12528
Neuberger Berman, Inc.............................................................. 2,206,702 (4) 8.7%
605 Third Ave.
New York, NY, 10158-3698
</TABLE>
- ----------------------------------------
(1) Calculated as a percentage of shares of our Common Stock outstanding as of
December 31, 2003.
(2) As reported by the beneficial owner as of December 31, 2003, in a Schedule
13G filed with the Securities and Exchange Commission (SEC) on February 13,
2004. The reporting person, which is a parent holding company, has direct
and indirect investment advisor subsidiaries that advise one or more open
or closed-end investment companies or other managed accounts. Franklin
Advisers, Inc., an indirect wholly owned investment advisory subsidiary of
the reporting person, has sole voting and dispositive powers with respect
to 889,400 shares of Common Stock. Fiduciary Trust Company International,
an investment advisory subsidiary of the reporting person, has sole voting
and dispositive powers with respect to 521,850 shares of Common Stock. The
two affiliates of the reporting person reported the securities over which
they hold investment and voting power separately from each other because
such powers are exercised independently from each other, the reporting
person, and all other investment advisor subsidiaries of the reporting
person.
(3) As reported by the beneficial owner in a Schedule 13G filed with the
Securities and Exchange Commission (SEC) on February 4, 2004. The reporting
person, which is a parent holding company, has sole voting power with
respect to 1,026,848 shares of Common Stock, shared voting and dispositive
power with respect to 233,240 shares of Common Stock, and sole dispositive
power with respect to 1,010,668 shares of Common Stock. The reporting
person and direct or indirect subsidiaries beneficially own all of the
shares in their various fiduciary capacities. As a result, another entity
in every instance is entitled to dividends or proceeds of sale. The
reporting person, on behalf of itself and its direct and indirect
subsidiaries (including Mellon Bank, N.A., which is a bank as defined in
Section 3(a)(6) of the Securities Exchange Act of 1934 (Exchange Act)),
disclaims that the filing of the Schedule 13G is an admission of beneficial
ownership of any such shares for the purposes of Section 13(d) or 13(g) of
the Exchange Act.
(4) As reported by the beneficial owner as of December 31, 2003, in a Schedule
13G (Amendment No. 3) filed with the SEC on February 13, 2004. The
reporting person has sole voting power with respect to 124,803 shares of
Common Stock, shared voting power with respect to 1,636,400 shares of
Common Stock, and shared dispositive power with respect to 2,206,722 shares
of Common Stock. The reporting person, which is an investment company and a
parent holding company, owns 100% of Neuberger Berman, LLC and Neuberger
Berman Management Inc. Neuberger Berman, LLC is an investment advisor and
broker/dealer with discretion. Neuberger Berman Management Inc. is an
investment advisor to a Series of Public Mutual Funds. Neuberger Berman
Genesis Fund Portfolio, a series of Equity Managers Trust, beneficially
owns 1,591,200 shares of Common Stock. Neuberger Berman, LLC serves as
sub-adviser and Neuberger Berman Management Inc. serves as investment
manager of Neuberger Berman Genesis Fund Portfolio, which holds such shares
in the ordinary course of its business and not with the purpose of changing
or influencing the control of the issuer. The balance of the shares with
respect to which the reporting person has shared voting power is held by
Neuberger Berman's various other Funds. Neuberger Berman, LLC is the
sub-advisor to such Funds. Neuberger Berman, LLC also has the sole power to
vote the shares of many unrelated clients. The clients are the actual
owners of those shares and have the sole right to receive and the power to
direct the receipt of dividends from or proceeds from the sale of such
shares. The balance of the shares with respect to which the reporting
person has shared dispositive power is for individual client accounts.
Security Ownership of Management
The following table sets forth certain information regarding the beneficial
ownership of our Common Stock as of March 1, 2004, by (i) each director, (ii)
each officer named in the Summary Compensation Table, and (iii) all directors
and officers as a group:
<TABLE>
<CAPTION>
Shares Percentage
Beneficially Beneficially
Name Owned (1) Owned (2)
- -------------------------------------------------------------------------------- -------------- ------------
<S> <C> <C>
John C. East (3)................................................................ 312,832 1.2%
James R. Fiebiger (3)........................................................... 11,250 *
Esmat Z. Hamdy (3).............................................................. 128,261 *
Paul V. Indaco (3).............................................................. 227,296 *
Jacob S. Jacobsson (3).......................................................... 20,000 *
Dennis G. Kish (3).............................................................. 153,748 *
Fares N. Mubarak (3)............................................................ 151,582 *
Henry L. Perret................................................................. 24,238 *
Robert G. Spencer (3)........................................................... 35,166 *
All Directors and Executive Officers as a Group (13 persons) (3)................ 1,397,235 5.4%
</TABLE>
- ----------------------------------------
* Less than one percent.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
of Common Stock beneficially owned.
(2) Calculated as a percentage of shares of Common Stock outstanding as of
March 1, 2004.
(3) Includes for each indicated director and officer shares issuable pursuant
to stock options that are exercisable within 60 days after the Record Date:
for Mr. East, 235,428 shares; for Mr. Fiebiger, 11,250 shares; for Mr.
Hamdy, 87,123 shares; for Mr. Indaco, 223,186 shares; for Mr. Jacobsson,
20,000 shares; for Mr. Kish, 153,748 shares; for Mr. Mubarak, 149,796
shares; for Mr. Spencer, 32,500 shares; and for all directors and officers
as a group, 1,229,249 shares.
Changes in Control
We know of no arrangements that may result in a change in control of Actel.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed for professional services rendered by our
auditors, Ernst & Young LLP, for the most two recent fiscal years consisted of
the following:
<TABLE>
<CAPTION>
2003 2002
---------------- ----------------
<S> <C> <C>
Audit Fees...................................................................... $ 380,562 $ 355,680
Audit Related Fees.............................................................. 41,210 46,800
Tax Fees (1).................................................................... 346,944 (2) 315,378 (3)
All Other Fees.................................................................. 0 0
</TABLE>
- ----------------------------------------
(1) Consists of tax-related services performed in connection with the
preparation of state and federal tax returns, as well as other tax
consulting matters, including an analysis regarding the realizability of
net operating losses we acquired in our purchase of GateField Corporation.
The completion of the net operating loss analysis resulted in a
reclassification from goodwill to net deferred tax assets. See Note 2 of
Notes to Consolidated Financial Statements for more information.
(2) Includes $90,000 in fees for services performed in connection with the
preparation of state and federal tax returns.
(3) Includes $94,508 in fees for services performed in connection with the
preparation of state and federal tax returns.
Audit Committee's Pre-Approval Policies and Procedures
Our Audit Committee pre-approves all audit and permissible non-audit
services provided by our independent auditors. These services may include audit
services, audit-related services, tax services, and other services. Pre-approval
is generally provided for up to one year and any pre-approval is detailed as to
the particular service or category of services and is generally subject to a
specific budget. The independent auditors and management are required to
periodically report to the Audit Committee regarding the extent of services
provided by the independent auditors in accordance with this pre-approval. The
Audit Committee may also pre-approve particular services on a case-by-case
basis. In addition, the Audit Committee has delegated to its Chairman the
authority to pre-approve audit and permissible non-audit services, provided that
any such pre-approval decision is presented to the full Audit Committee at its
next scheduled meeting. All audit, audit-related, and tax services for our 2002
fiscal year rendered by Ernst & Young following the enactment of the
Sarbanes-Oxley Act of 2002 and all audit, audit-related, and tax services
rendered by Ernst & Young for our 2003 fiscal year were pre-approved by the
Audit Committee.
PART IV
ITEM 15. 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 our 2002 Annual Report are
incorporated by reference in Item 8 of this Annual Report on Form 10-K:
Consolidated balance sheets at December 31, 2003 and 2002
Consolidated statements of operations for each of the three years in
the period ended December 31, 2003
Consolidated statements of shareholders' equity and other
comprehensive income/(loss) for each of the three years in the period
ended December 31, 2003
Consolidated statements of cash flows for each of the three years in
the period ended December 31, 2003
Notes to consolidated financial statements
(2) Financial Statement Schedule. The financial statement schedule
listed under 15(d) hereof is filed with this Annual Report on Form 10-K.
(3) Exhibits. The exhibits listed under Item 15(c) hereof are filed
with, or incorporated by reference into, this Annual Report on Form 10-K.
(b) Reports on Form 8-K.
On October 22, 2003, we announced our financial results for the quarter
ended October 5, 2003. The full text of the press release issued in connection
with the announcement was attached as Exhibit 99.1 to our Current Report on Form
8-K (Item 9 pursuant to Item 12) furnished to the SEC on October 22, 2003.
On October 17, 2003, we entered into a Preferred Stock Rights Agreement
(Rights Agreement) with Wells Fargo Bank, MN N.A., as Rights Agent, and
announced that our Board of Directors had adopted a Shareholder Rights Plan.
Under the Shareholder Rights Plan, our Board of Directors declared a dividend of
one right (Right) to purchase one one-thousandth (0.001) of one share of our
Series A Participating Preferred Stock (Series A Preferred) for each outstanding
share of our Common Stock. The dividend is payable on November 10, 2003 (Record
Date) to shareholders of record as of the close of business on that date. Each
Right entitles the registered holder to purchase from Actel one one-thousandth
(0.001) of a share of Series A Preferred at an exercise price of $220.00,
subject to adjustment. The full text of the press release issued in connection
with the announcement was attached as Exhibit 99.1 and the full text of the
Rights Plan was attached as Exhibit 4.1 to our Current Report on Form 8-K (Items
5 and 7) filed with the SEC on October 24, 2004.
(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, as amended (filed as
Exhibit 3.1 to the Registrant's Annual Report on Form 10-K
(File No. 0-21970) for the fiscal year ended January 5,
2003).
3.2 Restated Bylaws (filed as Exhibit 3.1 to the Registrant's
Annual Report on Form 10-K (File No. 0-21970) for the fiscal
year ended January 5, 2003).
3.3 Certificate of Amendment to Certificate of Determination of
Rights, Preferences and Privileges of Series A Participating
Preferred Stock of Actel Corporation (filed as Exhibit 3.3
to the Registrant's Registration Statement on Form 8-A (File
No. 000-2197), filed on October 24, 2003).
4.1 Preferred Stock Rights Agreement, dated as of October 17,
2003, between the Registrant and Wells Fargo Bank, MN N.A.,
including the Certificate of Amendment of Certificate to
Determination, the form of Rights Certificate and the
Summary of Rights attached thereto as Exhibits A, B, and C,
respectively (filed as Exhibit 4.1 to the Registrant's
Registration Statement on Form 8-A (File No. 000-2197),
filed on October 24, 2003).
10.1 (1) 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 (1) 1986 Incentive Stock Option Plan, as amended and restated
(filed as Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-21970) for the fiscal quarter ended
July 7, 2002).
10.3 (1) 2003 Director Stock Option Plan (filed as Exhibit 4.4 to the
Registrant's Registration Statement on Form S-8 (File No.
333-112215), declared effective on January 26, 2004).
10.4 (1) Amended and Restated 1993 Employee Stock Purchase Plan
(filed as Exhibit 10.4 to the Registrant's Annual Report on
Form 10-K (File No. 0-21970) for the fiscal year ended
January 5, 2003).
10.5 1995 Employee and Consultant Stock Plan, as amended and
restated (filed as Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q (File No. 0-21970) for the
fiscal quarter ended July 7, 2002).
10.6 (1) Employee Retention Plan, as amended and restated (filed as
Exhibit 10.6 to the Registrant's Annual Report on Form 10-K
(File No. 0-21970) for the fiscal year ended January 6,
2002).
10.7 (1) Deferred Compensation Plan, as amended and restated (filed
as Exhibit 10.7 to the Registrant's Annual Report on Form
10-K (File No. 0-21970) for the fiscal year ended December
31, 2000).
10.8 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).
10.9 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).
10.10 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).
10.11 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
fiscal quarter ended October 2, 1994).
10.12 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 fiscal quarter ended July 2, 1995).
10.13 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).
10.14 Patent Cross License Agreement dated August 25, 1998,
between Actel Corporation and QuickLogic Corporation. (filed
as Exhibit 10.19 to the Registrant's Annual Report on Form
10-K (File No. 0-21970) for the fiscal year ended January 3,
1999).
10.15 Development Agreement by and between Actel Corporation and
Infineon Technologies AG effective as of June 6, 2002 (filed
as Exhibit 10.19 to the Registrant's Annual Report on Form
10-K (File No. 0-21970) for the fiscal year ended January 5,
2003).
10.16 Supply Agreement by and between Actel Corporation and
Infineon Technologies AG effective as of June 6, 2002 (filed
as Exhibit 10.20 to the Registrant's Annual Report on Form
10-K (File No. 0-21970) for the fiscal year ended January 5,
2003).
10.17 Office Lease Agreement for the Registrant's facilities in
Mountain View, California, dated February 27, 2003 (filed as
Exhibit 10.21 to the Registrant's Annual Report on Form 10-K
(File No. 0-21970) for the fiscal year ended January 5,
2003).
14 Code of Ethics for Principal Executive and Senior Financial
Officers.
21 Subsidiaries of Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Power of Attorney.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------------------
(1) 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:
<TABLE>
<CAPTION>
Schedule Description Page
------------ ---------------------------------------------------- ---------
<S> <C>
II Valuation and qualifying accounts 111
</TABLE>
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.
<PAGE>
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
Date: March 17, 2004 By: /s/ John C. East
-------------------------------------
John C. East
President and Chief Executive Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
------------------------------------------------- --------------
<S> <C> <C>
/s/ John C. East President and Chief Executive Officer (Principal
- ----------------------------------------- Executive Officer) and Director March 17, 2004
(John C. East)
/s/ Jon A. Anderson Vice President of Finance and Chief Financial
- ----------------------------------------- Officer (Principal Financial and Accounting
(Jon A. Anderson) Officer) March 17, 2004
/s/ James R. Fiebiger
- -----------------------------------------
(James R. Fiebiger) Director March 17, 2004
/s/ Henry L. Perret
- -----------------------------------------
(Henry L. Perret) Director March 17, 2004
/s/ Jacob S. Jacobsson
- -----------------------------------------
(Jacob S. Jacobsson) Director March 17, 2004
/s/ Robert G. Spencer
- -----------------------------------------
(Robert G. Spencer) Director March 17, 2004
</TABLE>
<PAGE>
SCHEDULE II
ACTEL CORPORATION
--------------------------------------
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Balance at
beginning end of
of period Provisions Write-Offs period
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 2001........................... $ 1,070 $ 572 $ 314 $ 1,328
Year ended December 31, 2002........................... 1,328 86 336 1,078
Year ended December 31, 2003........................... 1,078 355 355 1,078
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-14
<SEQUENCE>3
<FILENAME>exhibit14.txt
<DESCRIPTION>CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS
<TEXT>
Exhibit 14
ACTEL CORPORATION
CODE OF ETHICS FOR
PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS
I. INTRODUCTION AND PURPOSE
This Code of Ethics for Principal Executive and Senior Financial Officers
(Code) helps maintain the Company's standards of business conduct and ensures
compliance with legal requirements, specifically Section 406 of the
Sarbanes-Oxley Act of 2002 and SEC rules promulgated thereunder.
The purpose of the Code is to deter wrongdoing and promote ethical conduct.
The matters covered in this Code are of the utmost importance to the Company,
our shareholders, and our business partners, and are essential to our ability to
conduct our business in accordance with our stated values.
Nothing in this Code, in any company policies and procedures, or in other
related communications (verbal or written) creates or implies an employment
contract or term of employment.
II. APPLICATION
The Code is applicable to the following persons, referred to as the
Officers:
o Our principal executive officer,
o Our principal financial officer,
o Our principal accounting officer or controller, and
o Persons performing similar functions and responsibilities, who
shall be identified by the Audit Committee from time to time for
the purpose of ensuring that this Code is applicable to all
appropriate personnel.
III. CODE OF ETHICS
It is the policy of the Company that each Officer:
o Act honestly and ethically.
o Avoid and ethically address actual or apparent conflicts of
interest between personal and professional relationships,
including disclosure of any transaction or relationship that
reasonably could be expected to give rise to a conflict of
interest to the Company's Audit Committee.
o Provide full, fair, accurate, timely, and understandable
disclosure in the Company's public communications, including
reports and documents that the Company files with, or submits to,
the SEC.
o Comply with applicable governmental laws, rules, and regulations.
o Report promptly any conduct that the Officer believes to be a
violation of the Code to the Company's Audit Committee. It is
against the Company's policy to retaliate in any way against an
Officer for good faith reporting of violations of this Code.
IV. ACCOUNTABILITY
Actual violations of this Code, including failures to report potential
violations by others, can lead to disciplinary action at the Company's
discretion, up to and including termination.
V. WAIVER AND AMENDMENT
We are committed to continuously reviewing and updating our policies and
procedures. Therefore, this Code is subject to modification. Any amendment or
waiver of any provision of this Code must be approved in writing by the
Company's Board of Directors and promptly disclosed pursuant to applicable laws
and regulations.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>exhibit21.txt
<DESCRIPTION>SUBSIDIARIES
<TEXT>
ACTEL CORPORATION
--------------------------------------
Subsidiaries
Actel Europe, Ltd., a U.K. corporation
Actel Engineering Eurl, a French corporation
Actel Europe SARL, a French corporation
Actel GmbH, a German corporation
Actel Italia SRL, an Italian corporation
Actel Pan-Asia Corporation, a Nevada corporation
Actel Pan-Asia, Hong Kong Ltd., a Hong Kong corporation
Actel Japan, KK, a Japanese corporation
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>exhibit23.txt
<DESCRIPTION>CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
<TEXT>
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, 2004, included in the 2003
Annual Report to Shareholders of Actel Corporation.
Our audits also included the financial statement schedule of Actel Corporation
listed in Item 14(a) of this Annual Report (Form 10-K). 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
taken 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 Nos. 333-112215, 33-74492, 333-3398, 333-71627, 333-36222, 333-43274,
333-54652, and 333-81926) of our report dated January 21, 2004, 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, 2003,
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
San Jose, California
March 16, 2004
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-24
<SEQUENCE>6
<FILENAME>exhibit24.txt
<DESCRIPTION>POWER OF ATTORNEY
<TEXT>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints John C. East, Jon A. Anderson, 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.
<TABLE>
<CAPTION>
Signature Title Date
------------------------------------------------- --------------
<S> <C> <C>
/s/ John C. East President and Chief Executive Officer (Principal
- ----------------------------------------- Executive Officer) and Director March 17, 2004
(John C. East)
/s/ Jon A. Anderson Vice President of Finance and Chief Financial
- ----------------------------------------- Officer (Principal Financial and Accounting
(Jon A. Anderson) Officer) March 17, 2004
/s/ James R. Fiebiger
- -----------------------------------------
(James R. Fiebiger) Director March 17, 2004
/s/ Henry L. Perret
- -----------------------------------------
(Henry L. Perret) Director March 17, 2004
/s/ Jacob S. Jacobsson
- -----------------------------------------
(Jacob S. Jacobsson) Director March 17, 2004
/s/ Robert G. Spencer
- -----------------------------------------
(Robert G. Spencer) Director March 17, 2004
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>7
<FILENAME>exhibit311.txt
<DESCRIPTION>CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)
<TEXT>
Exhibit 31.1
CERTIFICATION
I, John C. East, certify that:
1. I have reviewed this annual report on Form 10-K of Actel Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 17, 2004 /s/ John C. East
-------------------------------------------
John C. East
President and Chief Executive Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>8
<FILENAME>exhibit312.txt
<DESCRIPTION>CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A)
<TEXT>
Exhibit 31.2
CERTIFICATION
I, Jon A. Anderson, certify that:
1. I have reviewed this annual report on Form 10-Q of Actel Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 17, 2004 /s/ Jon A. Anderson
-------------------------------------------
Jon A. Anderson
Vice President of Finance
and Chief Financial Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>9
<FILENAME>exhibit32.txt
<DESCRIPTION>CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
<TEXT>
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, John C. East, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Actel Corporation on Form 10-K for the fiscal year ended January 4,
2004, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Annual
Report on Form 10-K fairly presents in all material respects the financial
condition and results of operations of Actel Corporation.
By: /s/ John C. East
-------------------------------
John C. East
Chief Executive Officer
Actel Corporation
I, Jon A. Anderson, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Actel Corporation on Form 10-K for the fiscal year ended January 4,
2004, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Annual
Report on Form 10-K fairly presents in all material respects the financial
condition and results of operations of Actel Corporation.
By: /s/ Jon A. Anderson
-------------------------------
Jon A. Anderson
Chief Financial Officer
Actel Corporation
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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