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Actel 10-K 2008 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number 0-21970
ACTEL CORPORATION
(650) 318-4200
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
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Note — Checking the box above will not relieve any
registrant required to file reports pursuant to Section 13
or 15(d) of the Exchange Act from their obligations under those
Sections.
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 þ No o
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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to
the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently
completed fourth fiscal quarter: $337,300,407
Note. — If a determination as to whether a
particular person or entity is an affiliate cannot be made
without involving unreasonable effort and expense, the aggregate
market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the
circumstances, provided that the assumptions are set forth in
this Form.
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock, as of the latest
practicable date: 25,639,147 shares of Common Stock
outstanding as of March 17, 2008.
In this Annual Report on
Form 10-K,
Actel Corporation and its consolidated subsidiaries are referred
to as “we,” “us,” “our,” “The
Company” or “Actel.” You should read the
information in this Annual Report with the Risk Factors in
Item 1A. Unless otherwise indicated, the information in
this Annual Report is given as of March 17, 2008, 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. Actual results could differ materially from those
projected in the forward-looking statements due to the risks
identified in the Risk Factors or for other reasons.
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Actel Corporation is the leading supplier of low-power
field-programmable gate arrays (“FPGAs”) and
programmable system chips (“PSCs”). Attacking power
consumption from both the chip and the system levels, the
Company’s innovative programmable logic solutions enable
power-efficient design. In support of our nonvolatile Flash- and
antifuse-based FPGAs, we offer design and development software
and tools to optimize power consumption; power-smart
intellectual property (“IP”) cores, including
industry-standard processor technologies; small footprint
packaging; programming hardware and starter kits; and a variety
of design services. We target a wide range of applications in
the aerospace, automotive, avionics, communications, consumer,
industrial, medical, and military markets that require low power
or other attributes of our nonvolatile Flash and antifuse-based
technologies that have an inherent competitive advantage.
The Company was founded and incorporated in California in 1985.
Actel’s Common Stock trades on the NASDAQ Global Market
under the symbol ACTL. Our corporate headquarters are located at
2061 Stierlin Court, Mountain View, Calif., 94043, and our
Website address is www.actel.com. We provide access free
of charge through a link on our Web site 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, Actel Fusion, Axcelerator,
FlashLock, FuseLock, Libero, ProASIC, and ProASIC Plus names and
logos are registered trademarks of Actel. This Annual Report
also includes unregistered trademarks of Actel as well as
registered and unregistered trademarks of other companies.
Three principal types of integrated circuits (“ICs”)
are used in nearly every electronic system: processors, which
are used for control and computing tasks; memory devices, which
are used to store program instructions and data; and logic
devices, which are used to adapt these processing and storage
capabilities to a specific application. The logic market is
highly fragmented and includes application-specific integrated
circuits (“ASICs”) and programmable logic devices
(“PLDs”). FPGAs are one type of PLD. Price,
performance, reliability, power consumption, security, density,
features, ease of use, and time to market determine the degree
to which logic devices compete for specific applications. Unlike
ASICs, which are customized for use in a specific application at
the time of manufacture, FPGAs and complex PLDs
(“CPLDs”) are manufactured as standard components and
customized “in the field,” allowing the same device
type to be used for many different applications. Using software
tools, users program their design into a PLD, resulting in lower
development costs and inventory risks, shorter design cycles,
and faster time to market.
Designers of portable, battery-powered equipment face consumer
demand for smaller, cheaper, feature-rich portable devices with
longer battery lives. The longer the battery life, the lower the
cost of ownership for consumers. Traditionally, ASICs and CPLDs
have addressed the low-power needs of portable consumer
applications. However, with long design cycles and little
flexibility to address changing standards and late-stage design
modifications, ASICs are riskier and often impractical for
portable applications with short product-life cycles. Moreover,
CPLDs are becoming less attractive in some low-power
applications due mainly to increasing demand for high-end
features. As a result, FPGAs are becoming the preferred solution
as competition intensifies and time to market has an increasing
impact on the success of portable, battery-powered products. Of
course, these FPGAs must meet the other design requirements,
including cost, performance, size, security, and (most
importantly) power.
FPGAs based on static access random memory (“SRAM”)
technology have inherently high static power consumption. Even
“low-power” SRAM-based FPGAs draw on the order of ten
times more power than specified for typical battery-operated
applications. SRAM-based FPGAs also experience power surges at
start-up that drain batteries and can cause
system-initialization failures. Compounding the problem, each
process node “shrink” increases the static power
consumption of transistor-heavy SRAM-based FPGAs. The power
problem becomes further complicated with respect to SRAM-based
solutions that utilize Flash technology to program the
device’s SRAM architecture. Though marketed as Flash-based
devices, these solutions add Flash circuitry to the power-
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draining SRAM FPGA fabric, so they have inherently high static
power consumption like a standard SRAM-based FPGA.
Looking at the power usage from a system perspective, once a
system’s power specifications are met, additional effort is
seldom expended to improve the design. Because electronic
systems are sold by the hundreds of millions, a few watts of
inefficiency in each system translates into a huge waste of
power and, ultimately, adverse environmental effects. In
addition, there is usually no easy way to track power usage to
the individual components or voltage rails, making it difficult
to eliminate unnecessary power consumption from systems. There
is also rarely a way to measure voltages, currents, and
temperatures when the system is in operation, which further
complicates the task of recognizing and eliminating
inefficiencies in power usage.
The proliferation of new management standards, such as Advanced
Telecommunications Computer Architecture (“ATCA”),
Micro Telecom Computing Architecture (“MicroTCA”), and
Intelligent Platform Management Interface (“IPMI”),
confirms the need for system and enterprise-level power
management. Systems employing these standards require the
capability to measure voltages, currents, and temperature in
real time and recognize problems; to log and communicate this
data; and to take corrective action when appropriate. System
management historically required multi-chip solutions. However,
with as many as 15 extra chips, these solutions are expensive,
occupy valuable board space, and themselves consume power.
Multi-chip solutions also require substantial engineering
resources, which are often scarce.
FGPAs based on Flash technology have significantly lower static
power than SRAM-based solutions, making a Flash-based,
single-chip FPGA the preferred approach for creating a simple
and inexpensive system management solution. Already available
“off the shelf,” these nonvolatile,
live-at-power-up
solutions enable system power management and reduce component
count. Because they are field-programmable, these flexible
devices are also adaptable to the unique needs and changing
demands of portable applications with high-end features and
short product-life cycles, reducing development time and cost as
well as engineering resource requirements. By integrating
necessary housekeeping functions, such as
boot-up and
power-supply sequencing, with power-management functionality,
total system costs are also reduced. As complete Flash-based
solutions, these devices are augmented by software that enables
power-conscious design, including power-driven
“layout” and advanced power-analysis capabilities,
permitting users to minimize the power consumption of their
systems. Since each watt that is conserved reduces system
operating costs, the deployment of cost-effective power
management solutions at the enterprise level saves huge amounts
of money as well as energy and generates significant
environmental benefits.
To a great extent, the characteristics of an FPGA are dictated
by the technology used to make the device programmable. Devices
based on nonvolatile Flash or antifuse programming elements
offer significant power, single-chip,
live-at-power-up,
security, our and neutron-immunity advantages over volatile
FPGAs based on SRAM technology. Our strategy is to offer our
FPGAs to markets in which our nonvolatile Flash- and
antifuse-based technologies have an inherent competitive
advantage.
Because they don’t use power-draining SRAM configuration
bit cells, nonvolatile Flash-based FPGAs have significantly
lower static power than SRAM-based solutions, making them
optimal for low-power applications. In addition, some of our
Flash-based FPGAs have been designed specifically for low-power
applications. These FPGAs deliver greater complexity and
features, use 200 times less static power, and enable ten times
longer battery life in portable applications than competitive
“low power” PLD offerings.
Unlike volatile SRAM-based FPGAs, our nonvolatile FPGAs do not
require additional system components, such as configuration
serial nonvolatile memory or a Flash-based microcontroller, to
configure the device at every
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system
power-up. By
eliminating the support devices required by volatile SRAM-based
FPGAs, our nonvolatile single-chip FPGAs reduce the direct costs
of the bill of materials. In addition, our nonvolatile Flash-
and antifuse-based FPGAs lower associated total system costs by
reducing design complexity, increasing reliability, and
simplifying materials management.
Our nonvolatile devices are live at
power-up
(“LAPU”): as soon as system power is applied to the
board and normal operating specifications are achieved, our
devices are working. The LAPU feature greatly simplifies total
system design and often permits the removal of expensive
power-sequencing, voltage-monitor, and brownout-detection
devices from the board. Simplifying the system design reduces
total system cost and design risk while increasing system
reliability and improving system initialization time.
Once programmed, our nonvolatile single-chip devices retain
configuration indefinitely without requiring an external
configuration device. With no bitstream susceptible to
interception, our nonvolatile solutions eliminate the potential
for in-system errors or data erasures that might occur during
download. For our Flash-based devices, we offer the Actel
FlashLock feature, which provides a unique combination of
reprogrammability and design security without external overhead.
Our Flash-based devices with AES-based security permit secure,
remote field updates of both system design and Flash memory
content. For our antifuse-based FPGAs, we offer the Actel
FuseLock feature, which ensures that unauthorized users will not
be able to read back the contents of our FPGA.
Our Flash- and antifuse-based devices are not subject to
configuration upsets caused by high-energy neutrons naturally
present in the earth’s atmosphere. SRAM-based FPGAs, on the
other hand, are vulnerable to neutron-induced configuration loss
not only under high-altitude conditions, as traditionally
believed, but also in ground-based applications. The energy of
the collision can change the state of the SRAM FPGA’s
configuration cell and thereby cause an unpredictable change in
FPGA functionality. Impossible to prevent in SRAM FPGAs, these
errors can result in
failure-in-time
(“FIT”) rates in the thousands and complete system
failures.
The introduction of new products that address customer
requirements and compete effectively with respect to price,
features, and performance is key to our future success. Also
critical are the IP cores, development tools, technical support,
and design services that enable our customers to implement their
designs in our products.
We offer customers a range of low-power Flash-based solutions to
address design challenges in the aerospace, automotive,
avionics, communications, consumer, industrial, and medical
markets. With densities ranging from 15,000 to 3,000,000 system
gates, our reprogrammable product families exploit the inherent
benefits of our nonvolatile Flash technology: low power, single
chip, LAPU, security, and neutron immunity. Our Flash-based
solutions include the Actel IGLOO, ProASIC3/E, ProASIC Plus, and
ProASIC FPGA and Fusion PSC families as well as those families
optimized for an ARM Cortex-M1 or ARM 7 processor: the M1 IGLOO,
M1 ProASIC3/E, and M7 ProASIC3/E FPGA and M1 Fusion and M7
Fusion PSC families.
We also offer a broad portfolio of nonvolatile antifuse-based
FPGAs designed to meet the performance, power, security, and
reliability requirements of the aerospace, automotive, avionics,
communications, consumer, industrial, medical, and military
markets. Ranging in density from 3,000 to 4,000,000 system
gates, our single-chip solutions include FPGAs qualified to
automotive, commercial, industrial, and military specifications
as well as radiation-tolerant and radiation-hardened devices.
Spanning six process geometries, our antifuse-based solutions
include the RTAX-S, RTAX-SL, Axcelerator, eX, SX, SX-A, MX, and
the legacy DX, XL, ACT 3, ACT 2, and ACT 1 families.
To meet the diverse requirements of our customers, we offer
almost all our products in a variety of speed grades, package
types,
and/or
ambient (environmental) temperature tolerances. We also offer
“green,” lead-free,
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and RoHS-compliant packages, which provide the necessary
mechanical and environmental protection while ensuring
consistent reliability and performance.
The families discussed below are currently being designed by
customers into their next-generation applications. Although our
more mature product families have been excluded from this
discussion, they continue to generate significant revenues.
Designers of portable and handheld applications are taking note
of our IGLOO family due to its unprecedented low power. Since
its introduction in August 2006, the innovative IGLOO FPGA
family has won numerous prestigious industry product awards,
including the 2007 EDN China Innovation, the 2007 EE
Times ACE, the 2007 Portable Design China
“Low-power Product of the Year,” and the 2006
EDN “Hot 100 Products” Awards.
Offering 200 times less static power and more than ten times the
battery life of competitive “low power” FPGA
offerings, our IGLOO family has set a new standard for low power
consumption. The family offers quick and easy power control with
flexible implementation options, including the Flash*Freeze,
low-power active, and sleep modes, and is the only truly
low-power FPGA solution to support 1.2V core operation. We
provide designers with comprehensive solutions for IGLOO,
including storage, display, and control-related development
boards, reference designs, and IP cores, to enable rapid design
of their portable and power-sensitive applications. Sample Actel
IGLOO FPGA applications:
The Actel Fusion PSC has attracted interest from a broad
spectrum of customers for use in a wide range of applications.
Fusion has also won multiple prestigious product awards,
including the 2005 EDN Innovation, the 2006 IEC
DesignVision, the 2005 EDN “Hot 100 Products,”
the 2006 EDN China Leading Product, and the 2006 Electron
D’Or Awards. In addition, our Fusion design team was a
finalist in the 2005 EE Times ACE Awards Design Team of
the Year category.
The Actel Fusion PSC’s system management functionality,
which includes power and thermal management, data logging, and
system diagnostics, gives us the opportunity to win numerous
designs in high-volume applications. The Actel Fusion PSC can
integrate system and power management functions and provide
programmable
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flexibility in a single chip, resulting in potential cost,
power, and space savings of 50% or more relative to current
implementations. To provide templates for the customization of
system management functions and to speed development time, we
also offer the System Management Development Kit, a complete
prototyping and development kit. In addition, we have introduced
several free Fusion-based reference designs addressing the
MicroTCA standard, which is related to system management. Sample
Actel Fusion PSC applications:
Our successful ProASIC3/E FPGAs are commercially qualified and
shipping into high-volume applications to customers worldwide in
the automotive, communications, consumer, industrial, and
medical markets. Optimized for cost, our reprogrammable ProASIC3
family also delivers high performance to power-conscious
applications. ProASIC3E devices support free implementation of
the ARM Cortex-M1 soft processor IP core, offering the benefits
of programmability and time to market at an ASIC-like unit cost.
Sample ProASIC3/E applications:
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Designers utilizing our RTAX-S FPGAs value their radiation
tolerance, high reliability, firm-error immunity, and
programmability. Our RTAX-S FGPAs are not subject to the high
up-front tooling charges and long lead-times associated with
radiation-hardened ASICs, giving us development-cost and
time-to-market
advantages. In addition, our RTAX-S devices have triple module
redundancy “built in,” whereas competing high-density
FPGA solutions require triple module redundancy to be
instantiated by the user, which can consume more than two-thirds
of the FPGA’s available logic. No other FPGA delivers the
density, radiation tolerance, and reliability of our 4,000,000
system-gate RTAX4000S device, which significantly expanded the
number of space applications that can be supported by our RTAX-S
family. Sample RTAX-S applications:
In support of our low-power FPGAs and power-efficient PSC
products, we offer power-optimized design and development
software and tools, power-smart IP cores, programming hardware
and starter kits, and a variety of services that enable our
customers to implement their designs in our products.
The Actel Libero integrated design environment (“IDE”)
seamlessly integrates
best-in-class
design tools from Mentor Graphics, SynaptiCAD, and Synplicity
with Actel-developed custom tools into a single FPGA development
package. Emphasizing power-conscious design, the Actel Libero
IDE includes power-driven layout and advanced power-analysis
capabilities, allowing users to optimize their systems for low
power consumption. Usable with the Actel Libero IDE, our
CoreConsole IP Deployment Platform (“IDP”) enables
designers to quickly combine IP blocks. We also offer a
comprehensive development environment, boards, and reference
designs to enable customers to get system-level products to
market quickly and reduce cost and risk.
We offer more than 180 IP cores designed, optimized, and
verified to work with our FPGAs for use in automotive, consumer,
embedded, high-performance communications, military, and
networking applications. When implemented in our devices, these
cores allow designers to streamline their designs, which reduces
design costs and risks and time to market. For embedded systems
designers using our FPGAs, we offer a comprehensive portfolio of
optimized processor solutions, including a variety of
industry-standard ARM, 8051, and LEON IP cores. We also
offer the FPGA-optimized ARM Cortex-M1 processor free of license
and royalty fees for use in our ARM-enabled Actel IGLOO, Fusion,
and ProASIC3 families.
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We offer several programming options, including Silicon Sculptor
3 and the FlashPro series, for designers utilizing our
nonvolatile FPGAs. Our Silicon Sculptor 3 is a compact,
high-speed, single-device programmer for all Actel devices. Up
to 12 Silicon Sculptor 3 programmers can be connected to a
single PC using nested USB hubs. FlashPro 3 and FlashPro Lite
are compact and cost-effective programmers for our Flash-based
devices. With their in-system programming capability, these
programmers limit incompatibility problems and expensive
redesign costs and offer faster time to market. FlashPro 3
programmers support Fusion, IGLOO, and ProASIC3/E devices and
are powered from the USB port. FlashPro Lite programmers support
ProASIC Plus devices and are powered from the target board. We
also offer programming adapter modules, surface-mount sockets,
prototyping adapter boards and mechanical packages, and
accessories.
In addition to demonstrator and evaluation boards, we offer
starter kits for the following devices: IGLOO,
M1-IGLOO,
Fusion, M1-Fusion, ProASIC3/E, M1-ProASIC3, ProASIC Plus, and
Axcelerator. We also offer a battery-powered IGLOO-based Icicle
Kit to demonstrate extended battery life for portable designs.
Low-cost starter kits, which include design and programming
software and device programmers, are a quick and cost-effective
way to assess an FPGA technology.
To shorten design times for customers utilizing our nonvolatile
FPGAs, we offer a variety of services and support, including
design services, technical support, and training. Located in Mt.
Arlington, New Jersey, our Protocol Design Services Group offers
a variety of design services, including FPGA, ASIC, and system
design; software development and implementation; and development
of prototypes, first articles, and production units. The
Protocol Design Services team has participated in the
development of a wide range of proprietary designs, including
interfacing, processing, control, and monitoring applications
for the aerospace, automotive, communications, consumer,
industrial, medical, and military markets.
FPGAs are used in a broad range of applications across nearly
all electronic system market segments. Our products serve a wide
range of customers within the automotive, communications,
consumer, industrial, and military and aerospace markets. We are
targeting applications that require low power or other
attributes of our nonvolatile Flash and antifuse-based
technologies that have an inherent competitive advantage.
Until recently, automotive manufacturers have engaged in the
costly and complex design of ASICs because it was the only way
to get the low power, high reliability, and endurance needed for
automotive systems. During 2007, we announced that our low-power
ProASIC3 FPGA family had achieved AEC-Q100 (Grades 1 and
2) qualification by passing a series of stress tests
designed to ensure the quality, reliability, and endurance of
semiconductors in automotive applications. Our AEC-Q100, Grade 1
ProASIC3 devices are the first FPGAs to achieve this quality
level, enabling our FPGA technology to move beyond in-cabin
telematics and infotainment into system-critical applications
such as the powertrain, engine control modules, and safety
systems. Our ProASIC3 devices are-well suited to address the
changing and emerging standards within these system-critical
applications. In contrast to SRAM-based FPGAs, our ProASIC3
family consumes up to 100 times less power and is immune to firm
errors, which can result in system failure. During 2007, we also
announced that:
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Today’s system management implementations often require
numerous discrete components (sometimes numbering in the
hundreds) that occupy large amounts of board space and are
inflexible to change. In the communications market, increased
costs and risks are driving the rapid adoption of standards for
remotely managed systems, such as MicroTCA. Built on the ATCA
specification, MicroTCA is an emerging global standard that
offers adopters a powerful combination of lower cost, smaller
form factor, improved reliability and flexibility, and reduced
time to market for remotely managed systems. As a smaller,
lower-cost option for the marketplace, MicroTCA has the
potential to replace successful standards like CompactPCI and
VME as the platform of choice. In the communications space, VoIP
gateways, WiMax, wireless base stations, and media servers are
expected to be widespread adopters. Our Fusion-based MicroTCA
reference designs include hardware, software, and IP for a
complete solution to meet the cost, footprint, flexibility,
security, and reliability requirements facing system designers.
We believe these free, tested reference designs will help drive
MicroTCA adoption and provide templates for the customization of
system management functions. As an early semiconductor entrant,
we believe that we are well-positioned to capture a significant
share of this promising market. To support system management
applications like MicroTCA, we also offer a portfolio of IP
cores for processing, analog, and memory interface and
communications.
For designers of battery-operated portable and consumer
applications, the goal is to achieve the lowest power possible
and to accommodate long system idle times by allowing the system
to enter and exit low-power modes quickly. Other considerations
include design security, prototyping, footprint, design reuse,
and field upgradeability. We have a detailed strategy and
multi-phased plan to increase market penetration for our ultra
low-power IGLOO FPGAs in the rapidly-growing portable market.
More specifically, the increasing popularity of personal media
players, MP3 devices, PDAs, and digital cameras has created a
tremendous demand for storage, liquid crystal display
(“LCD”) control, and human interface control. As a
result, our IGLOO-based programs will initially focus on the
portable storage, LCD, and human interface markets, which we
believe will result in the rapid deployment of our ultra
low-power FPGA technology in portable applications.
Recent advances in electronic component performance and
integration at lower price points have spurred the proliferation
of electronic control units. Crossing many technologies and
applications, from automated industrial manufacturing lines to
instrumentation systems, the focus is on increasing power
efficiency while reducing total system cost. For many industrial
applications, the Actel Fusion PSC can offer unprecedented
integration in a single-chip, replacing a host of discrete
components at less than half the cost and board space while
maintaining system reliability. The emergence of the
mixed-signal Fusion PSC with Flash memory also means that
designers can integrate a soft processor core, run directly from
on-chip memory, and tightly couple control logic and processing
needs. During 2007, we introduced a new, low-cost Actel Fusion
PSC reference design that enables intelligent system and power
management implementations. Our ProASIC3 and IGLOO FPGA families
are also attractive to customers in the industrial market. These
solutions offer designers a reprogrammable nonvolatile device
that combines fast time-to-market with low power and costs.
With a focus on stringent quality and reliability requirements,
military and aerospace designers have long recognized the
inherent advantages of nonvolatile FPGA technologies for
applications that require high reliability, firm-error immunity,
low power consumption, small footprint (single chip), and design
security. Thousands of our radiation-tolerant and
radiation-hardened FPGAs have performed mission- or
flight-critical functions aboard manned space vehicles, earth
observation satellites, and deep space probes. Over the last
decade, Actel FPGAs have been onboard more than 100 launches and
flown on over 300 satellites and spacecraft, including GPS-2RM,
Mars Reconnaissance Orbiter, Mars Explorer Rovers 1 and 2
(Spirit and Opportunity), Echostar, and Globalstar. We believe
that we are the leading supplier of military and aerospace PLDs.
During 2007, we introduced the lowest power PLD solution, the
new RTAX-SL FPGA family, specifically targeted at
high-reliability space-flight designs;
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an extension to our prototyping portfolio for the RTAX-S
families; and a new production flow that implements all the
steps specified by QML Class V and provides a higher level
of testing for our space products. Also during 2007:
We maintain a worldwide, multi-tiered selling organization that
includes a direct sales force, independent sales
representatives, electronics distributors, and value-added
resellers. Our North American sales force consists of sales and
administrative personnel and field application engineers
(“FAEs”) operating from offices located in major
metropolitan areas. Direct sales personnel call on target
accounts and support direct original equipment manufacturers
(“OEMs”). In addition to overseeing the activities of
direct sales personnel, our sales managers also oversee the
activities of sales representative firms operating from various
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 distribution agreements with Avnet and Mouser
Electronics, Inc. (“Mouser”). We generate a
significant portion of our revenues from international sales.
Sales to European customers accounted for 29% of net revenues in
2007, while sales to Pan Asian and Rest of the World
(“ROW”) customers accounted for 21%. Our European and
Pan Asian/ROW sales organization consists of employees operating
from various sales offices and distributors and sales
representatives.
Sales made through distributors accounted for 77% of our net
revenues in 2007. 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. Because of our price protection and return
policies, we generally do not recognize revenue on products sold
to distributors until the products are resold.
Our sales cycle 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 Actel or one of our distributors or
sales representatives. The sales manager or FAE may then
determine that additional assistance is required from engineers
based at our headquarters.
Our backlog was $70.1 million at January 6, 2008
compared with $57.2 million at December 31, 2006. 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.
We believe that premier customer service and technical support
are essential for success in the FPGA market. Our customer
service organization emphasizes dependable, prompt, accurate
responses to questions about product
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delivery and order status. Many of our customers regularly
measure the most significant areas of customer service and
technical support. Our FAEs are strategically located around the
world to provide technical support to our worldwide customer
base. 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, training classes on our software, and
functional failure analysis services.
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.
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:
Wafers purchased from our suppliers are assembled, tested,
marked, and inspected by Actel
and/or our
subcontractors before shipment to customers. We assemble most of
our plastic commercial products in China, Hong Kong, the
Philippines, Singapore, and South Korea. Hermetic package
assembly, which is often required for military applications, is
performed at one or more subcontractor manufacturing facilities,
usually in the United States.
We invest resources in the continual improvement of our
products, processes, and systems. We strive to ensure that our
quality and reliability systems conform to standards that have
worldwide recognition for improving an organization’s
capabilities. We recently were fully recertified for ISO
9001:2000 after a comprehensive audit by NSF International, a
leader in quality management systems registrations. We are also
STACK, QML, and PURE certified. STACK International consists of
major electronic equipment manufacturers serving the worldwide
high-reliability and communications markets. Our QML
certification confirms that quality management procedures,
processes, and controls comply with MIL-PRF-38535, the
performance specification used by the U.S. Department of
Defense for monolithic ICs. QML certification demonstrates our
capability to produce quality products for all types of high
reliability, military, and space applications. PURE, an
abbreviation for “PEDs (plastic encapsulated devices) Used
in Rugged Environments,” is an association of European
equipment makers dedicated to quality and reliability. The PURE
certification is for plastic quad flat pack packages. The ISO,
STACK, QML, and PURE certifications demonstrate that our quality
systems conform with internationally-valued standards and
confirm our commitment to supply top-quality FPGAs to a diverse
customer base.
We enjoy ongoing strategic relationships with customers,
distributors, sales representatives, foundries, assembly houses,
and other suppliers of goods and services. Some highlights from
2007 include the following:
In May 2007, Aldec announced the availability of an RTAX-S
Prototyping Board for our antifuse-based RTAX-S FPGAs. Easing
the prototyping process for space-flight systems, the new RTAX-S
Prototyping Board utilizes our Flash-based ProASIC3 FPGAs,
allowing designers to design across multiple aerospace projects,
shorten design cycles, and lower project costs. In March 2007,
Aldec announced the release of CoVer, a Windows-based
hardware/software co-verification solution for engineers using
our FPGAs with an ARM processor, such as our
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CoreMP7 soft ARM7 core. CoVer provides control and visibility
across engineering teams, which also translates into shorter
design schedules and lower project costs.
In September 2007, Arasan announced the joint development with
Actel of a storage daughter card for Marvell
Semiconductor’s “Littleton” PXA 300/310 Handheld
Platform Development Kit. Targeted at smart phones, GPS devices,
and PDAs, the storage card utilizes an Actel IGLOO FPGA to
extend the capabilities of Marvell’s processor.
In March 2007, ARM and Actel jointly announced the availability
of the ARM Cortex-M1 processor, the first FPGA-optimized ARM
processor. Eliminating the license and royalty fees typically
associated with industry-leading processor IP cores, we offer
free access to the Cortex-M1 processor for use in our M1-enabled
IGLOO and ProASIC3 FPGAs and Fusion PSCs.
In December 2007, Attodyne, a design services company
specializing in video and LCDs, introduced the IGLOO Video Demo
Board and the IGLOO Video Demo Kit. We have also worked with
Attodyne to offer a broad range of display-related reference
blocks that leverage our industry-leading IGLOO FPGAs.
As part of its portable storage initiative announced in
September 2007, iWave Systems introduced a full-featured
Freescale i.MX27 processor development platform, which can
demonstrate the use of our IGLOO FPGA as an ultra low-power
controller for PDAs,
point-of-sale
terminals, rugged data communication devices, and GPS
applications.
In January 2007, we jointly announced with Mentor Graphics the
signing of a new OEM agreement that expands our existing
technology and marketing relationship. Under this agreement, we
will be able to provide Precision Synthesis (Actel Edition) as
part of our Libero IDE Web download product bundle. In addition,
we will continue to cooperate with Mentor Graphics to further
improve tool integration, increase productivity, and enhance
customer design success and quality of results.
In January 2007, we jointly announced with Mouser the signing of
a global distribution agreement. This agreement complements our
existing distributor relationships and expands our reach to
customers seeking readily-available, small-volume quantities.
Customers can browse and purchase our products through
Mouser’s printed catalog or directly from their website at
www.mouser.com/actel.
In September 2007, PalmChip announced a storage daughter card
for cameras, smart phones, and security and surveillance
applications. Using an Actel FPGA to serve as the bridge from
the processor bus to multiple storage interfaces, the platform
includes the Marvell’s PXA 270 processor but also serves as
a reference design for X-Scale and ARM processors.
Our research and development expenditures are divided among
circuit design, software development, and process technology
activities, all of which are involved in the development of new
products based on existing or emerging technologies. In the
areas of circuit design and process technology, our research and
development
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activities also involve continuing efforts to reduce the power
and cost and improve the performance of current products,
including “shrinks” of the design rules under which
such products are manufactured. Emphasizing
power
conscious design, our software research and development
activities include enhancing the functionality, usability, and
availability of high-level design and development tools and IP
cores in a complete and automated desktop design environment.
In 2007, 2006, and 2005, our research and development expenses
were $63.7 million, $56.9 million, and
$48.2 million, respectively. We believe technical
leadership and innovation are essential to our future success
and we are committed to continuing a significant level of
research and development effort. Neverthless, these efforts may
not be successful, timely, or cost effective.
We believe that the increasing costs associated with the use of
advanced chip manufacturing technology are driving the
development and use of PLDs. Also driving the use of PLDs are
the increasingly stringent criteria for power, cost, footprint,
features, design reuse, reliability, and security.
Competition is intense and we expect that to increase as the
market grows. We believe our products and technologies are
superior to competitive products for many applications requiring
low power, nonvolatility or high reliability and security.
However, our primary competitors, Xilinx and Altera, are
substantially larger than Actel, offer in the PLD market
generally and the FPGA market in particular, products to a more
extensive customer base, and have substantially greater
financial, technical, sales, and other resources. We also expect
continued competition from ASIC suppliers and from new companies
that may enter the PLD or PSC markets.
We believe that the important competitive factors in our market
are power consumption; 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; 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. While we believe we
compete favorably with respect to these factors, 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.
As of February 25, 2008, we had more than 345 United States
patents and applications pending for more than 120 additional
United States patents. We also had more than 120 foreign patents
and applications pending for more than 90 patents outside the
United States. Our patents, which cover (among other things)
circuit architectures, antifuse and Flash structures, and
programming methods expire between 2008 and 2026. 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,
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”) under the License Agreement, which was amended
and restated in 2000, BTR licensed its proprietary technology to
Actel for development and use in FPGAs and certain multichip
modules. At the end of 2004, we elected under the License
Agreement to convert to a non-exclusive license, as a
consequence of which we ceased to pay BTR advance royalties
after March 2006. In September 2005, Actel initiated an
arbitration proceeding against BTR under the License Agreement
to determine
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Actel’s rights under the License Agreement. This
arbitration demand resulted from BTR’s assertion that Actel
products were covered by BTR patents and, therefore, that
royalties were due under the License Agreement. BTR later added
trade secret claims to the arbitration. In December 2006, the
parties agreed to settle the case by means of Actel’s
acquisition of the patents and trade secrets at issue, as well
as certain other intellectual property assets controlled by BTR,
for $7.5 million. The parties closed the transaction in March
2007.
In connection with the settlement of patent litigation in 1998,
we entered into a Patent Cross License Agreement with QuickLogic
that covers the products of both companies that were first
offered for sale on or before September 4, 2000, or future
generations of such products.
In December 2006, Zilog, Inc. filed suit against Actel, alleging
that Actel products infringed a patent owned by Zilog. Actel
denied all allegations of infringement. Prior to any substantive
litigation, the parties negotiated a settlement under which
Actel paid Zilog $0.4 million in exchange for a complete
release. The parties executed the settlement agreement in June
2007.
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. When probable and reasonably
estimable, we make 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 ultimate resolution of these claims will
not have a materially adverse effect on our business, financial
condition, or results of operations. Our failure to resolve a
claim could result in litigation or arbitration, which can
result in significant expense and divert the efforts of our
technical and management personnel, whether or not determined in
our favor. In addition, our evaluation of the impact of these
pending disputes could change based upon new information.
Subject to the foregoing, we do not believe that the ultimate
resolution of any pending patent dispute is likely to have a
materially adverse effect on our financial position at
January 6, 2008, or results of operations or cash flows for
the fiscal quarter or year then ended.
At the end of 2007, we had 584 full-time employees,
including 146 in marketing, sales, and customer support; 233 in
engineering and research and development; 163 in operations; and
42 in administration and finance. This compares with
574 full-time employees at the end of 2006, an increase of
2%. Net revenues were approximately $337,000 per employee in
2007 compared with approximately $334,000 per employee in 2006,
representing an increase of approximately 1%. We have no
employees represented by a labor union, have not experienced any
work stoppages, and believe that our employee relations are
satisfactory.
Before deciding to purchase, hold, or sell our Common Stock,
you should carefully consider the risks described below in
addition to the other cautionary statements and risks described
elsewhere (and the other information contained) in this Annual
Report on
Form 10-K
and subsequent reports on
Forms 10-Q
and 8-K. The
risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not currently known to
us or that we currently deem immaterial may also affect our
business. If any of these known or unknown risks or
uncertainties actually occurs and has a materially adverse
effect on us, our business, financial condition, and results of
operations could be seriously harmed. In that event, the market
price for our Common Stock will likely decline and you may lose
all or part of your investment.
Since September 2006, we worked to resolve issues associated
with our historical stock option practices and accounting. A
Special Committee of our Board of Directors (“Special
Committee”), with the assistance of independent legal
counsel, conducted an extensive review of our stock option
practices covering the period from January 1996 through December
2006. The Special Committee concluded that there was inadequate
documentation supporting the recorded measurement dates for each
of our company-wide annual grants during the period
1996-2001;
that there were a number of other grants during the
1996-2001
period for which there was inadequate
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documentation supporting the recorded measurement dates,
including some executive grants and grants to new employees in
connection with corporate acquisitions; and that, beginning in
2002, documentation relating to annual and other grants improved
substantially, although some minor errors occurred thereafter in
the form of corrections or adjustments to grant allocations
after the recorded measurement dates. In addition to these
grants, we subsequently concluded that there was inadequate
documentation supporting the recorded measurement date for four
of our company-wide grants during the period
2002-2004,
and for one stock option grant in the period from our initial
public offering in August 1993 through December 1995. As a
result, we determined that we had unrecorded non-cash
equity-based compensation charges associated with our equity
incentive plans for the period 1994 through 2006. Since these
charges were material to our financial statements for the years
1994 through 2005, we restated our historical financial
statements to record additional non-cash charges for stock-based
compensation expense.
Our
historical stock option granting practices and the restatement
of our financial statements have exposed us to civil litigation
claims and regulatory proceedings, and may expose us to future
civil litigation claims, regulatory proceedings, government
inquiries, and enforcement actions, that could burden Actel and
have a materially adverse effect on our financial condition,
business, results of operations, and/or cash
flows.
Our past stock option granting practices and the restatement of
our prior financial statements have exposed and may continue to
expose us to the risk of litigation. As described in
Part I, Item 3, “Legal Proceedings,” a
complaint and two amended complaints have been filed in the
United States District Court for the Northern District of
California derivatively on our behalf against certain of our
current and former officers and Directors related to certain
stock option grants that were allegedly backdated. We may become
subject to additional private lawsuits related to our past stock
option granting practices or the restatement of our prior
financial statements. The expenses associated with the
lawsuit(s) may be significant, the amount of time to resolve and
the resolution of the lawsuit(s) is unpredictable, and defending
the lawsuit(s) may divert management’s attention from the
day-to-day
operations of our business, any of which could have a materially
adverse effect on our financial condition, business, results of
operations,
and/or cash
flows.
In addition, our past stock option granting practices and the
restatement of our prior financial statements have exposed and
may continue to expose us to greater risks associated with
regulatory proceedings and government inquiries and enforcement
actions. As described in Part I, Item 3, “Legal
Proceedings,” the SEC initiated an informal inquiry into
our historical stock option granting practices and closed its
file without recommending any enforcement action by the SEC. Any
future government inquiries, investigations, or actions could
require us to expend significant management time and incur
significant legal and other expenses, and could result in civil
and criminal actions seeking, among other things, injunctions
against us and the payment of significant fines and penalties by
us, any of which could have a materially adverse effect on our
financial condition, business, results of operations,
and/or cash
flows.
A
number of our current and former executive officers and
Directors have been named as parties to a derivative action
lawsuit related to our historical stock option grant practices,
and there is a possibility of additional civil litigation
claims, regulatory proceedings, government inquiries, and
enforcement actions, any of which could result in significant
legal expenses.
Certain of our current and former officers and Board members are
subject to a lawsuit purportedly filed on our behalf, they may
become subject to additional private lawsuits. Although we are
not aware of any current or former officer or Board member that
is currently the subject of any government inquiry,
investigation, or action, they could be the subject of future
government inquiries, investigations, or other actions related
to our historical stock option grant practices. Subject to
certain limitations, we are obligated to indemnify our current
and former Directors, officers, and employees in connection with
the investigation of our historical stock option practices and
the pending lawsuit, as well as any future civil litigation
claims and government inquiries, investigations or actions. The
expenses associated with such matters could have a materially
adverse effect on our financial condition, business, results of
operations and cash flows.
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Risks
Related to Our Failure to Meet Expectations
Our quarterly revenues and operating results are subject to
fluctuations resulting from general economic conditions and a
variety of risks specific to Actel or characteristic of the
semiconductor industry, including booking and shipment
uncertainties, supply problems, and price erosion. These and
other factors make it difficult for us to accurately project
quarterly revenues and operating results, which may fail to meet
our expectations. When we fall short of our quarterly revenue
expectations, our operating results will probably also be
adversely affected because the majority of our expenses are
fixed and therefore do not vary with revenues. Any failure to
meet expectations could cause our stock price to decline
significantly.
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,
and conversion of our products to ASICs or other competing
products for price or other reasons. In addition, we sometimes
book a disproportionately large percentage of turns orders
during the final weeks of the quarter. Any failure or delay in
receiving expected turns orders would have an immediate and
adverse impact on quarterly revenues.
We sometimes ship a disproportionately large percentage of our
quarterly revenues during 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.
Orders from military and aerospace customers tend to be large
monetarily 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
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. Any failure
to effect scheduled shipments by the end of a quarter would have
an immediate and adverse impact on quarterly revenues.
We generate the majority of our quarterly revenues from sales
made through distributors. Since we generally 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 therefore highly dependent on the accuracy
of shipment forecasts from our distributors in setting our
quarterly revenue expectations. We are also highly dependent on
the timeliness and accuracy of resale reports from our
distributors. Late or inaccurate resale reports, particularly in
the last month of a quarter, contribute to our difficulty in
predicting and reporting our quarterly revenues
and/or
operating results.
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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 photomasks, impurities in the materials
used, contaminants in the environment, and performance failures
by personnel and equipment. In addition, we may not discover
defects or other errors in new products until after we have
commenced volume production. Semiconductor products intended for
military and aerospace applications and new products, such as
our Flash-based Actel Fusion PSCs and ProASIC 3/E FPGAs and
antifuse-based Axcelerator FPGAs, are often more complex and
more difficult to produce, increasing the risk of manufacturing-
and design-related defects. Our failure to effect scheduled
shipments by the end of a quarter due to unexpected supply
constraints or production difficulties would have an immediate
and adverse impact on quarterly revenues.
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 Actel that utilizes
independent facilities, almost all of which are offshore. Yield
problems are most common at new foundries, particularly when new
technologies are involved, or on new processes or new products,
particularly new products on new processes. 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. In addition, if
we discover defects or other errors in a new product that
require us to “re-spin” some or all of the
product’s mask set, we must expense the photomasks that are
replaced. This type of expense is becoming more significant as
the cost and complexity of photomask sets continue to increase.
Lower than expected yields of usable die or other unanticipated
increases in the cost of our products 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 or other
cost reductions during a quarter could reduce our gross margin,
which would adversely affect our quarterly 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 direct sales for strategic or other reasons, and
provide price concessions to our distributors for a portion of
their original purchase price in order for them to address
individual negotiations involving high-volume or competitive
situations. Typically, a customer purchasing a small quantity of
product for prototyping or development from a distributor will
pay list price. However, a customer using our products in volume
production will often negotiate a substantial price discount
from the distributor. Under such circumstances, the distributor
will in turn often negotiate and receive a price concession from
Actel. This is a standard practice in the semiconductor industry
and we provide some level of price concession to every
distributor. Unanticipated declines in the average selling
prices of our products could cause our quarterly revenues
and/or gross
margin to fall short of expectations, which would adversely
affect our quarterly financial results.
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
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and subjective judgments that we make concern income taxes,
inventories, legal matters and loss contingencies, revenues, and
stock-based compensation expense. 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. If these estimates or their related assumptions
change, our operating results for the periods in which we revise
our estimates or assumptions could be adversely and perhaps
materially affected.
Our
gross margin may decline as we increasingly compete with 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 ASIC and
it is easier to convert between competing PLDs or between a PLD
and an ASIC. The increased price competition may also be due in
part to the increasing penetration of PLDs into price-sensitive
markets previously dominated by ASICs. We have strategically
targeted many of our products at the value-based market, which
is defined primarily by low prices. If our strategy is
successful, we will generate an increasingly greater percentage
of our net revenues from low-price products, which may make it
more difficult to maintain our gross margin at our historic
levels. Any long-term decline in our gross margin may have an
adverse effect on our operating results.
In order for us to sell an FPGA, our 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 design and development software). These efforts
usually precede by many months (and often a year or more) the
generation of FPGA sales, if any. In addition, the value of any
design win 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,
and/or
operating results.
Our products are complex and may contain errors, manufacturing
defects, design defects, or otherwise fail to comply with our
specifications, particularly when first introduced or as new
versions are released. Our new products are being designed on
ever more advanced processes, adding cost, complexity, and
elements of experimentation to the development, particularly in
the areas of mixed-voltage and mixed-signal design. We rely
primarily on our in-house personnel to design test operations
and procedures to detect any errors prior to delivery of our
products to customers.
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 the original manufacturer of those FPGAs. During 2004, The
Aerospace Corporation (“Aerospace”) proposed a series
of experiments to test various hypotheses on the root cause of
the failures and to generate reliability data that could be used
by space industry participants in deciding whether or not to
launch spacecraft with RTSX-S FPGAs that were already
integrated. Also during 2004, we announced the availability of
RTSX-SU devices from UMC; Aerospace and Actel each recommended
that customers switch to UMC-manufactured RTSX-SU devices if
their schedules permitted; and we offered to accept RTSX-S parts
from the original manufacturer in exchange for RTSX-SU parts. By
the fourth quarter of 2004, most customers had decided to switch
to RTSX-SU devices. Utilizing all of the available data,
Aerospace calculated a failure in time (“FIT”) rate
for our RTSX-SU devices manufactured at UMC of 13 to 34
(depending on the definition of failure) for an average design,
mission life, and amount of screening time. A FIT is one failure
per billion
device-hours,
so if a group of devices has a FIT rate of 13 to 34, the
customer should expect between 13 and 34 failures per billion
device-hours.
A billion hours is more than 1,000 centuries. On
February 15,
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2006, Aerospace brought to a close the regular meeting of space
industry participants on this matter, although testing has
continued.
If problems occur in the operation or performance of our
products, we may experience delays in meeting key introduction
dates or scheduled delivery dates to our customers, in part
because our products are manufactured by third parties. These
problems also could cause us to incur significant re-engineering
costs, divert the attention of our engineering personnel from
our product development efforts, and cause significant customer
relations and business reputation problems. Any error or defect
might require product replacement or recall or obligate us to
accept product returns. Any of the foregoing could have a
material adverse effect on our financial results and business in
the short
and/or long
term.
Product liability claims may be asserted with respect to our
products. Our products are typically sold at prices that are
significantly lower than the cost of the end-products into which
they are incorporated. A defect or failure in our product could
cause failure in our customer’s end-product, so we could
face claims for damages that are much higher than the revenues
and profits we receive from the products involved. In addition,
product liability risks are particularly significant with
respect to aerospace, automotive, and medical applications
because of the risk of serious harm to users of these products.
Any product liability claim, whether or not determined in our
favor, can result in significant expense, divert the efforts of
our technical and management personnel, and harm our business.
In the event of an adverse settlement of any product liability
claim or an adverse ruling in any product liability litigation,
we could incur significant monetary liabilities, which may not
be covered by any insurance that we carry and might have a
materially adverse effect on our financial condition
and/or
operating results.
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, market,
and sell new or improved products that satisfy customer needs,
compete effectively, and generate acceptable margins may
adversely affect our business, financial condition,
and/or
operating results. While most of our product development
programs have achieved a level of success, some have not. For
example, we determined during 2007 that a $3.7 million
charge for impairment to one of our long-term assets was
required under generally accepted accounting principles. The
long-term asset was a prepaid wafer credit. We concluded that,
due to our decision to abandon the development of commercial
Flash product families on a
90-nanometer
process, we had only a remote chance to draw the credit down.
Our experience generally suggests that the risk is greater when
we attempt to develop products based in whole or in part on
technologies with which we have limited experience. During 2005,
we introduced our new Actel Fusion technology, which integrates
analog capabilities, Flash memory, and FPGA fabric into a single
PSC that may be used with soft processor cores, including the
ARM7 processor core that we offer. We have limited experience
with analog circuitry and soft processor cores and no prior
experience with PSCs.
When entering a new market, the first-mover typically faces the
greatest market and technological challenges. To be successful
in the PSC market and realize the advantages of being the
initial entrant, we need to understand the market, the
competition, and the value proposition that we are bringing to
potential customers; identify the early adopters and understand
their buying process, decision criteria, and support
requirements; and select the right sales channels and provide
the right customer service, logistical, and technical support,
including training. Any or all of these may be different for the
PSC market than for the value-based or system-critical FPGA
markets. Meeting these challenges is a top priority for Actel
generally and for our sales and marketing organizations in
particular. Our
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failure to meet these challenges could have a materially adverse
effect on our business, financial condition,
and/or
operating results.
To develop and introduce a product, we must successfully
accomplish all of the following:
Each of these steps is difficult and subject to failure or
delay, and the failure or delay of any step can cause the
failure or delay of the entire development and introduction. In
addition to failing to meet our development and introduction
schedules for new products or the supporting software or
hardware, our new products may not gain market acceptance, and
we may not 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/or
operating results.
Our future success is highly dependent upon the timely
development and introduction of competitive new products at
acceptable margins. However, there are greater design and
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,
and/or
results of operation.
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 Actel and the
foundry to produce acceptable yields. Minute impurities, errors
in any step of the fabrication process, defects in the
photomasks 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 our new products as well as time it takes
us to bring them to
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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,
and/or
operating results.
Our gross margin is the difference between the amount it costs
Actel to make our products and the revenues we receive from the
sale of those 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. The
lower gross margins typically associated with new products could
have a materially adverse effect on our operating results.
The semiconductor industry is intensely competitive. Our
competitors include suppliers of ASICs, CPLDs, and FPGAs. Our
biggest direct competitors are Xilinx, Altera, and Lattice, all
of which are suppliers of CPLDs and SRAM-based FPGAs; and
QuickLogic, a supplier of antifuse-based FPGAs. Altera and
Lattice have announced the development of FPGAs manufactured on
embedded Flash processes. In addition, we 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. We also face competition from companies that
specialize in converting our products into ASICs.
We are much smaller than Xilinx and Altera, which have broader
product lines, more extensive customer bases, and substantially
greater financial and other resources. Additional competition is
also possible from major domestic and international
semiconductor suppliers, all of which are larger and have
broader product lines, more extensive customer bases, and
substantially greater financial and other resources than Actel,
including the capability to manufacture their own wafers. We may
not be able to overcome these competitive disadvantages.
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.
Our antifuse-based FPGAs and (to a lesser extent) Flash-based
PSCs and 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 may
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,
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our products typically have been fabricated using processes at
least one generation 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
obtain earlier access to advanced processes, we may not be able
to overcome these competitive disadvantages.
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. These events or conditions could impair our
operations, which may have a materially adverse effect on our
business, financial condition,
and/or
operating results.
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 as well as
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 China or between North Korea and South Korea. These
countries may also be more susceptible to epidemics. For
example, 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/or
operating results.
Our insurance policies provide coverage for only certain types
of losses and may not be adequate to fully offset even covered
losses. If we were to incur substantial liabilities not
adequately covered by insurance, our business, financial
condition,
and/or
operating results could be adversely and perhaps materially
affected.
We rely heavily on, but generally have little control over, our
independent foundries, suppliers, subcontractors, and
distributors, whose interests may diverge from our interests.
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,
Matsushita 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 some 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 in the case of Infineon, which could impair our
ability to meet our product delivery obligations and may have a
materially adverse effect on our business, financial condition,
and/or
operating results.
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The semiconductor industry has from time to time experienced
shortages of manufacturing capacity. When production capacity is
tight, the relatively small number 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 could have a materially
adverse effect on our business, financial condition,
and/or
operating results.
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. Any of these developments could have a materially
adverse effect on our business, financial condition,
and/or
operating results.
We rely primarily on foreign subcontractors for the assembly and
packaging of our products and, to a lesser extent, for the
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
for each product and from time to time have 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/or
operating results.
We are dependent on independent software and hardware developers
for the design, development, supply, maintenance, and support of
some of our analog capabilities, IP cores, design and
development software, programming hardware, design diagnostics
and debugging tool kits, and demonstration boards (or certain
elements of those products). Our reliance on independent
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 products, 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,
and/or
operating results.
In 2007 and 2006, sales made through distributors accounted for
77% of our net revenues, compared with 64% for 2005. Our
distributors offer products of several different companies, so
they may reduce their efforts to win new designs or sell our
products or give higher priority to other products. This is
particularly a concern with respect to any distributor that also
sells products of our direct competitors. A reduction in design
win or sales effort, termination of relationship, failure to pay
for products, or discontinuance of operations because of
financial
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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/or
operating results.
Although we have contracts with our distributors, the agreements
are terminable by either party on short notice. We consolidated
our distribution channel in 2001 by terminating our agreement
with Arrow Electronics, Inc., which accounted for 13% of our net
revenues in 2001. On March 1, 2003, we again consolidated
our distribution channel by terminating our agreement with
Pioneer-Standard Electronics, Inc., which accounted for 26% of
our net revenues in 2002, after which Unique Technologies, Inc.
(Unique), a sales division of Memec, was our sole distributor in
North America. Unique accounted for 33% of our net revenues in
2004. During 2005, Avnet acquired Memec, after which Avnet
became our primary distributor in North America. Avnet accounted
for 40% of our net revenues in 2007 and 2006. Even though Xilinx
is Avnet’s biggest line, our transition from Unique to
Avnet was generally satisfactory. The loss of Avnet as a
distributor, or a significant reduction in the level of design
wins or sales generated by Avnet, could have a materially
adverse effect on our business, financial condition,
and/or
operating results. In 2006, we added Mouser as a distributor in
North America and elsewhere.
Our distributors occasionally build inventories in anticipation
of significant growth in sales and, when such growth does not
occur as rapidly as anticipated, substantially reduce the amount
of product ordered from us in subsequent quarters. Such a
slowdown in orders generally reduces our gross margin because we
are unable to take advantage of any manufacturing cost
reductions while the distributor depletes its inventory.
Unlike our older RTSX-S and RTSX-SU space-grade FPGAs, our new
RTAX-S space-grade FPGAs are subject to the International
Traffic in Arms Regulations (“ITAR”), which is
administered by the U.S. Department of State. ITAR controls
not only the export of RTAX-S FPGAs, but also the export of
related technical data and defense services as well as foreign
production. While we believe that we have obtained and will
continue to obtain all required licenses for RTAX-S FPGA
exports, we have undertaken corrective actions with respect to
the other ITAR controls and are implementing improvements in our
internal compliance program. If the corrective actions and
improvements were to fail or be ineffective for a prolonged
period of time, it could have a materially adverse effect on our
business, financial condition,
and/or
operating results. In addition, the fact that our new RTAX-S
space-grade FPGAs are ITAR-controlled may make them less
attractive to foreign customers, which could also have a
materially adverse effect on our business, financial condition,
and/or
operating results.
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,
and/or
operating results.
Sales to customers outside North America accounted for 50% of
net revenues in 2007, compared with 49% in 2006, 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.
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Changes in United States export laws that require us to obtain
additional export licenses sometimes cause significant shipment
delays. Any future restrictions or charges imposed by the United
States or any other country on our international sales or sales
offices could have a materially adverse effect on our business,
financial condition,
and/or
operating results.
We have experienced substantial
period-to-period
fluctuations in revenues and operating results due to conditions
in the overall economy, in the general semiconductor industry,
in our major markets, and at our major customers. We may again
experience these fluctuations, which could be adverse and may be
severe.
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 operating results. Any future
downturns in the semiconductor industry may have a similar
adverse effect on our business, financial condition,
and/or
operating results.
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 32% of our revenues for 2007 and 34% of our net
revenues for 2006 compared with 41% for 2005, 36% for 2004 and
2003, 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 could
have a materially adverse effect on our revenues
and/or
operating results.
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. We believe that this trend toward the use of
“off-the-shelf”
products generally has 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/or
operating results. On the other hand, there are signs that this
trend toward the use of
off-the-shelf
products may be reversing. If defense contractors were to use
more customized ASICs and fewer
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 also have a materially adverse effect on our
business, financial condition,
and/or
operating results.
A relatively small number of customers are responsible for a
significant portion our net revenues. We have experienced
periods in which sales to one or more of our major customers
declined significantly as a percentage of our net revenues. For
example, Lockheed Martin accounted for 4% of our net revenues
during 2004 compared with 11% during 2003. We believe that sales
to a limited number of customers will continue to account for a
substantial
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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/or
operating results.
We have a mixed history of success in our acquisitions. 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 Actel 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 (possibly 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 Actel or the acquired entity. An acquired
entity could have unknown liabilities, and our business may not
achieve the results anticipated at the time of the acquisition.
The occurrence of any of these circumstances could disrupt our
operations and may have a materially adverse effect on our
business, financial condition,
and/or
operating results.
Pending or new accounting pronouncements, corporate governance
or public disclosure requirements, or tax regulatory rulings
could have an impact, possibly material and adverse, on our
business, financial condition,
and/or
operating results. Any change in accounting pronouncements,
corporate governance or public disclosure requirements, or
taxation rules or practices, as well as any change in the
interpretation of existing pronouncements, requirements, or
rules or practices, may call into question our SEC or tax
filings and could affect our reporting of transactions completed
before the change.
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 123(R), “Share-Based
Payment: An Amendment of FASB Statements No. 123 and
95.” SFAS No. 123(R) eliminates the ability to
account for share-based compensation transactions using APB
Opinion No. 25, “Accounting for Stock Issued to
Employees,” and instead requires companies to recognize
compensation expense using a fair-value based method for costs
related to share-based payments, including stock options and
employee stock purchase plans. We implemented the standard in
the fiscal year that began January 2, 2006, and the
adoption of SFAS No. 123(R) had a material effect on
our consolidated operating results and earnings per share.
In addition, we historically have used stock options as a key
component of employee compensation in order to align
employees’ interests with the interests of our
shareholders, encourage employee retention, and provide
competitive compensation packages. To the extent that
SFAS No. 123(R) or other new regulations make it more
difficult or expensive to grant options to employees, we may
incur increased out-of-pocket compensation costs, change our
equity compensation strategy, or find it difficult to attract,
retain, and motivate employees. Any of these results could
materially and adversely affect our business
and/or
operating results.
Changing laws, regulations, and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley
Act of 2002 and new SEC regulations and Nasdaq National Market
rules, have resulted in significant additional expense. We are
committed to maintaining high standards of corporate governance
and public disclosure, and therefore have invested the resources
necessary to comply with the evolving laws, regulations, and
standards. This investment has resulted in increased general and
administrative expenses as well as a diversion of management
time and attention from revenue-generating activities to
compliance activities. If our efforts to comply
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with new or changed laws, regulations, and standards differ from
the activities intended by regulatory or governing bodies, we
might be subject to lawsuits or sanctions or investigation by
regulatory authorities, such as the SEC or The Nasdaq National
Market, and our reputation may be harmed.
We evaluated our internal controls systems in order to allow
management to report on, and our independent public accountants
to attest to, our internal controls, as required by
Section 404 of the Sarbanes-Oxley Act. In performing the
system and process evaluation and testing required to comply
with the management certification and auditor attestation
requirements of Section 404, we incurred significant
additional expenses, which adversely affected our operating
results and financial condition and diverted a significant
amount of management’s time. While we believe that our
internal control procedures are adequate, we may not be able to
continue complying with the requirements relating to internal
controls or other aspects of Section 404 in a timely
fashion. If we were not able to comply with the requirements of
Section 404 in a timely manner in the future, we may be
subject to lawsuits or sanctions or investigation by regulatory
authorities. Any such action could adversely affect our
financial results and the market price of our Common Stock. In
any event, we expect that we will continue to incur significant
expenses and diversion of management’s time to comply with
the management certification and auditor attestation
requirements of Section 404.
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. As we sometimes have in the past, we may obtain
licenses under patents that we are alleged to infringe. Although
patent holders commonly offer licenses to alleged infringers, we
may not be offered a license for patents that we are alleged to
infringe or we may not find the terms of any offered licenses
acceptable. We may not be able to resolve any claim of
infringement, and the ultimate resolution of any claim may have
a materially adverse effect on our business, financial
condition,
and/or
operating results.
Our failure to resolve any claim of infringement could result in
litigation or arbitration. During 2006, we were involved with
BTR in an arbitration, which settled on March 16, 2007, and
with Zilog in litigation, which settled on June 11, 2007
(see “BUSINESS — Patents and Licenses”). 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 and arbitration proceedings, whether or not
determined in our favor, 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 or arbitration
involving intellectual property, we could suffer significant
(and possibly treble) monetary damages, which could have a
materially adverse effect on our business, financial condition,
and/or
operating results. 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/or
operating results.
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. The steps we have taken may not 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,
and/or
operating results.
Our success is dependent in large part on our ability to attract
and retain 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.
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The failure to recruit employees with the necessary technical or
other skills or the loss of key employees could have a
materially adverse effect on our business, financial condition,
and/or
operating results. From time to time 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,
and/or
operating results.
We have adopted an Employee Retention Plan that provides for
payment of a benefit to our employees who hold unvested stock
options or restricted stock units (“RSUs”) 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 and RSUs 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, 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 Actel, even if our shareholders support the
acquisition.
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:
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We account for goodwill and other intangible assets under
SFAS No. 142, “Goodwill and Other Intangible
Assets.” Under this standard, goodwill is tested for
impairment annually or more frequently if certain events or
changes in circumstances indicate that the carrying amount of
goodwill exceeds its implied fair value. The two-step impairment
test identifies potential goodwill impairment and measures the
amount of a goodwill impairment loss to be recognized (if any).
The first step of the goodwill impairment test, used to identify
potential impairment, compares the fair value of a reporting
unit with its carrying amount, including goodwill. We are a
single reporting unit under SFAS No. 142, so we use
the enterprise approach to compare fair value with book value.
Since the best evidence of fair value is quoted market prices in
active markets, we use our market capitalization as the basis
for the measurement. As long as our market capitalization is
greater than our book value and we remain a single reporting
unit, our goodwill will be considered not impaired, and the
second step of the impairment test will be unnecessary. If our
market capitalization were to fall below our book value, we
would proceed to the second step of the goodwill impairment
test, which measures the amount of impairment loss by comparing
the implied fair value of our goodwill with the carrying amount
of our goodwill. As long as we remain a single reporting entity,
we believe that the difference between the implied fair value of
our goodwill and the carrying amount of our goodwill would equal
the difference between our market capitalization and our book
value. Accordingly, if our market capitalization fell below our
book value and we remained a single reporting unit, we expect
that we would write down our goodwill, and recognize a goodwill
impairment loss, equal to the difference between our market
capitalization and our book value.
None.
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 January 2014. We have a renewal option for an
additional ten-year term. In addition to our facility in
Mountain View, we also lease sales offices in various countries
around the world to support our worldwide customer base. We
believe our facilities will be adequate for the foreseeable
future.
On August 30, 2006, a shareholder derivative action was
filed in the United States District Court for the Northern
District of California, entitled Frank Brozovich v. John
C. East, et al., 06-cv-05352-JW, against certain of our
former and current officers and directors alleging that the
individual defendants violated
Section 10(b)/Rule 10b-5
of the Securities Exchange Act of 1934 (the “Exchange
Act”), breached their fiduciary duties, and were unjustly
enriched in connection with the timing of stock option grants
from 1996 to 2001. In addition, on November 2, 2006, a
second nearly identical shareholder derivative complaint,
entitled Samir Younan v. John C. East, et al.,
5:06-cv-06832-JW, was filed in the same court. Younan
alleged further causes of action in connection with the
timing of stock option grants from 1994 to 2000, including
violations of Sections 14(a) and 20(a) of the Exchange Act,
and violation of California Corporation Code Section 25402.
On January 10, 2007, these cases were consolidated as In
re Actel Derivative Litigation, 5:06-cv-05352-JW and
plaintiffs Younan and Brozovich were appointed
lead plaintiffs. Plaintiffs filed a consolidated complaint on
February 9, 2007. The consolidated complaint alleges causes
of action in connection with the timing of stock option grants
from 1996 to 2002, including violations of Sections 10(b),
14(a), and 20(a) of the Exchange Act, breach of fiduciary duty,
accounting, unjust enrichment, and violation of California
Corporation Code Section 25402. Actel is named solely as a
nominal defendant against whom no recovery is sought. The
Company and the individual defendants intend to defend these
cases vigorously.
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By a letter dated November 2, 2006, we were informed by the
SEC’s Office of Enforcement that it was conducting an
informal inquiry to determine whether there had been violations
of the federal securities laws. The letter asked us to produce
(i) spreadsheets identifying all stock options granted to
any of our employees or members of the Board of Directors since
January 1, 1997; (ii) documents constituting our
policies, practices, and procedures for granting stock options
during such period; and (iii) public disclosures of our
policies, practices, and procedures and how we accounted for
stock option grants during such period. We voluntarily produced
the requested documents and the Special Committee and its
independent counsel periodically apprised the SEC’s Office
of Enforcement staff on the status of the independent
investigation. By a letter dated May 23, 2007, we were
informed by the SEC’s Office of Enforcement staff that it
had closed its file and would not recommend any enforcement
action by the SEC.
On November 13, 2006, we received notice from The Nasdaq
Stock Market (“Nasdaq”) of a staff determination that
we were not in compliance with the requirement for continued
listing set forth in Nasdaq Marketplace Rule 4310(c)(14).
Under that Rule, listed companies must file with the SEC all
required reports. Our noncompliance was a result of the ongoing
stock option review and our related failure to file with the SEC
a Quarterly Report on
Form 10-Q
for the fiscal quarter ended October 1, 2006. On
January 3, 2007, we received an additional staff
determination notice that we were not in compliance with the
requirement for continued listing set forth in Nasdaq
Marketplace Rules 4350(e) and 4350(g). Under those Rules,
listed companies must hold an annual meeting of shareholders,
solicit proxies, and provide proxy statements to Nasdaq. Our
noncompliance was a result of the ongoing review and related
failure to hold an annual shareholder meeting in 2006.
We appealed the Nasdaq staff’s determinations at a hearing
held on January 11, 2007. On February 16, 2007, a
Nasdaq Listing Qualifications Panel (the “Panel”)
determined to continue our listing and grant our request for an
extension until May 17, 2007, to file our delinquent
filings and any required financial restatements and to hold our
annual meeting, subject to us providing the Panel with either a
copy of the Special Committee’s final investigatory report
or a written submission regarding the Special Committee’s
final investigatory results. On March 16, 2007, we provided
the Panel with the required written submission. On
March 20, 2007, we received an additional staff
determination notice relating to our failure to file with the
SEC an Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006. On
May 18, 2007, the Panel determined to delist our
securities, but stayed the suspension pending further action by
the Nasdaq Listing and Hearing Review Council (“Listing
Council”).
On April 2, 2007, the Listing Council called the
Panel’s decision for review and determined to stay the
Panel’s decision pending further action by the Listing
Council. The Nasdaq Listing Qualifications Department provided
the Listing Council with an updated qualifications summary sheet
on June 26, 2007, and we submitted additional information
to the Listing Council on June 29, 2007. On May 15,
2007, we received an additional staff determination notice
relating to our failure to file with the SEC a Quarterly Report
on
Form 10-Q
for the fiscal quarter ended April 1, 2007. On
August 13, 2007, we received an additional staff
determination notice relating to our failure to timely file with
the SEC a Quarterly Report on
Form 10-Q
for the fiscal quarter ended July 1, 2007. On
August 23, 2007, the Listing Counsel granted us an
extension until October 22, 2007, to demonstrate compliance
with all continued listing requirements.
As we requested on October 9, 2007, the Nasdaq Board of
Directors (the “Nasdaq Board”) on October 17,
2007, called for review the August 23, 2007, decision of
the Listing Council, and stayed the suspension of our securities
from trading, pending further consideration by the Nasdaq Board.
On November 9, 2007, the Nasdaq Board granted us an
extension until January 9, 2008, to file all delinquent
periodic reports necessary to regain compliance with the filing
requirement contained in Rule 4310(c)(14), and remanded
back to the Panel for further consideration our failure to
solicit proxies and hold an annual meeting, as required by
Rules 4350(e) and 4350(g). On November 13, 2007, we
received an additional staff determination notice relating to
our failure to timely file with the SEC a Quarterly Report on
Form 10-Q
for the fiscal quarter ended September 30, 2007. As we
requested on January 4, 2008, the Nasdaq Board on
January 8, 2008, granted us an extension until
February 20, 2008, to file all delinquent periodic reports
necessary to regain compliance with the filing requirement
contained in Rule 4310(c)(14). On January 22, 2008, we
filed with the SEC our Quarterly Report on
Form 10-Q
for the fiscal quarter ended October 1, 2006, and our
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006. On
February 11, 2008, we filed with the SEC our Quarterly
Report on
Form 10-Q
for the fiscal quarter ended April 1,
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2007; our Quarterly Report on
Form 10-Q
for the fiscal quarter ended July 1, 2007; and our
Quarterly Report on
Form 10-Q
for the fiscal quarter ended September 30, 2007. On
February 18, 2008, the Nasdaq staff determined that we had
regained compliance with requirement for continued listing set
forth in Rule 4310(c)(14). On March 4, 2008, we held
our Combined
2006-2007
Annual Meeting of Shareholders. Accordingly, we believe we
substantially complied with Rules 4350(e) and 4350(g) and
are therefore currently in compliance with all of Nasdaq’s
continued listing requirements.
None.
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 March 17, 2008, there
were 122 shareholders of record. The following table sets
forth, for the fiscal quarters indicated, the high and low sale
prices per share of our Common Stock as reported on the Nasdaq
National Market.
On March 17, 2008, the reported last sale of our Common
Stock on the Nasdaq National Market was $13.80.
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.
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The information set forth below is not necessarily indicative of
results of future operations, and should be read in conjunction
with Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”
and the consolidated financial statements and related notes
thereto included in Item 8 of this
Form 10-K
to fully understand factors that may affect the comparability of
the information presented below.
ACTEL
CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
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You should read the following discussion of our financial
condition and results of operations in conjunction with our
Consolidated Financial Statements and the related “Notes to
Consolidated Financial Statements,” and “Financial
Statement Schedules,” and “Supplementary Financial
Data” included in this Annual Report on
Form 10-K.
This Annual Report on
Form 10-K,
including the “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” contains
forward-looking statements regarding future events and the
future results of our Company that are based on current
expectations, estimates, forecasts, and projections about the
industry in which we operate and the beliefs and assumptions of
our management. Words such as ‘‘expects,’’
‘‘anticipates,” ‘‘targets,”
‘‘goals,’’ ‘‘projects,’’
‘‘intends,’’ ‘‘plans,’’
‘‘believes,’’ ‘‘seeks,’’
‘‘estimates,’’ variations of such words, and
similar expressions are intended to identify such
forward-looking statements. These forward-looking statements are
only predictions and are subject to risks, uncertainties, and
assumptions that are difficult to predict. Therefore, actual
results may differ materially and adversely from those expressed
in any forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to,
those discussed in this Report under the section entitled
“Risk Factors” in Item 1A of Part I and
elsewhere, and in other reports we file with the SEC,
specifically the most recent reports on
Form 10-Q.
We undertake no obligation to revise or update publicly any
forward-looking statements for any reason.
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.
Actel Corporation is the leading supplier of low-power FPGAs and
PSCs. Attacking power consumption from both the chip and the
system levels, the Company’s innovative programmable logic
solutions enable power-efficient design. In support of our
nonvolatile Flash- and antifuse-based FPGAs, we offer design and
development software and tools to optimize power consumption;
power-smart IP cores, including industry-standard processor
technologies; small footprint packaging; programming hardware
and starter kits; and a variety of design services. We target a
wide range of applications in the aerospace, automotive,
avionics, communications, consumer, industrial,
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medical, and military markets that require low power or other
attributes of our nonvolatile Flash and antifuse-based
technologies that have an inherent competitive advantage.
According to the Semiconductor Industry Association
(“SIA”), global sales of semiconductors rose to a
record $255.6 billion in 2007, an increase of 3.2% from the
previous record of $247.7 billion reported for 2006. Sales
growth was driven primarily by consumer products such as mobile
handsets, PCs, and consumer electronics, which have proliferated
as semiconductor technology has improved performance and
functionality at lower cost. According to the SIA report,
industry growth is expected to be 7.7% in 2008.
The logic market is highly fragmented and includes ASICs and
PLDs. FPGAs are one type of PLD. Price, performance,
reliability, power consumption, security, density, features,
ease of use, and time to market determine the degree to which
PLDs compete for specific applications. Unlike ASICs, which are
customized for use in a specific application at the time of
manufacture, PLDs are manufactured as standard components and
customized “in the field,” allowing the same device
type to be used for many different applications. Using software
tools, users program their design into a PLD, resulting in lower
development costs and inventory risks, shorter design cycles,
and faster time to market.
To a great extent, the characteristics of an FPGA are dictated
by the technology used to make the device programmable. Devices
based on nonvolatile Flash or antifuse programming elements
offer significant power, single-chip,
live-at-power-up,
security, and neutron-immunity advantages over volatile FPGAs
based on SRAM technology.
We believe that our long-term future lies with Flash technology,
which permits us to make FPGAs that are both nonvolatile and
reprogrammable. Perhaps the single biggest benefit of a
nonvolatile Flash-based FPGA array is significantly reduced
power consumption. Even though our Flash technology is unique,
the process is very similar to the standard embedded Flash
memory process, so we are able to share with others most of the
burden of developing and proving the process. While we were the
first company to sell Flash-based FPGAs, several suppliers of
SRAM-based FPGAs claim to offer “single-chip,
Flash-based” solutions. However, these “hybrid”
solutions are merely combinations of Flash memory components
with the underlying SRAM FPGA technology — either
integrated with the FPGA die into a single package or,
alternatively, stacked or placed
side-by-side.
The FPGA array is still SRAM, so it is still subject drawbacks
associated with that technology. These “hybrid”
approaches mitigate some of the limitations of traditional
SRAM-based solutions by providing a smaller footprint, a minor
reduction in power consumption, and small advances in
power-up
time and security, but they are only incremental improvements
over pure SRAM-based FPGAs. Since the embedded Flash memory
controls only the initial configuration of “hybrid”
devices during
power-up,
these solutions cannot offer the full advantages of Flash
technology provided by our nonvolatile Flash-based FPGAs:
exponentially lower power consumption, faster response times,
unparalleled reliability, and uncompromising security.
The one-time programmability of our antifuse-based FPGAs is
desirable in certain system-critical military and aerospace
applications, but commercial customers generally prefer
reprogrammable solutions, such as SRAM- or Flash-based FPGAs. In
addition, we are the only sizeable company that uses antifuse
technology, which means 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 FPGAs using antifuse
technology are typically one or two generations behind
competitive SRAM-based solutions manufactured on standard
processes.
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Our strategy is to offer FPGAs to markets in which our
nonvolatile Flash- and antifuse-based technologies have an
inherent competitive advantage. Our strategy involves
considerable risk as unique technologies and products can take
years to develop, if at all, and markets that we target may fail
to emerge. However, in addition to single-chip,
live-at-power-up,
security, and neutron-immunity benefits, we believe that our
nonvolatile FPGA solutions offer substantial low-power
advantages over volatile devices based on SRAM technology and we
plan to exploit those advantages.
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 design 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 2007 than
during 2006, and our backlog (which may be cancelled or
rescheduled by the customer on short notice without significant
penalty) was significantly higher at the end of 2007 than at the
end of 2006.
Results
of Operations
The following table sets forth certain financial data from the
Consolidated Statements of Operations expressed as a percentage
of net revenues:
We derive our revenues primarily from the sale of FPGAs, which
accounted for over 95% of net revenues in 2007, 2006 and 2005.
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 at least 47% of our revenues in 2007 from sales
of FPGAs to customers serving the military and aerospace and the
communications markets, compared with at least 53% in 2006 and
2005. 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 2007 were $197.0 million, an increase of 3%
over 2006. This increase was due primarily to a 6% increase in
the number of units shipped that was partially off-set by a
decrease of 3% in the overall average selling price
(“ASP”). The overall ASP decreased primarily due to a
change in our product mix: the sales of mature
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products, which usually have higher ASPs, decreased by
approximately 11% from the previous year while sales of new
products, particularly our Flash products, which usually have
lower ASPs, have increased by approximately 24% from the
previous year. Sales of new products comprised approximately 44%
of net revenues in 2007 compared with approximately 37% in 2006.
Net revenues in 2006 were $191.5 million, an increase of 7%
over 2005. This increase was due primarily to a 7% increase in
the overall average selling price (“ASP”) and a slight
increase in the total number of units shipped in the year. The
overall ASP increased primarily due to increases in ASPs from
most of the new and mature product families. Net revenues in
2006 increased $1.2 million as a result of a change in the
Company’s estimate of distributor revenue as noted in
Critical Accounting Policies and Estimates.
We shipped approximately 77% of our net revenues through the
distribution sales channel in 2007 compared with 77% in 2006 and
64% in 2005. Since 2003, Memec, Unique had been our primary
distributor in North America. During 2005, Avnet, Inc.
(“Avnet”) acquired Memec Group Holdings Ltd.
(“Memec”). We generally 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 50%
of net revenues in 2007, 49% in 2006 and 44% in 2005 with
European customers representing 29% of net revenues in 2007
compared to 27% of net revenues for 2006 and 2005.
Gross margin was 58.2% of revenues in 2007 compared with 60.5%
in 2006 and 59.0% in 2005. Gross margin in 2007 was unfavorably
impacted by a fourth quarter write-down of $2.2 million
associated with ProASIC last time buy inventory and higher
inventory reserve charges during 2007. The lower gross margin in
2007 was also attributable to the product mix where there were
higher sales of lower margin Flash products. Gross margin in
2006 was unfavorably impacted by a fourth quarter write-down of
$2.2 million associated with excess radiation tolerant
products. Gross margin in 2006 benefited from lower inventory
write-downs as compared with fiscal 2005 coupled with a
reduction in license costs as a result of consolidation of a
number of our license agreements with third parties.
We seek to reduce costs and improve gross margins 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.
R&D expenditures were $63.7 million, or 32% of net
revenues, in 2007 compared with $56.9 million, or 30% of
net revenues, in 2006 and $48.2 million, or 27% of net
revenues, in 2005. R&D spending in 2007 increased due to a
$3.7 million charge during the second quarter to reserve
for certain wafer prepayments combined with a charge of
$0.9 million during the first quarter of fiscal 2007 for
re-work of certain products under development. In addition, 2007
included generally higher costs associated with expanded
R&D efforts and increased headcount. R&D spending in
2006 increased due to recognition of stock-based compensation
expense under SFAS 123(R), along with higher costs
associated with expanded R&D efforts and increased
headcount. Stock-based compensation expenses under
SFAS 123(R) were $4.0 million in 2007 compared with
$5.6 million in 2006.
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 (to a lesser extent) Flash FPGAs are manufactured
using customized processes that require a substantial time to
develop, 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.
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SG&A expenses in 2007 were $63.1 million, or 32% of
net revenues, compared with $68.0 million, or 36% of net
revenues, in 2006 and $49.6 million, or 28% of net
revenues, in 2005. The decrease in SG&A expenses in 2007
was due to decreased legal costs and settlements, which was
partially off-set by increased costs associated with the
Company’s stock option investigation. SG&A expenses in
2006 included $10.4 million in legal settlements resulting
from the BTR and Zilog patent infringement claims. Costs
associated with the Company’s stock option investigation
were $5.5 million in 2007 compared with $2.0 million
in 2006. Stock-based compensation expense under SFAS 123(R)
were $3.3 million in 2007 compared with $4.8 million
in 2006.
During fiscal 2006, we incurred costs of $10.0 million and
$0.4 million in connection with the settlement of two
patent infringement claims brought against us. SG&A
expenses also increased $4.8 million in 2006 due to
recognition of stock-based compensation expense under
SFAS 123(R). SG&A expenses in 2006 included legal and
accounting costs of approximately $2.0 million associated
with the Company’s stock option investigation. There were
no such expenses recorded in 2005. SG&A spending in 2006
increased as a percentage of sales over 2005 levels primarily as
a result of the items noted above.
Amortization of other acquisition-related intangibles was $0 in
2007, $15,000 in 2006 and $1.9 million in 2005. The
decrease in 2006 as compared with 2005 was attributable to
intangible assets, related to an acquisition completed in the
year 2000, being fully amortized during the second quarter of
2006.
Interest income and other, net of expense, was
$8.6 million, $7.1 million and $3.9 million in
2007, 2006 and 2005, respectively. For 2007, our average
investment portfolio return on investment was 4.8% compared with
4.2% in 2006 and 2.8% in 2005, resulting in higher interest
income during fiscal 2007 as compared with prior years. Our
average investment portfolio balance was $162.9 million in
2007 compared with $157.0 million in 2006 and
$144.9 million in 2005. 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.
Significant components affecting the effective tax rate include
pre-tax net income or loss, federal R&D tax credits,
non-deductible stock based compensation, the state composite tax
rate, and adjustments to income taxes as a result of tax audits
and reviews and recognition of certain deferred tax assets
subject to valuation allowances.
Our tax benefit for 2007 was $0.6 million representing an
effective tax rate of 17%. The difference between the effective
tax rate and the statutory tax rate is primarily due to
non-deductible stock-based compensation partially offset by
research tax credits and state tax benefits. Our tax provision
for 2006 was $0.3 million despite a pre-tax loss of
$1.9 million. This tax charge is primarily due to
non-deductible stock-based compensation. Our tax provision for
2005 was $2.7 million based upon a 28% annual effective tax
rate. This rate was calculated based on a statutory tax rate
benefited by R&D tax credits and state tax benefits.
Financial
Condition, Liquidity, and Capital Resources
Our total assets were $363.6 million at the end of 2007
compared with $368.9 million at the end of 2006. The
decrease in total assets was attributable principally to
decreases in cash, cash equivalents, accounts receivable, and
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inventory. The following table sets forth certain financial data
from the consolidated balance sheets expressed as the percentage
change from December 31, 2006 to January 6, 2008.
Our cash, cash equivalents, and short-term investments were
$189.2 million at the end of 2007 compared with
$192.0 million at the end of 2006. This decrease of
$2.8 million from the end of 2006 was due primarily to
$10.8 million of net cash provided by operating activities
combined with $45.5 million in cash provided by sales of
available-for-sale securities, more than offset by
$2.5 million of cash used in financing activities,
$44.3 million used to purchase available-for-sale
securities and $13.0 million of cash used to purchase
property and equipment.
Cash provided by operating activities for 2007 included non-cash
charges of $10.4 million for depreciation and amortization,
$7.9 million for non-cash stock compensation, a charge of
$3.7 million against certain wafer prepayments, decreases
in accounts receivable of $3.9 million, and decreases in
inventory of $3.5 million. These were partially off-set by
a net loss of $2.9 million, decreases in accounts payable
and other liabilities of $8.6 million, increases in license
agreements of $1.9 million, and decreases in deferred
income of $3.2 million. The decreases in accounts payable
and other liabilities is primarily due to payments made under
accrued license agreements and payments of accruals for legal
settlements recorded in 2006. Spending on property and equipment
amounted to $13.0 million in 2007.
Cash provided by operating activities for 2006 included non-cash
charges of $9.8 million for depreciation and amortization,
$11.0 million for non-cash stock compensation, decreases in
accounts receivable of $3.3 million, and increases in
accounts payable and other liabilities of $10.2 million.
These were partially off-set by a net loss of $2.2 million,
increases in inventories of $1.6 million, and increases in
license agreements and other assets of $5.6 million.
Spending on property and equipment amounted to $8.7 million
in 2006.
Cash from the issuance of Common Stock under employee stock
plans amounted to $0 in 2007, $9.4 million in 2006, and
$11.0 million in 2005.
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 the following
twelve months. 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.
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The following represents contractual commitments not accrued on
the balance sheet associated with operating leases as of
January 6, 2008:
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.
Our net accounts receivable was $18.1 million at the end of
2007 compared with $22.0 million at the end of 2006. This
decrease is due mainly to improved collection efforts during the
2007 fiscal year end. Net accounts receivable represented
34 days of sales outstanding at the end of fiscal 2007
compared with 42 days at the end of fiscal 2006.
We sell our products to distributors who resell our products to
OEMs or their contract manufacturers. Our payment terms
generally require the distributor to settle amounts owed to us
based on list price, which typically may be in excess of their
ultimate cost as a result of agreements with the distributors
allowing for price adjustments and credits. Accordingly, when a
distributors’ resale is priced at a discount from list
price, we credit back to the distributor a portion of their
original purchase price, usually within 30 days after the
resale transaction has been reported to the Company. This
practice has an adverse impact on the working capital of our
distributors since they are required to pay the full list price
to Actel and receive a subsequent discount only after the
product has been sold to a third party. As a consequence,
beginning in the third quarter of fiscal 2007, we have entered
into written business arrangements with certain distributors
whereby we issue advance credits to the distributors to minimize
the adverse impact on the distributor’s working capital.
The advance credits are updated and settled on a quarterly
basis. The advance credits have no impact on our revenue
recognition since revenue from distributors is not recognized
until the distributor sells the product but the advance credits
do reduce our accounts receivable and our deferred income on
shipments to distributors as reflected in our consolidated
balance sheet. The amount of the advance credit as of
January 6, 2008 was $6.2 million.
Our net inventories were $35.6 million at the end of 2007
compared with $39.2 million at the end of 2006. We continue
to hold material from “last time buy” inventory
purchases made in 2003, 2005 and 2007 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 we believe that
our then-current inventories are insufficient to meet
foreseeable future demand. Inventory purchased in last time buy
transactions is 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.
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Inventory at January 6, 2008 and December 31, 2006,
included $3.4 million and $1.9 million, respectively,
of inventory purchased in last time buys. During 2007, we
recorded a write down against last time buy inventory of
$2.2 million. No write down of last time buy material had
been recorded in 2006. Inventory days of supply, based on fourth
quarter cost of sales, decreased from 174 days at the end
of 2006 to 139 days at the end of 2007.
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 than our competitors using standard
processes. Accordingly, our inventory levels will probably
always be higher than that of our major competitors using
standard processes.
Our net property and equipment was $25.4 million at the end
of 2007 compared with $22.8 million at the end of 2006. We
invested $13.0 million in property and equipment in 2007
compared with $8.7 million in 2006. Capital expenditures
during the past two years have been primarily for engineering,
manufacturing, and office equipment. Depreciation of property
and equipment was $10.4 million in 2007 compared with
$9.8 million in 2006.
Our net goodwill was $30.2 million at the end of both 2007
and 2006. There was a slight decrease in goodwill as a result of
the realization of certain net operating loss carryforwards
associated with the Company’s fiscal 2000 acquisition of
Gatefield. We had originally established a valuation allowance
for a portion of the net operating loss carryforwards acquired
in connection with the acquisition of Gatefield. To the extent
such valuation allowance is subsequently reversed as a result of
the realization of the deferred tax asset,
SFAS No. 109 requires that the offsetting credit is
recognized first as a reduction of goodwill.
Goodwill is recorded when consideration paid in an acquisition
exceeds the fair value of the net tangible and intangible assets
acquired. We account for goodwill in accordance with
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. Under SFAS No. 142,
we do not 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 quarters of 2007 and 2006, and noted no
indicators of impairment.
Our other assets, net were $19.4 million at the end of 2007
compared with $19.8 million at the end of 2006. The
decrease was due primarily to a decrease of $1.6 million in
license agreements partially off-set by $1.1 million
increase in deferred compensation plan assets.
Our total current liabilities were $58.1 million at the end
of 2007 compared with $67.5 million at the end of 2006. The
decrease was due primarily to decreases in accrued license
agreements of $4.2 million and decreases in other
liabilities of $3.2 million.
Shareholders’ equity was $291.5 million at the end of
2007 compared with $290.6 million at the end of 2006. The
increase in 2007 included $7.5 million of stock-based
compensation partially offset by a net loss of
$2.9 million, a cumulative effect recorded upon the
adoption of the Emerging Issues Task Force (“EITF”)
Issue
No. 06-2,
“Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43, Accounting for
Compensated Absences” of $2.5 million, net of tax, and
$2.8 million of tax withholdings on restricted stock
partially off-set by $0.3 million in receipts of price
differentials on remeasured options.
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In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements” (“SFAS 157”).
SFAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements.
SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and is
applicable for Actel in the first quarter of fiscal year 2008.
We are evaluating the impact of adopting SFAS 157 on our
consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position
No. FAS 157-1
(“FSP
FAS 157-1”),
“Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement Under Statement 13” and FASB
Staff Position
No. FAS 157-2
(“FSP
FAS 157-2”),
“Effective Date of FASB Statement No. 157.” FSP
FAS 157-1
amends SFAS No. 157 to exclude from its scope
SFAS No. 13 and other pronouncements that address fair
value measurements for purposes of lease classification or
measurement. The scope exception does not apply to assets
acquired and liabilities assumed in a business combination that
are required to be measured at fair value (including assets and
liabilities not related to leases). FSP
FAS 157-2
delays by one year the effective date of SFAS No. 157
for certain types of nonfinancial assets and nonfinancial
liabilities for fiscal years beginning after November 15,
2008. The guidance in FSP
FAS 157-1
and FSP
FAS 157-2
is effective upon initial adoption of SFAS No. 157,
which is the first quarter of fiscal year 2008 for us.
In February 2007, the FASB issued SFAS No. 159
(“SFAS 159”), “The Fair Value Option for
Financial Assets and Financial Liabilities”. SFAS 159
permits entities to choose to measure certain financial
instruments and certain other items at fair value. The standard
requires that unrealized gains and losses on items for which the
fair value option has been elected be reported in earnings.
SFAS 159 is effective as of the beginning of the first
fiscal year that begins after November 15, 2007 and is
applicable for Actel in the first quarter of fiscal 2008. We are
currently evaluating the impact, if any, of the adoption of
SFAS 159 on our consolidated financial statements.
In June 2007, the FASB ratified EITF Issue
No. 07-3,
“Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities”
(“EITF 07-3”).
The Task Force reached a consensus that nonrefundable advance
payments for goods or services that will be used or rendered for
future research and development activities should be deferred
and capitalized. Such amounts should be recognized as an expense
as the related goods are delivered or the related services are
performed. The Task Force expects a company to continue
evaluating whether it expects the goods to be delivered or
services to be rendered. If a company does not expect the goods
to be delivered or services to be rendered, the capitalized
advance payment should be charged to expense.
EITF 07-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2007 and is applicable for
Actel in the first quarter of fiscal year 2008. This
pronouncement applies prospectively for new contractual
arrangements entered into beginning in the first quarter of
fiscal year 2008. We are currently evaluating the impact of
adopting
EITF 07-3
on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), “Business Combinations”
(“SFAS 141R”). SFAS 141R amends how business
acquisitions are accounted for. SFAS 141R is effective for
fiscal years beginning after December 15, 2008, and will be
adopted by Actel in the first quarter of fiscal 2009. We are
currently evaluating the impact, if any, of the adoption of
SFAS 141R on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements — an amendment of Accounting Research
Bulletin No. 51” (“SFAS 160”).
SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than
the parent, the amount of consolidated net income attributable
to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest, and the valuation of retained
noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning on
or after December 15, 2008, and will be applicable to Actel
in the first quarter of fiscal year 2009. We are currently
evaluating the impact, if any, of the adoption of SFAS 160
on our consolidated financial statements.
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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 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, complex
and subjective judgments, often as a result of the need to make
estimates about the effect of matters that are inherently
uncertain. Based upon this definition, our most critical
policies include revenue recognition, inventories, stock-based
compensation, legal matters and income taxes. 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.
We sell our products to OEMs and to distributors who resell our
products to OEMs or their contract manufacturers. We recognize
revenue on products sold to our OEMs upon shipment. Because
sales to our distributors are generally made under agreements
allowing for price adjustments, credits, and right of return
under certain circumstances, we generally defer recognition of
revenue on products sold to distributors until the products are
resold by the distributor and price adjustments are determined,
at which time our final net sales price is fixed. Deferred
revenue net of the corresponding deferred cost of sales are
recorded in the caption “deferred income on shipments to
distributors” in the liability section of the consolidated
balance sheet. Deferred income effectively represents the gross
margin on the sale to the distributor, however, the amount of
gross margin we recognize in future periods will be less than
the originally recorded deferred income as a result of
negotiated price concessions. Distributors resell our products
to end customers at various negotiated price points which vary
by end customer, product, quantity, geography and competitive
pricing environments. When a distributors’ resale is priced
at a discount from list price, we credit back to the distributor
a portion of their original purchase price after the resale
transaction is complete. Thus, a portion of the deferred income
on shipments to distributors balance will be credited back to
the distributor in the future. Based upon historical trends and
inventory levels on hand at each of our distributors as of
January 6, 2008, we estimate that approximately
$13.8 million of the deferred income on shipments to
distributors on the Company’s balance sheet as of
January 6, 2008, will be credited back to the distributors
in the future. These amounts will not be recognized as revenue
and gross margin in our Statement of Operations. Since we expect
our distributors to “turn” their inventory balances
five to six times a year, we expect that a majority of the
inventory held by our distributors at the end of any quarter
will be resold to end customers over the next two quarters.
Revenue recognition depends on notification from the distributor
that product has been resold. This reported information includes
product resale price, quantity, and end customer information as
well as inventory balances on hand. Our revenue reporting is
dependent on us receiving timely and accurate data from our
distributors. In determining the appropriate amount of revenue
to recognize, we use this data from our distributors and apply
judgment in reconciling differences between their reported
inventory and sell through activities. Because of the time
involved in collecting, assimilating and analyzing the data
provided by our distributors, we report actual sell through
revenue one month in arrears. This practice requires us to make
an estimate of one month’s distributor sell through
activity at the end of each fiscal quarter. This estimate is
adjusted the following month to reflect actual sell through
activity reported by our distributors.
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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, we examine
inventory line items that may have some form of 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.
Our inventory valuation policies also take into consideration
“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 we believe that
our then current inventories are insufficient to meet
foreseeable future demand. We made last time buys of certain
products from our wafer suppliers in 2003, 2005 and 2007. Since
this inventory was not acquired to meet current demand, we apply
a discrete write down policy for inventory purchased in last
time buy 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. Evaluations of last time buy
inventory in 2007 resulted in write-downs of $2.2 million.
No write-downs of last time buy material had been recorded in
2006. These write-downs were taken because actual sell through
results did not meet expectations or estimations of expected
future demand.
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 a liability or the
amount of a loss. When probable and reasonably estimable, we
make provisions 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.
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,
and/or
results of operations. Our failure to resolve a claim could
result in litigation or arbitration, which can result in
significant expense and divert the efforts of our technical and
management personnel, whether or not determined in our favor.
Actel is a nominal defendant in a consolidated shareholder
derivative action filed in the United States District Court for
the Northern District of California against certain current and
former officers and Directors. The Company and the individual
defendants intend to defend these cases vigorously. In addition,
our evaluation of the impact of these claims and contingencies
could change based upon new information. 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 financial position as of
January 6, 2008, or results of operations or cash flows for
the fiscal year then ended.
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
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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. We assessed our deferred tax assets at the end of
2007 and determined that it was more likely than not that we
would be able to realize approximately $35.4 million of net
deferred tax assets based upon our forecast of future taxable
income and other relevant factors.
Beginning January 2, 2006, we adopted the fair value
recognition provisions of SFAS 123(R), using the modified
prospective transition method, and therefore have not restated
prior period’s results. Under the fair value recognition
provisions of SFAS 123(R), we estimate the fair value of
our employee stock awards at the date of grant using the
Black-Scholes-Merton option pricing model, which requires the
use of certain subjective assumptions. The most significant of
these assumptions are our estimates of expected volatility of
the market price of our stock and the expected term of the stock
award. We have determined that historical volatility is the best
predictor of expected volatility and the expected term of our
awards was determined taking into consideration the vesting
period of the award, the contractual term and our historical
experience of employee stock option exercise behavior. As
required under the accounting rules, we review our valuation
assumptions at each grant date and, as a result, we could change
our assumptions used to value employee stock-based awards
granted in future periods. In addition, we are required to
estimate the expected forfeiture rate and only recognize expense
for those awards expected to vest. If our actual forfeiture rate
were materially different from our estimate, the stock-based
compensation expense would be different from what we have
recorded in the current period. The fair value of restricted
stock units was calculated based upon the fair value of our
Common Stock at the date of grant. Further, SFAS 123(R)
requires that employee stock-based compensation costs be
recognized over the vesting period of the award and we have
elected the straight-line method as the basis for recording our
expense.
The Company recorded $7.9 million and $11.0 million of
stock-based compensation expense for the years ended
January 6, 2008 and December 31, 2006, respectively.
As required by SFAS 123(R), management made an estimate of
expected forfeitures and is recognizing compensation costs only
for those equity awards expected to vest. As of January 6,
2008, the total compensation cost related to options and
nonvested stock granted to employees under the Company’s
stock option plans but not yet recognized was approximately
$11.4 million, net of estimated forfeitures of
approximately $1.0 million. This cost will be amortized
over a weighted-average period of 2.51 years and will be
adjusted for subsequent changes in estimated forfeitures. As of
January 6, 2008, the total compensation cost related to
options to purchase shares of the Company’s common stock
under the ESPP but not yet recognized was approximately
$0.2 million. This cost will be amortized over a
weighted-average period of 0.14 years.
As of January 6, 2008, our investment portfolio consisted
primarily of asset backed obligations, 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 investments in debt securities, which totaled
$159.1 million at January 6, 2008, 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 for
a period of time sufficient to recover the carrying value of the
investment which may not be until maturity. A hypothetical
100 basis point increase in interest rates compared with
interest rates at January 6, 2008, and December 31,
2006, would result in a reduction of approximately
$2.1 million and $2.4 million in the fair value of our
available-for-sale debt securities held at January 6, 2008,
and December 31, 2006, respectively.
The potential changes noted above are based upon sensitivity
analyses performed on our financial position at January 6,
2008. Actual results may differ materially.
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ACTEL
CORPORATION
See Notes to Consolidated Financial Statements
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ACTEL
CORPORATION
See Notes to Consolidated Financial Statements
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ACTEL
CORPORATION
COMPREHENSIVE
INCOME/(LOSS)
See Notes to Consolidated Financial Statements
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ACTEL
CORPORATION
See Notes to Consolidated Financial Statements
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ACTEL
CORPORATION
The leading supplier of nonvolatile solutions, Actel
Corporation, founded in California in 1985, designs, develops,
and markets Flash- and antifuse-based field-programmable gate
arrays (“FPGAs”) for a wide range of applications
within the aerospace, automotive, avionics, communications,
consumer, industrial, medical, and military markets. In support
of its FPGA devices, the company also offers design and
development software, intellectual property (“IP”)
cores, programming hardware, debugging tool kits and
demonstration boards, design services, field engineering and
technical support. We sell our products globally through a
worldwide, multi-tiered sales and distribution network.
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. Assets and liabilities that are not denominated in
the functional currency are remeasured into U.S. dollars,
and the resulting gains or losses are included in interest
income and other, net of expense. All intercompany accounts and
transactions have been eliminated in consolidation.
Our fiscal year ends on the first Sunday after
December 30th. Fiscal 2007 ended on January 6, 2008,
fiscal 2006 ended on December 31, 2006, and fiscal 2005
ended on January 1, 2006. Fiscal 2007 consisted of
53 weeks while fiscal 2006 and fiscal 2005 consisted of
52 weeks each.
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, any
change in these estimates or their related assumptions could
have a materially adverse effect on our operating results.
Our policy is to expense advertising and promotion costs as they
are incurred. Our advertising and promotion expenses were
approximately $3.4 million in 2007, $3.4 million in
2006 and $3.4 million in 2005 and are included in selling,
general and administrative expenses in the accompanying
consolidated statements of operations.
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. Investments consist principally of corporate,
federal, state, and local municipal obligations. See Note 3
for further information regarding short-term investments.
We account for our investments in accordance with the provisions
of 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. We may also make long term equity investments for
the promotion of business and strategic objectives.
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ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We monitor all of 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. 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 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 or a debt security 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 including the creditworthiness of the
issuer 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. If
management concludes it has the intent and ability as necessary,
to hold such securities for a period of time sufficient to allow
for an anticipated recovery of fair value up to the cost of the
investment, and the issuers of the securities are creditworthy,
no other-than-temporary impairment is deemed to exist and the
investment may be classified as long-term. No impairment charges
were recorded for 2007, 2006 or 2005.
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, which
are stated at fair value, and our Common Stock contributed to
the plan by participants, which is stated at historical 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 losses on the
trading asset portfolio were $0.1 million in 2007, and
$0.2 million in 2006 and $0.1 million in 2005. The
deferred compensation assets, included under other assets in the
consolidated balance sheets, were $5.2 million in 2007,
$4.1 million in 2006 and $3.3 million in 2005 and the
deferred compensation liabilities were $5.5 million,
$4.4 million, and $3.7 million, respectively, in those
years.
Financial instruments that potentially subject us to
concentrations of credit risk consist principally of cash and
cash equivalents, short-term and long-term 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 77% of our revenues in 2007, 77% of
our revenues in 2006 and 64% in 2005. During 2003, we
consolidated our distribution channel by terminating our
agreement with Pioneer, leaving Memec as our sole distributor in
North America. During 2005, Avnet, Inc. (“Avnet”)
acquired Memec Group Holdings Ltd. (“Memec”) in a
stock and cash transaction. Avnet accounted for 40% of our net
revenues in 2007 and 2006. The loss of Avnet as
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ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
a distributor could have a material adverse effect on our
business, financial condition and results of operations. We had
no single end customer accounting for greater than 10% of net
revenues in 2007, 2006 or 2005.
As of January 6, 2008, we had accounts receivable totaling
$18.1 million, net of an allowance for doubtful accounts of
$0.7 million. Of the $18.1 million in net accounts
receivable, Avnet accounted for 39%. If sales levels were to
increase the level of receivables would likely also increase. In
the event that customers were to delay their payments to us, the
levels of accounts receivable would also increase. We maintain
an allowance 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 and our operating results
would be negatively impacted.
We depend on a limited number of independent wafer
manufacturers, subcontractors for the assembly and packaging of
our products and software and hardware developers for the
design, development and maintenance of our products. Our
reliance on these independent suppliers of products and services
involves certain risks, including lack of control over capacity
allocation, delivery schedules and customer support. 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 or services 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/or
operating results.
We use the following methods and assumptions in estimating our
fair value disclosures for financial instruments:
The carrying amount reported in the balance sheets for accounts
payable approximates fair value because of relatively short
payment terms.
The carrying amounts reported in the balance sheets for cash and
cash equivalents approximate fair value because of the
relatively short time to maturity.
The fair value of our insurance contracts (entered into in
connection with our deferred compensation plan) is based upon
cash surrender value.
The fair values for marketable debt and equity securities are
based on quoted market prices.
In accordance with 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, we test
goodwill 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 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.
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In June, 2006, the FASB ratified the consensus reached in EITF
Issue
No. 06-2,
“Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43, Accounting for
Compensated Absences”. This consensus provides that
sabbatical leave or other similar benefits provided to an
employee should be considered to accumulate over the service
period as described in FASB Statement No. 43. This EITF was
effective for fiscal years beginning after December 15,
2006 and was adopted by Actel in the first quarter of fiscal
2007. Actel recorded a $2.5 million cumulative adjustment,
net of tax, to decrease the January 1, 2007 balance of
retained earnings.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements” (“SFAS 157”).
SFAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements.
SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and is
applicable for Actel in the first quarter of fiscal year 2008.
We are evaluating the impact of adopting SFAS 157 on our
consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position
No. FAS 157-1
(“FSP
FAS 157-1”),
“Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement Under Statement 13” and FASB
Staff Position
No. FAS 157-2
(“FSP
FAS 157-2”),
“Effective Date of FASB Statement No. 157.” FSP
FAS 157-1
amends SFAS No. 157 to exclude from its scope
SFAS No. 13 and other pronouncements that address fair
value measurements for purposes of lease classification or
measurement. The scope exception does not apply to assets
acquired and liabilities assumed in a business combination that
are required to be measured at fair value (including assets and
liabilities not related to leases). FSP
FAS 157-2
delays by one year the effective date of SFAS No. 157
for certain types of nonfinancial assets and nonfinancial
liabilities for fiscal years beginning after November 15,
2008. The guidance in FSP
FAS 157-1
and FSP
FAS 157-2
is effective upon initial adoption of SFAS No. 157,
which is the first quarter of fiscal year 2008 for us.
In February 2007, the FASB issued SFAS No. 159
(“SFAS 159”), “The Fair Value Option for
Financial Assets and Financial Liabilities”. SFAS 159
permits entities to choose to measure certain financial
instruments and certain other items at fair value. The standard
requires that unrealized gains and losses on items for which the
fair value option has been elected be reported in earnings.
SFAS 159 is effective as of the beginning of the first
fiscal year that begins after November 15, 2007 and is
applicable for Actel in the first quarter of fiscal 2008. We are
currently evaluating the impact, if any, of the adoption of
SFAS 159 on our consolidated financial statements.
In June 2007, the FASB ratified EITF Issue
No. 07-3,
“Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities”
(“EITF 07-3”).
The Task Force reached a consensus that nonrefundable advance
payments for goods or services that will be used or rendered for
future research and development activities should be deferred
and capitalized. Such amounts should be recognized as an expense
as the related goods are delivered or the related services are
performed. The Task Force expects a company to continue
evaluating whether it expects the goods to be delivered or
services to be rendered. If a company does not expect the goods
to be delivered or services to be rendered, the capitalized
advance payment should be charged to expense.
EITF 07-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2007 and is applicable for
Actel in the first quarter of fiscal year 2008. This
pronouncement applies prospectively for new contractual
arrangements entered into beginning in the first quarter of
fiscal year 2008. We are currently evaluating the impact of
adopting
EITF 07-3
on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), “Business Combinations”
(“SFAS 141R”). SFAS 141R amends how business
acquisitions are accounted for. SFAS 141R is effective for
fiscal years beginning
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ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
after December 15, 2008, and will be adopted by Actel in
the first quarter of fiscal 2009. We are currently evaluating
the impact, if any, of the adoption of SFAS 141R on our
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements — an amendment of Accounting Research
Bulletin No. 51” (“SFAS 160”).
SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than
the parent, the amount of consolidated net income attributable
to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest, and the valuation of retained
noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning on
or after December 15, 2008, and will be applicable to Actel
in the first quarter of fiscal year 2009. We are currently
evaluating the impact, if any, of the adoption of SFAS 160
on our consolidated financial statements.
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.
Inventories are 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 demand, 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
unmarketability 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, we examine
inventory line items that may have some form of 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.
We made “last time buys” of certain products from our
wafer suppliers during 2003, 2005 and 2007. Our inventory
valuation policy has been designed to take into consideration
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
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ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
inventories are insufficient to meet foreseeable future demand.
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 our standard excess and
obsolescence write down policy. Inventory purchased in last time
buy transactions is 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 may be written down. Evaluations of last time buy
inventory resulted in a write down of $2.2 million in 2007
and $0.3 million in 2005 of last time buy material. No
write down of last time buy material had been recorded in 2006.
Approximately $3.4 million and $1.9 million related to
last time buy purchases was included in inventory on the balance
sheet at year end 2007 and 2006 respectively.
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 a liability or the
amount of a loss. When probable and reasonably estimable, we
make provisions 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.
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,
and/or
results of operations. Our failure to resolve a claim could
result in litigation or arbitration, which can result in
significant expense and divert the efforts of our technical and
management personnel, whether or not determined in our favor.
Actel is a nominal defendant in a consolidated shareholder
derivative action filed in the United States District Court for
the Northern District of California against certain current and
former officers and Directors. The Company and the individual
defendants intend to defend these cases vigorously. In addition,
our evaluation of the impact of these claims and contingencies
could change based upon new information. 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 financial position as of
January 6, 2008, or results of operations or cash flows for
the fiscal year then ended.
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:
See Note 2 for information on property and equipment
amounts.
We sell our products to OEMs and to distributors who resell our
products to OEMs or their contract manufacturers. We recognize
revenue on products sold to our OEMs upon shipment. Revenues
generated by the Protocol Design Services organization are
recognized as the services are performed. Because sales to our
distributors are generally made under agreements allowing for
price adjustments, credits, and right of return under certain
circumstances, we generally defer recognition of revenue on
products sold to distributors until the products are resold by
the distributor and price adjustments are determined at which
time our final net sales price is fixed. Deferred revenue net of
the corresponding deferred cost of sales are recorded in the
caption deferred income on shipments to distributors in the
liability section of the consolidated balance sheet. Deferred
income effectively represents the gross
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ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
margin on the sale to the distributor, however, the amount of
gross margin we recognize in future periods will be less than
the originally recorded deferred income as a result of
negotiated price concessions. Distributors resell our products
to end customers at various negotiated price points which vary
by end customer, product, quantity, geography and competitive
pricing environments. When a distributors’ resale is priced
at a discount from list price, we credit back to the distributor
a portion of their original purchase price after the resale
transaction is complete. Thus, a portion of the deferred income
on shipments to distributors balance will be credited back to
the distributor in the future. Based upon historical trends and
inventory levels on hand at each of our distributors as of
January 6, 2008, we currently estimate that approximately
$13.8 million of the deferred income on shipments to
distributors on the Company’s balance sheet as of
January 6, 2008, will be credited back to the distributors
in the future. These amounts will not be recognized as revenue
and gross margin in our Statement of Operations. Since we expect
our distributors to “turn” their inventory balances
five to six times a year, we expect that a majority of the
inventory held by our distributors at the end of any quarter
will be resold to end customers over the next two quarters.
Revenue recognition depends on notification from the distributor
that product has been resold. This reported information includes
product resale price, quantity, and end customer information as
well as inventory balances on hand. Our revenue reporting is
dependent on us receiving timely and accurate data from our
distributors. In determining the appropriate amount of revenue
to recognize, we use this data from our distributors and apply
judgment in reconciling differences between their reported
inventory and sell through activities. Because of the time
involved in collecting, assimilating and analyzing the data
provided by our distributors, we receive actual sell through
revenue one month in arrears. This practice requires us to make
an estimate of one month’s distributor sell through
activity at the end of each fiscal quarter. This estimate is
adjusted the following month to reflect actual sell through
activity reported by our distributors.
There is a level of uncertainty in the distributor revenue
estimation process and, accordingly, Actel maintains a reserve
for revenue estimates exceeding actual sell through activity. As
a result of ongoing improvements in distributor reporting and
reconciliation processes and an evaluation of recent trends in
variances between estimated amounts and actual sell through
activity, in the third quarter of 2006 Actel adjusted its
estimate of the distributor revenue reserve. The net effect of
this change in estimate was to increase 2006 revenue by
$1.2 million, increase costs of sales by $0.5 million,
and increase gross margin by $0.7 million.
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.
Stock-Based
Compensation
Effective January 2, 2006, we adopted the fair value
recognition provisions of SFAS No. 123 (Revised 2004),
“Share-Based Payment,” (“SFAS 123(R)”),
using the modified-prospective transition method. Under this
transition method, stock-based compensation cost recognized for
the years ended January 6, 2008 and December 31, 2006,
includes: (a) compensation cost for all unvested
stock-based awards as of January 2, 2006, that were granted
prior to January 2, 2006, based on the grant date fair
value estimated in accordance with the original provisions of
SFAS 123, and (b) compensation cost for all
stock-based awards granted subsequent to January 1, 2006,
based on the grant date fair value estimated in accordance with
the provisions of SFAS 123(R).
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We receive a tax deduction for certain stock option exercises in
the period options are exercised, generally for the excess of
the fair market value of the options at the exercise date over
the exercise prices of the options. Prior to the adoption of
SFAS 123(R) we reported all tax benefits resulting from the
exercise of stock options as operating cash flows in our
consolidated statement of cash flows. Beginning in 2006, the
excess tax benefits from the exercise of stock options are
reported as financing cash flows in accordance with
SFAS 123(R).
Valuation and amortization method — The Company
estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing formula and multiple option
award approach. This fair value is then amortized on a
straight-line basis over the requisite service periods of the
awards, which is generally the vesting period.
Expected Term — The Company’s expected
term represents the period that the Company’s stock-based
awards are expected to be outstanding and was determined based
on historical experience of similar awards, giving consideration
to the contractual terms of the stock-based awards, vesting
schedules and expectations of future employee behavior as
influenced by changes to the terms of its stock-based awards.
Expected Volatility — Effective January 2,
2006, pursuant to the SEC’s Staff Accounting
Bulletin 107, the Company reevaluated the assumptions used
to estimate stock price volatility and determined that it would
place exclusive reliance on historical stock price volatility
that corresponds to the period of expected term as the Company
has no reason to believe that the future stock price volatility
over the expected term is likely to differ from past stock price
volatility.
Expected Dividend — The Black-Scholes-Merton
valuation model calls for a single expected dividend yield as an
input. The dividend yield is determined by dividing the expected
per share dividend during the coming year by the grant date
stock price. The expected dividend assumption is based on the
Company’s current expectations about its stated dividend
policy which is to not pay dividends to its shareholders.
Risk-Free Interest Rate— The Company bases the
risk-free interest rate used in the Black-Scholes-Merton
valuation method on the implied yield currently available on
U.S. Treasury zero-coupon issues with an equivalent
remaining term. Where the expected term of the Company’s
stock-based awards do not correspond with the terms for which
interest rates are quoted, the Company performed a straight-line
interpolation to determine the rate from the available term
maturities.
Estimated Forfeitures— When estimating
forfeitures, the Company set the estimated forfeiture rate to be
equal to its 5 year average actual forfeiture rate.
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Fair Value — The fair values of the
Company’s stock options granted to employees for the years
ended January 6, 2008 and December 31, 2006, were
estimated using the following weighted- average assumptions:
As a result of the stock option investigation and related
employee trading black-out period, during the fourth quarter of
fiscal 2006 the Company suspended further contributions to the
ESPP and refunded all contributions remaining in the plan. The
ESPP remained suspended throughout the fiscal year ended
January 6, 2008.
During the fourth fiscal quarter of 2005, the Company
accelerated the vesting of unvested stock options previously
granted under its stock option plans that had an exercise price
greater than or equal to $19.73 per share that were held by
employees located outside the United States. Unvested options to
purchase approximately 91,400 shares became exercisable as
a result of the vesting acceleration. The affected stock options
have exercise prices ranging from $19.73 to $25.56 per share and
a weighted average exercise price of $22.02 which is
significantly above the current fair value of the stock. The
affected options included no options held by the Company’s
executive officers. The primary purpose of the accelerated
vesting was to enable the Company to avoid recognizing in its
consolidated statement of operations compensation expense
associated with these options in future periods upon adoption of
SFAS No. 123(R) in the first quarter of 2006.
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:
The weighted-average fair value per share of options granted
during 2005 was $6.57. The weighted-average fair value per share
of ESPP rights granted during 2005 was $5.35.
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following pro forma net loss per share were determined as if
we had accounted for employee stock-based compensation for our
employee stock plans under the fair value method prescribed by
FAS 123 for the year ended January 1, 2006 (in
thousands, except per share amounts).
Certain amounts from prior years have been reclassified in the
Consolidated Balance Sheet to conform to the current year
presentation.
We sell our products to distributors who resell our products to
OEMs or their contract manufacturers. Our payment terms
generally require the distributor to settle amounts owed to us
based on list price, which typically may be in excess of their
ultimate cost as a result of agreements with the distributors
allowing for price adjustments and credits. Accordingly, when a
distributors’ resale is priced at a discount from list
price, we credit back to the distributor a portion of their
original purchase price, usually within 30 days after the
resale transaction has been reported to the Company. This
practice has an adverse impact on the working capital of our
distributors since they are required to pay the full list price
to Actel and receive a subsequent discount only after the
product has been sold to a third party. As a consequence,
beginning in the third quarter of fiscal 2007, we have entered
into written business arrangements with certain distributors
whereby we issue advance credits to the distributors to minimize
the adverse impact on the distributor’s working capital.
The advance credits are updated and settled on a quarterly
basis. The advance credits have no impact on our revenue
recognition since revenue from distributors is not recognized
until the distributor sells the product but the advance credits
do reduce our accounts receivable and our deferred income on
shipments to distributors as reflected in our consolidated
balance sheet. The amount of the advance credit as of
January 6, 2008 was $6.2 million.
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Depreciation expense was approximately $10.4 million in
2007, $9.8 million in 2006 and $9.1 million in 2005,
and is included with amortization expense in the Consolidated
Statements of Cash Flows.
Our net goodwill was $30.2 million at the end of both 2007
and 2006. There was a slight decrease in goodwill as a result of
the realization of certain net operating loss carryforwards
associated with the Company’s fiscal 2000 acquisition of
Gatefield. We had originally established a valuation allowance
for a portion of the net operating loss carryforwards acquired
in connection with the acquisition of Gatefield. To the extent
such valuation allowance is subsequently reversed as a result of
the realization of the deferred tax asset, FAS 109 requires
that the offsetting credit is recognized first as a reduction of
goodwill.
Identified intangible assets as of January 6, 2008 and
December 31, 2006, consisted of the following:
58
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Amortization expense related to identifiable intangible assets
was $0 and $15,000 for fiscal 2007 and 2006, respectively. All
identifiable intangible assets had been fully amortized as of
December 31, 2006.
The following is a summary of available-for-sale securities at
January 6, 2008 and December 31, 2006:
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a summary of available-for-sale securities that
were in an unrealized loss position as of January 6, 2008:
Approximately $29.9 million of investment securities,
representing 18% of our total investment portfolio, has been in
an unrealized loss position for greater than six months. It is
our intention and within our ability, as necessary, to hold
these securities in an unrealized loss position for a period of
time sufficient to allow for an anticipated recovery of fair
value up to (or greater than) the cost of the investment. In
addition, we have assessed the creditworthiness of the issuers
of the securities and have concluded that based upon all these
factors that other-than-temporary impairment of these securities
does not exist at January 6, 2008. At January 6, 2008
and December 31, 2006, we classified $6.4 million and
$34.2 million, respectively of the investments we intend to
hold to recovery as long-term because these investment
securities carry maturity dates greater than twelve months from
the balance sheet date.
The adjustments to unrealized gains (losses) on investments, net
of taxes, included as a separate component of shareholders’
equity totaled approximately $1.2 million for the year
ended January 6, 2008, $0.3 million for the year ended
December 31, 2006, and ($0.3) million for the year
ended January 1, 2006. See Note 7 for information
regarding other comprehensive income (loss). Net realized gains
and losses in 2007, 2006 and 2005 were immaterial.
The expected maturities of our investments in debt securities at
January 6, 2008, 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.
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
generally not our intention to hold these floating rate
municipal bonds until their contractual maturities, these
amounts have been classified in the accompanying consolidated
balance sheet as short-term investments that are
available-for-sale.
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. Since cash
payments in 2006 and 2007 were less than rent expense recognized
on a straight-line basis we recorded a deferred rent liability
of $0.1 million in 2007
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
and $0.1 million in 2006. 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.
Rental expense under operating leases was approximately
$3.8 million for 2007, $3.9 million for 2006, and
$3.8 million for 2005. Amounts amortized under licensing
agreements were approximately $4.6 million in 2007,
$4.2 million in 2006, and $5.3 million in 2005.
As of January 6, 2008, the Company has approximately
$8.6 million of non-cancelable obligations to providers of
electronic design automation software expiring at various dates
through 2012. The current portion of these obligations of
$4.9 million is recorded in accrued license fees and the
long-term portion of these obligations of $3.7 million is
recorded at net present value in “Other long-term
liabilities” on the accompanying balance sheet. Interest
expense implicit in to these long-term license agreements is
being amortized to the income statement. We recorded
$0.2 million and $0.1 million of interest expense
related to these obligations in 2007 and 2006, respectively. The
asset portion of these commitments of $13.9 million is
recorded in the “Other assets, net” line of the
balance sheet and $2.8 million is recorded in “Prepaid
expenses and other current assets”.
The following represents contractual commitments associated with
operating leases at January 6, 2008:
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 are 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 have an irrevocable standby letter of credit in favor of
Britannia Hacienda in care of Britannia Management Services in
the amount of $0.5 million pursuant to the terms and
conditions of the lease for our principal facilities and
executive offices located in Mountain View, California. In
addition, we have established an irrevocable letter of credit in
favor of Matsushita Electric Industrial. Co., Ltd., one of our
foundry partners, in the amount of Japanese Yen 30 million
(approximately $0.3 million). Our agreement with Wells
Fargo Bank under which these letters of credit were issued
requires us to maintain certain financial ratios and levels of
net worth. At January 6, 2008, we were in compliance with
these covenants for the letters of credit.
The amounts discussed above exclude liabilities under FASB
Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes,” as we are unable to reasonably estimate the
ultimate amount or timing of the settlements. See Note 8
“Tax Provision,” in the Notes to Consolidated
Financial Statements” for further discussion.
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 contribution to the plan in 2007,
2006 or 2005. The contributions vest annually, retroactively
from an eligible employee’s date of hire, at the rate of
25% per year. In addition, contributions become fully vested
upon retirement from Actel at age 65. There is no guarantee
we will make any contributions to the plan in the future,
regardless of our financial performance.
The Company recorded $7.9 million and $11.0 million of
stock-based compensation expense for the years ended
January 6, 2008 and December 31, 2006, respectively.
As required by SFAS 123(R), management estimates expected
forfeitures and is recognizing compensation costs only for those
equity awards expected to vest. The following table summarizes
the distribution of stock-based compensation expense related to
stock options, restricted stock, and the Employee Stock Purchase
Plan (“ESPP”) for the years ended January 6, 2008
and December 31, 2006 (in thousands):
Stock-based compensation expense for 2006 includes
$0.1 million associated with the extension of employee
options that were scheduled to expire in the fourth quarter of
fiscal 2006 during the stock option investigation blackout
period. The Company agreed to extend the life of the expiring
options for continuing employees until 30 days following
the release of the blackout period. This extension represents a
modification to these options which resulted in the additional
charge during the fourth quarter of fiscal 2006.
Stock-based compensation expense for 2007 includes approximately
$1.0 million associated with the extension of employee
options that were scheduled to expire during 2007 during the
stock option investigation blackout period. The Company agreed
to extend the life of the expiring options for continuing
employees until 30 days following the release of the
blackout period. This extension represents a modification to
these options which resulted in the additional charge during
2007 of approximately $0.7 million. In addition, the
Company agreed to extend the life of the expiring options for
certain terminated employees until 30 days following the
release of the blackout period. This extension represents a
modification to these options which resulted in an additional
stock-based compensation charge during 2007 of $0.3 million.
In addition, stock-based compensation costs of $0.1 million
and $0.3 million were included in inventory as of
January 6, 2008 and December 31, 2006, respectively.
As of January 6, 2008, the total compensation cost related
to options and nonvested stock granted to employees under the
Company’s stock option plans but not yet recognized was
approximately $11.4 million, net of estimated
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
forfeitures of approximately $1.0 million. This cost will
be amortized over a weighted-average period of 2.51 years
and will be adjusted for subsequent changes in estimated
forfeitures.
As of January 6, 2008, the total compensation cost related
to options to purchase shares of the Company’s common stock
under the ESPP but not yet recognized was approximately
$0.2 million. This cost will be amortized over a
weighted-average period of 0.14 years.
The total fair value of shares vested during the years ended
January 6, 2008 and December 31, 2006 were
$6.1 million and $8.5 million, respectively.
There were no exercises of stock options or purchases of stock
under our employee stock purchase plan for the year ended
January 6, 2008 due to the stock option investigation and
related suspension of our employee stock purchase plan.
Under SFAS No. 123(R), the benefits of tax deductions
in excess of recognized compensation cost is to be reported as a
financing cash flow, rather than as an operating cash flow. The
future realizability of tax benefits related to stock
compensation is dependent upon the timing of employee exercises
and future taxable income, among other factors. For the fiscal
years ended January 6, 2008 and December 31, 2006, we
did not recognize any tax benefits on option exercises.
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. At January 6, 2008, 20,660,147 shares of Common
Stock were reserved for issuance under these plans, of which
4,410,474 were available for grant. There were no options
granted to consultants in 2007 or 2006.
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 January 6, 2008,
500,000 shares of Common Stock were reserved for issuance
under such plan, of which 375,000 were available for grant.
We generally 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.
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company issues shares of common stock upon the exercise of
stock options. The following table summarizes our stock option
activity and related information for the three years ended
January 6, 2008:
The aggregate intrinsic value is calculated as the difference
between the cash exercise price of the underlying awards and the
quoted price of the Company’s common stock for the
0.9 million options that were in-the-money at
January 6, 2008. During the years ended December 31,
2006, and January 1, 2006, the aggregate intrinsic value of
options exercised under the Company’s stock option plans
were $1.2 million, and $1.3 million, respectively,
determined as of the date of option exercise. There were no
options exercised under the Company’s stock option plans
during the year ended January 6, 2008.
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information about stock options
outstanding at January 6, 2008:
At December 31, 2006, 3,649,528 outstanding options were
exercisable.
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). At January 6,
2008, 494,804 shares of Common Stock were available for
issuance under the ESPP. The ESPP is administered in
consecutive, overlapping offering periods of up to
24 months each, with each offering period divided into four
consecutive purchase periods. On the last business day of each
purchase period, shares of Common Stock are purchased with
employees’ payroll deductions accumulated during the
purchase period at a price per share equal to 85% of the market
price of the Common Stock on the first day of the applicable
offering period or the last day of the purchase period,
whichever is lower. There were no shares issued under the
Company’s ESPP in 2007. There were 243,139 shares
issued in 2006 under the ESPP, and 701,669 shares issued in
2005.
During the fourth quarter of fiscal 2006, as a result of the
options investigation and related employee trading black-out
period, the Company suspended further contributions to the ESPP
and refunded all contributions remaining in the plan.
Accordingly, there were no ESPP options outstanding at
January 6, 2008 and December 31, 2006. In connection
with the ESPP suspension, the Company recorded a charge of
approximately $1.0 million and $0.2 million for the
years ended January 6, 2008 and December 31, 2006,
respectively, which represents the remaining unamortized fair
value of the current purchase period canceled during the period.
During the year ended December 31, 2006, the aggregate
intrinsic value of options exercised under the Company’s
ESPP were $0.6 million. There were no options exercised
under the Company’s ESPP during the year ended
January 6, 2008.
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On December 1, 2005 Actel offered to certain employees the
opportunity to participate in an employee Stock
Option/Restricted Stock Unit Exchange Program (the
“Exchange Program”). Under the Exchange Program,
employees were allowed to exchange “eligible stock
options” for “restricted stock units.”
“Eligible stock options” were all unexercised stock
options (whether vested or unvested) with an exercise price per
share of $19.73 or more. The number of restricted stock units
that an employee would receive in exchange for the eligible
stock options, as well as the vesting schedule of the restricted
stock units, depended on the number and exercise price of the
eligible stock options exchanged.
The Exchange Program expired on January 3,
2006. Pursuant to the Exchange Program, the Company
accepted for cancellation options to purchase
4,182,027 shares of the Company’s common stock and
granted restricted stock units to purchase 1,130,965 shares
of the Company’s common stock resulting in an overall
exchange ratio of 3.7 options to 1.0 restricted stock unit.
Included in these figures were 1,474,500 options previously held
by our executive officers who received a total of 422,544
restricted stock units in the Exchange Program. The Company
entered into Restricted Stock Unit Agreements dated
January 3, 2006 with each participating employee.
As the offer to replace the eligible stock options with
restricted stock was made on December 1, 2005, all the
option awards eligible to participate in the Exchange Program
were subject to variable accounting from December 1, 2005
to January 1, 2006 (the last fiscal day of 2005), in
accordance with
EITF 00-23.
The Company did not record a charge pursuant to
EITF 00-23
in fiscal 2005 since the fair market value of Actel common stock
declined during the offer period.
During the year ended January 6, 2008, we also granted
additional RSUs and stock options to certain US employees as
part of our long-term equity incentive program. The RSUs granted
under this program vest over a period of four years. As of
January 6, 2008, the total compensation cost not yet
recognized related to RSUs granted subsequent to January 3,
2006 was approximately $2.2 million. The Company issues
shares of common stock upon vesting of RSUs. The following is a
summary of RSU activity through January 6, 2008:
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of comprehensive income (loss), net of tax, are
as follows:
Accumulated other comprehensive loss for 2007 and 2006 is
presented on the accompanying consolidated balance sheets and
consists solely of the accumulated net unrealized gain on
available-for-sale securities.
On January 1, 2007, the Company adopted FASB Interpretation
No. (“FIN”) 48, “Accounting for Uncertainty in
Income Taxes — An Interpretation of FASB Statement
No. 109”. This Interpretation clarifies the accounting
for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. This
Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. As a result of adoption of FIN 48, the
Company did not record any adjustments to the Company’s
accumulated retained earnings as of January 1, 2007. In
addition, we do not expect any material changes to the estimated
amount of liability associated with our uncertain tax positions
within the next 12 months.
The Company had approximately $2.6 million of unrecognized
tax benefits as of January 1, 2007. The following table
summarizes the activity related to our unrecognized tax benefits
for the year ended January 6, 2008 (in thousands):
Of the $3.2 million of unrecognized tax benefits,
$2.3 million, if recognized, would affect the effective tax
rate.
We file income tax returns in the U.S. federal
jurisdiction, California and various state and foreign tax
jurisdictions in which we have a subsidiary or branch operation.
The tax years 2003 to 2007 remain open to examination by the
U.S. and state tax authorities, and the tax years 2002 to
2007 remain open to examination by the foreign tax authorities.
Our policy is that we recognize interest and penalties accrued
on any uncertain tax positions as a component of income tax
expense. As of January 6, 2008, we had approximately
$0.1 million of accrued interest and penalties associated
with uncertain tax positions.
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of income (loss) before income taxes were as
follows:
The tax provision (benefit) consists of:
The tax provision (benefit) reconciles to the amount computed by
multiplying income before tax by the U.S. statutory rate as
follows:
Table of Contents
ACTEL
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Significant components of our deferred tax assets and
liabilities for federal and state income taxes are as follows:
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