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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 7, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-21970
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ACTEL CORPORATION
(Exact name of Registrant as specified in its charter)
California 77-0097724
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
955 East Arques Avenue
Sunnyvale, California 94086-4533
(Address of principal executive offices) (Zip Code)
(408) 739-1010
(Registrant's telephone number, including area code)
--------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Number of shares of Common Stock outstanding as of August 7, 2002:
24,611,626.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
ACTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited, in thousands except per share amounts)
Three Months Ended Six Months Ended
-------------------------------------- -----------------------
Jul. 7, Jul. 1, Apr. 7, Jul. 7, Jul. 1,
2002 2001 2002 2002 2001
--------- --------- --------- --------- ---------
Net revenues................................ $ 34,293 $ 36,460 $ 33,060 $ 67,353 $ 81,494
Costs and expenses:
Cost of revenues......................... 12,956 17,572 12,784 25,740 34,446
Research and development................. 9,902 9,103 9,737 19,639 18,867
Selling, general, and administrative..... 11,036 10,289 10,711 21,747 21,473
Amortization of goodwill and other
acquisition-related intangibles*...... 681 3,729 681 1,362 7,478
--------- --------- --------- --------- ---------
Total costs and expenses........... 34,575 40,693 33,913 68,488 82,264
--------- --------- --------- --------- ---------
Loss from operations........................ (282) (4,233) (853) (1,135) (770)
Interest income and other, net.............. 1,813 2,023 1,488 3,301 4,108
Loss on sale and write-down of marketable
equity security............................. (1,010) - (123) (1,133) -
--------- --------- --------- --------- ---------
Income (loss) before tax provision 521 (2,210) 512 1,033 3,338
Tax provision............................... 117 421 117 234 3,174
--------- --------- --------- --------- ---------
Net income (loss)........................... $ 404 $ (2,631) $ 395 $ 799 $ 164
========= ========= ========= ========= =========
Net income (loss) per share:
Basic.................................... $ 0.02 $ (0.11) $ 0.02 $ 0.03 $ 0.01
========= ========= ========= ========= =========
Diluted.................................. $ 0.02 $ (0.11) $ 0.02 $ 0.03 $ 0.01
========= ========= ========= ========= =========
Shares used in computation:
Basic.................................... 24,382 23,642 24,170 24,276 23,557
========= ========= ========= ========= =========
Diluted.................................. 26,036 23,642 25,388 25,676 25,113
========= ========= ========= ========= =========
- -------------------------------------------------------------
* In the first quarter of 2002, Actel adopted Statement of Financial
Accounting Standards (SFAS) Nos. 141 and 142, which eliminated the
systematic amortization of goodwill. Please see Note 2 for further
discussion of the impact of adopting these new pronouncements.
See Notes to Unaudited Consolidated Financial Statements
ACTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited, in thousands)
Jul. 7, Jan. 6,
2002 2002*
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 15,800 $ 7,912
Short-term investments.............................................................. 117,576 120,923
Accounts receivable, net............................................................ 19,299 16,759
Inventories, net.................................................................... 36,507 36,338
Deferred income taxes............................................................... 23,312 26,096
Prepaid expenses and other current assets........................................... 6,277 4,251
---------- ----------
Total current assets.......................................................... 218,771 212,279
Property and equipment, net............................................................ 14,691 14,665
Goodwill, net.......................................................................... 37,180 37,180
Other assets, net...................................................................... 25,220 25,958
---------- ----------
$ 295,862 $ 290,082
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 9,112 $ 10,129
Accrued salaries and employee benefits.............................................. 7,164 7,189
Other accrued liabilities........................................................... 5,943 6,332
Deferred income..................................................................... 28,077 26,758
---------- ----------
Total current liabilities..................................................... 50,296 50,408
Deferred compensation plan liability................................................ 1,963 1,994
---------- ----------
Total liabilities............................................................. 52,259 52,402
Commitments and contingencies
Shareholders' equity:
Common stock........................................................................ 24 24
Additional paid-in capital.......................................................... 167,048 162,324
Retained Earnings................................................................... 76,006 75,207
Note receivable from officer........................................................ - (368)
Unearned compensation cost.......................................................... (246) (314)
Accumulated other comprehensive income.............................................. 771 807
---------- ----------
Total shareholders' equity.................................................... 243,603 237,680
---------- ----------
$ 295,862 $ 290,082
========== ==========
- ------------------------------------------------------------
* Derived from the audited financial statements included in Actel's report on
Form 10-K for the fiscal year ended January 6, 2002.
See Notes to Unaudited Consolidated Financial Statements
ACTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Six Months Ended
------------------------
Jul. 7, Jul. 1,
2002 2001
---------- ----------
Operating activities:
Net income.......................................................................... $ 799 $ 164
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization..................................................... 5,040 10,995
Stock compensation cost recognized................................................ 68 157
Changes in operating assets and liabilities:
Accounts receivable............................................................. (2,540) 14,766
Inventories..................................................................... (169) (7,935)
Other current assets............................................................ (693) 3,366
Accounts payable, accrued salaries and employee benefits, and other accrued
liabilities................................................................... (932) (11,668)
Deferred income................................................................. 1,319 (13,767)
Deferred income taxes........................................................... 59 (664)
---------- ----------
Net cash provided by (used in) operating activities................................. 2,951 (4,586)
---------- ----------
Investing activities:
Purchases of property and equipment................................................. (3,704) (4,743)
Purchases of available-for-sale securities.......................................... (100,546) (97,180)
Sales of available-for-sale securities.............................................. 103,833 101,295
Other assets........................................................................ 262 (2,437)
---------- ----------
Net cash used in investing activities............................................... (155) (3,065)
---------- ----------
Financing activities:
Sale of common stock................................................................ 5,092 3,961
---------- ----------
Net cash provided by financing activities........................................... 5,092 3,961
---------- ----------
Net increase (decrease) in cash and cash equivalents................................... 7,888 (3,690)
Cash and cash equivalents, beginning of period......................................... 7,912 9,266
---------- ----------
Cash and cash equivalents, end of period............................................... $ 15,800 $ 5,576
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for taxes................................................................. $ 84 $ 199
See Notes to Unaudited Consolidated Financial Statements
ACTEL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited consolidated condensed financial statements of
Actel Corporation (Actel) have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
Actel's discussion and analysis of its financial condition and results of
operations are based upon Actel's consolidated condensed financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires Actel 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 United States Securities and Exchange
Commission (SEC) has defined the most critical accounting policies as the ones
that are most important to the portrayal of issuer's financial condition and
results, and requires management to make its most difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based upon this definition, Actel's most critical policies
include: inventories, impairment of investments in other companies, intangible
assets and goodwill, income taxes, and legal matters. Actel bases its estimates
on historical experience and on various other assumptions that are believed 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. Actel also has other key accounting policies, such as
policies for revenue and accounts receivable. These other policies either do not
generally require management to make estimates and judgments that are as
difficult or as subjective, or it is less likely that they would have a material
impact on Actel's reported results of operations for a given period. Further
information regarding all of these policies, as well as the estimates and
judgments involved, were disclosed in Actel's 2001 Form 10-K filed with the SEC.
As of July 7, 2002, there have been no significant changes to any critical
accounting policies or to the related estimates and judgments involved in
applying these policies, except for the determination by management that loss on
the investment in a publicly-traded equity security was other than temporary, as
described in Note 7.
The consolidated condensed financial statements include the accounts of
Actel and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. The interim financial
statements should be read in conjunction with the audited financial statements
included in Actel's Annual Report on Form 10-K for the year ended January 6,
2002 (2001 Form 10-K). The results of operations for the quarter ended July 7,
2002, are not necessarily indicative of results that may be expected for the
entire fiscal year, which ends January 5, 2003.
2. Impact of Recently Issued Accounting Standards
In October 2001, FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This standard supersedes SFAS No. 121.
Although retaining many of the fundamental recognition and measurement
provisions of SFAS No. 121, the new rules significantly change the criteria that
must be met to classify an asset as held-for-sale. The standard also supersedes
certain provisions of Accounting Principles Board Opinion (APB) No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 requires expected future operating losses
from discontinued operations to be displayed in discontinued operations in the
period(s) in which the losses are incurred rather than as of the measurement
date, as previously required. SFAS No. 144 became effective for fiscal years
beginning after December 15, 2001. Actel adopted SFAS No. 144 in the first
quarter of 2002. The adoption of SFAS No. 144 did not impact Actel's financial
position, operating results, or cash flows.
3. Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, Goodwill and Other
Intangible Assets." These standards are effective for fiscal years beginning
after December 15, 2001. Actel adopted SFAS No. 141 and SFAS No. 142 in the
first quarter of 2002. Under these pronouncements, goodwill and any intangible
assets with an indefinite life (goodwill) will no longer be amortized, but will
be subject to an annual impairment test. Intangible assets with a finite useful
life (other intangible assets) will continue to be amortized over their
estimated useful lives. As of July 7, 2002, unamortized goodwill was $37.2
million. For the quarter and six months ended July 7, 2002, goodwill was not
amortized, which resulted in the elimination of $3.0 million and $6.0 million,
respectively, of amortization expense that would have been recognized as expense
prior to the adoption of SFAS Nos. 141 and 142. For the quarter and six months
ended July 1, 2001, the amortization expense related to goodwill was $2.9
million and $5.8 million, respectively. Other intangible assets, with a net book
value of $8.6 million at July 7, 2002 (included in other assets line of the
consolidated condensed balance sheet), will continue to be amortized over their
estimated useful lives. For the quarter and six months ended July 7, 2002,
amortization expense associated with other intangible assets was $0.7 million
and $1.4 million, respectively. For the quarter and six months ended July 1,
2001, amortization expense associated with other intangible assets was $0.8
million and $1.7 million, respectively. Management concluded there was no
cumulative effect from prior years that Actel was required to record in the
first quarter of 2002 as a result of adopting SFAS No. 142. The current year
impairment review will be completed by the end of the third quarter of 2002.
Accordingly, management is still evaluating the impact that the adoption of SFAS
No. 142 will have on Actel's financial position, operating results, and cash
flows.
ACTEL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SFAS No. 142 requires disclosure of adjusted net income and adjusted net
income per share for all periods presented on the interim statements of
operations, as adjusted to eliminate the effects of goodwill amortization. The
periods presented below are adjusted to eliminate the effect of goodwill
amortization, which is no longer being amortized for periods beginning with the
first quarter of 2002.
Three Months Ended Six Months Ended
-------------------------------------- ------------------------
Jul. 7, Jul. 1, Apr. 7, Jul, 7, Jul. 1,
2002 2001 2002 2002 2001
----------- ----------- ---------- ----------- ----------
(in thousands, except per share amounts)
Reported net income (loss).................. $ 404 $ (2,631) $ 395 $ 799 $ 164
Amortization of goodwill.................... - 2,937 - - 5,775
----------- ----------- ---------- ----------- ----------
Adjusted net income excluding amortization of
goodwill................................. $ 404 $ 306 $ 395 $ 799 $ 5,939
=========== =========== ========== =========== ==========
Reported net income (loss) per share:
Basic.................................... $ 0.02 $ (0.11) $ 0.02 $ 0.03 $ 0.01
=========== =========== ========== =========== ==========
Diluted.................................. $ 0.02 $ (0.11) $ 0.02 $ 0.03 $ 0.01
=========== =========== ========== =========== ==========
Adjusted net income per share:
Basic.................................... $ 0.02 $ 0.01 $ 0.02 $ 0.03 $ 0.25
=========== =========== ========== =========== ==========
Diluted.................................. $ 0.02 $ 0.01 $ 0.02 $ 0.03 $ 0.24
=========== =========== ========== =========== ==========
Shares used in computing adjusted net income
per share:
Basic.................................... 24,382 23,642 24,170 24,276 23,557
=========== =========== ========== =========== ==========
Diluted.................................. 26,036 25,087 25,388 25,676 25,113
=========== =========== ========== =========== ==========
ACTEL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Inventories
Inventories consist of the following:
Jul. 7, Jan. 6,
2002 2002
---------- ---------
(in thousands)
Inventories:
Purchased parts and raw materials................................................... $ 4,946 $ 6,972
Work-in-process..................................................................... 29,034 26,670
Finished goods...................................................................... 2,527 2,696
---------- ---------
$ 36,507 $ 36,338
========== =========
Inventory is stated at the lower of cost (first-in, first-out) or market
(net realizable value). Management believes 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 either 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 have a result other than anticipated,
inventory levels may be adversely affected.
Actel writes down its inventory for obsolescence and 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, Actel applies
a methodology that includes assumptions and estimates to arrive at the net
realizable value. First, Actel identifies any inventory that has been previously
reserved in prior periods. This inventory remains written down until sold,
destroyed, or otherwise dispositioned. Second, Actel's quality assurance
personnel examine inventory line items that may have some form of obsolescence
due to non-conformance with electrical and mechanical standards. Third, Actel
assesses the inventory not otherwise identified to be reserved against product
history and forecast demand, typically six months. Finally, the result of this
methodology is analyzed by management in light of the product life cycle, design
win activity, and competitiveness 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 projected by management, additional inventory write-downs may be required.
ACTEL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share in accordance with SFAS No. 128, "Earnings per Share":
Three Months Ended Six Months Ended
-------------------------------------- ------------------------
Jul. 7, Jul. 1, Apr. 7, Jul. 7, Jul. 1,
2002 2001 2002 2002 2001
----------- ----------- ---------- ----------- ----------
(in thousands, except per share amounts)
Basic:
Average common shares outstanding............. 24,382 23,642 24,170 24,276 23,557
Shares used in computing net income per share. 24,382 23,642 24,170 24,276 23,557
=========== =========== ========== =========== ==========
Net income.................................... $ 404 $ (2,631) $ 395 $ 799 $ 164
=========== =========== ========== =========== ==========
Net income per share.......................... $ 0.02 $ (0.11) $ 0.02 $ 0.03 $ 0.01
=========== =========== ========== =========== ==========
Diluted:
Average common shares outstanding........... 24,382 23,642 24,170 24,276 23,557
Net effect of dilutive stock options - based
on the treasury stock method............. 1,654 - 1,218 1,400 1,556
----------- ----------- ---------- ----------- ----------
Shares used in computing net income per share 26,036 23,642 25,388 25,676 25,113
=========== =========== ========== =========== ==========
Net income.................................. $ 404 $ (2,631) $ 395 $ 799 $ 164
=========== =========== ========== =========== ==========
Net income per share........................ $ 0.02 $ (0.11) $ 0.02 $ 0.03 $ 0.01
=========== =========== ========== =========== ==========
ACTEL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Comprehensive Income/(Loss)
The components of comprehensive income (loss), net of tax, are as follows:
Three Months Ended Six Months Ended
-------------------------------------- ------------------------
Jul. 7, Jul. 1, Apr. 7, Jul. 7, Jul. 1,
2002 2001 2002 2002 2001
----------- ----------- ---------- ----------- ----------
(in thousands)
Net income (loss)........................... $ 404 $ (2,631) $ 395 $ 799 $ 164
Unrealized gain (loss) on available-for-sale
securities............................... 383 179 (406) (23) 455
Less reclassification adjustment for (gains)
losses included in net income*........... 2 - (15) (13) -
---------- ----------- ---------- ----------- ----------
Other comprehensive income (loss)........... 385 179 (421) (36) 455
---------- ----------- ---------- ----------- ----------
Total comprehensive income (loss)........... $ 789 $ (2,452) $ (26) $ 763 $ 619
========== =========== ========== =========== ==========
- ------------------------------------------------------------
* Includes $0.5 million and $0.1 million losses on sales of a publicly-traded
equity security in the second quarter and first quarter of 2002,
respectively.
Accumulated other comprehensive income presented in the accompanying
consolidated condensed balance sheets consists of the accumulated net unrealized
gain (loss) on available-for-sale securities.
ACTEL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Investments in Other Companies
During the quarter and six months ended July 7, 2002 Actel recorded losses
of $1.0 million and $1.1 million, respectively, related to an investment in a
publicly traded company. These amounts are composed of a realized loss on the
shares sold during the quarter and a decline in market value deemed to be other
than temporary. During the second quarter of 2002, Actel sold a portion of an
investment in a publicly-traded equity security with a cost basis of $3.0
million for proceeds of $2.5 million, resulting in a realized loss on the sale
of $0.5 million. For the six months ended July 7, 2002, Actel sold shares of
this publicly-traded equity security with a cost basis of $3.8 million for
proceeds of $3.1 million, resulting in a realized losses on the sales of $0.7
million. Actel accounts for investments in marketable equity securities in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under SFAS No. 115, if the decline in value below cost is
determined to be other than temporary, the unrealized losses will be realized as
expense on the income statement in the period when that determination is made.
As a matter of policy, Actel determines a decline in market value to be other
than temporary when, in the absence of other overriding factors, a stock has
traded below cost for a consecutive six-month period. Overriding factors such as
general economic and industry specific trends may be either aggravating or
mitigating. When a decline in market value is determined to be other than
temporary, the investment is written down to the fair value at the time of
impairment, with the amount of the write-down realized as expense on the income
statement. Based on a number of factors, including the magnitude of the drop in
market value below Actel's cost, declining cash balances at the issuing company,
and general economic conditions, management concluded that the decline in value
of the publicly-traded equity security was other than temporary at the end of
the second quarter of 2002. Accordingly, the value of the security was written
down to the market value at July 7, 2002, and a loss on the write-down of $0.5
million was recorded. At July 7, 2002, Actel's remaining investment in the
equity security had a cost basis of $0.7 million (after adjustment for
impairment loss described above).
At July 7, 2002, Actel held an equity investment in a private company
located in the United Kingdom. This investment is carried at its cost of $2.2
million on the balance sheet as part of other assets. As this equity security is
not publicly traded, determining the fair value of this investment is judgmental
in nature and dependant on management's assessment of the performance of the
company, which includes, among other things, successfully developing and
introducing a new technology into the market as well as obtaining additional
funding to finance these activities until the company can generate positive cash
flows from the sale of the new products. This investment is subject to a
multitude of risks, including but not limited to the risks that the company may
not be successful in developing the planned technology, that the company may not
be able to secure necessary funding to continue operations, that a suitable
market for such technology may not develop, or that a competitor may develop a
superior product. If any of these risks materialize, or other indicators of
possible impairment arise, the investment will be evaluated for impairment and
written down to a balance equal to the fair value at the time of impairment,
with the amount of the write-down realized as an expense on the income
statement. Based on the progress made toward technological goals, the
expectation of future marketability of the technology under development, and
additional funding arrangements secured in March 2002, Actel concluded no
impairment of this investment existed at July 7, 2002.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The {bracketed statements} contained in this Quarterly Report on Form 10-Q
are forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Actual events and results
may differ materially from those expressed or forecast in forward-looking
statements due to the Risk Factors set forth in this Quarterly Report on Form
10-Q or at the end of Part I of Actel's Annual Report on Form 10-K for the year
ended January 6, 2002 (2001 Form 10-K), or for other reasons. All information
contained or incorporated by reference in this Quarterly Report on Form 10-Q
should be read in conjunction with and in the context of such Risk Factors.
Unless otherwise indicated, the statements contained in this Quarterly Report on
Form 10-Q are made as of August 7, 2002, and Actel undertakes no obligation to
update such statements, including forward-looking statements.
Critical Accounting Policies
Actel's discussion and analysis of its financial condition and results of
operations are based upon Actel's consolidated condensed financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires Actel 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 United States Securities and Exchange
Commission (SEC) has defined the most critical accounting policies as the ones
that are most important to the portrayal of issuer's financial condition and
results, and requires management to make its most difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based upon this definition, Actel's most critical policies
include: inventories, impairment of investments in other companies, intangible
assets and goodwill, income taxes, and legal matters. Actel bases its estimates
on historical experience and on various other assumptions that are believed 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. Actel also has other key accounting policies, such as
policies for revenue and accounts receivable. These other policies either do not
generally require management to make estimates and judgments that are as
difficult or as subjective, or it is less likely that they would have a material
impact on Actel's reported results of operations for a given period. Further
information regarding all of these policies, as well as the estimates and
judgments involved, were disclosed in Actel's 2001 Form 10-K filed with the SEC.
As of July 7, 2002, there have been no significant changes to any critical
accounting policies or to the related estimates and judgments involved in
applying these policies, except for the determination by management that loss on
the investment in a publicly-traded equity security was other than temporary, as
described below.
In accordance with Actel's critical accounting policies related to
determining impairment of investments in other companies, Actel wrote down an
investment in a publicly-traded equity security and realized a loss on the
write-down of $0.5 million. Actel accounts for investments in marketable equity
securities in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Under SFAS No. 115, if the decline in value
below cost is determined to be other than temporary, the unrealized losses will
be realized as expense on the income statement in the period when that
determination is made. As a matter of policy, Actel determines a decline in
market value to be other than temporary when, in the absence of other overriding
factors, a stock has traded below cost for a consecutive six-month period.
Overriding factors such as general economic and industry specific trends may be
either aggravating or mitigating. When a decline in market value is determined
to be other than temporary, the investment is written down to the fair value at
the time of impairment, with the amount of the write-down realized as expense on
the income statement. Based on a number of factors, including the magnitude of
the drop in market value below Actel's cost, declining cash balances at the
issuing company, and general economic conditions, management concluded that the
decline in value of the publicly-traded equity security was other than temporary
at the end of the second quarter of 2002. Accordingly, the value of the security
was written down to the market value at July 7, 2002, and a loss on the
write-down of $0.5 million was recorded. At July 7, 2002, Actel's remaining
investment in the equity security had a cost basis of $0.7 million (after
adjustment for impairment loss described above).
Results of Operations
Net Revenues
Net revenues for the second quarter of 2002 were $34.3 million, an increase
of 4% from the first quarter of 2002 and a decrease of 6% from the second
quarter of 2001. Quarterly net revenues increased sequentially due to a 26%
increase in unit shipments of field programmable gate arrays (FPGAs), which was
partially offset by an 18% decrease in the overall average selling price (ASP)
of FPGAs. Quarterly net revenues declined from a year ago due to a 28% increase
in unit shipments and a 26% decrease in ASP. The overall level of demand in a
quarter influences total net revenues, and the mix of products sold is generally
the primary factor affecting unit volume and ASP levels. Actel's product
portfolio includes many products ranging from low ASP devices, which typically
sell in higher volumes, to high ASP devices, which typically sell in lower
volumes. Sales to customers in the consumer and computing markets (which
typically purchase lower ASP devices in higher volumes) made up a larger
percentage of revenues for the second quarter of 2002 than for the first quarter
of 2002 and the second quarter of 2001. This contributed to the increase in
units shipped and the decrease in ASP.
Net revenues were $67.4 million for the first six months of fiscal 2002, a
decrease of 17% from the first six months of fiscal 2001. Six-month net revenues
declined from a year ago due to a 20% decrease in ASP, which was partially
offset by a 4% increase in unit shipments. Shipments of higher volume, lower ASP
devices for use in consumer and computing applications constituted a
significantly higher percentage of its net revenues for the first six months of
2002 than for the first six months of 2001.
Gross Margin
Gross margin for the second quarter of 2002 was 62.2% of net revenues,
compared with 61.3% for the first quarter of 2002 and 51.8% for the second
quarter of 2001. Gross margin was 61.8% of net revenues for the first six months
of 2002, compared with 57.7% of net revenues for the first six months of 2001.
Gross margin for the second quarter of 2002 increased sequentially due to the
partial release of an accrual for disputed contractual obligations. During the
quarter, an understanding was reached regarding one of the disputed contractual
obligations for an amount less than Actel had accrued. The release of the excess
accrual resulted in a credit of $0.6 million to gross margin. Without the
release of the excess accrual, gross margin for the second quarter of 2002 would
have been 60.6%. Gross margins for the three and six months ended July 1, 2001,
were negatively impacted by charges for higher inventory reserves that were
taken due to declining demand and high inventory balances during 2001.
Actel seeks to reduce costs by improving wafer yields, negotiating price
reductions with suppliers, increasing the level and efficiency of its testing
and packaging operations, achieving economies of scale by means of higher
production levels, and increasing the number of die produced per wafer,
principally by shrinking the die size of its products. No assurance can be given
that these efforts will be successful. The capability of Actel to shrink the die
size of its FPGAs is dependent on the availability of more advanced
manufacturing processes. Due to the custom steps involved in manufacturing
antifuse and (to a lesser extent) flash FPGAs, Actel typically obtains access to
new manufacturing processes later than its competitors using standard
manufacturing processes.
Research and Development (R&D)
R&D expenditures for the second quarter of 2002 were $9.9 million, or 29%
of net revenues, compared with $9.7 million, or 29% of net revenues, for the
first quarter of 2002 and $9.1 million, or 25% of revenues, for the second
quarter of 2001. R&D expenditures were $19.6 million, or 29% of net revenues,
for the first six months of 2002, compared with $18.9 million, or 23% of net
revenues, for the first six months of 2001. The increase in R&D spending for the
second quarter and first six months of 2002 was due primarily to incremental
spending on a BridgeFPGA initiative that Actel announced during 2001 to address
interoperability problems created by the proliferation of high-performance
interface standards.
Selling, General, and Administrative (SG&A)
SG&A expenses for the second quarter of 2002 were $11.0 million, or 32% of
net revenues, compared with $10.7 million, or 32% of net revenues, for the first
quarter of 2002 and $10.3 million, or 28% of net revenues, for the second
quarter of 2001. SG&A expenses were $21.7 million, or 32% of net revenues, for
the first six months of 2002 compared with $21.5 million, or 26% of net
revenues, for the first six months of fiscal 2001. SG&A spending for the first
six months of 2002 was affected by increased headcount in the sales and
marketing functions related to the introduction and rollout of Actel's new
ProASIC Plus and Axcelerator product families.
Amortization of Goodwill and Other Acquisition-Related Intangibles and
Expenses
Amortization of goodwill and other acquisition-related intangibles and
expenses was $0.7 million for the second quarter of 2002, compared with $0.7
million for the first quarter of 2002 and $3.7 million for the second quarter of
2001. Amortization of goodwill and other acquisition-related intangibles was
$1.3 million for the first six months of 2002, compared with $7.5 million for
the first six months of 2001. The quarterly and six-month declines in
amortization from 2001 were due to the implementation of FAS No. 142 in the
first quarter of 2002, which eliminated the amortization of goodwill. See Note 2
of Notes to Unaudited Consolidated Condensed Financial Statements for further
discussion of FAS No. 142.
Interest Income and Other, Net
Interest income and other, net was $1.8 million for the second quarter of
2002, compared with $1.5 million for the first quarter of 2002 and $2.0 million
for the second quarter of 2001. The sequential increase resulted primarily from
realized gains in Actel's short-term investment accounts as well as an increased
amount of cash available for investing during the second quarter. Interest
income and other, net was $3.3 million for the first six months of 2002,
compared with $4.1 million for the first six months of 2001. The decrease was
due primarily to lower interest rates in 2002.
Loss on Sale and Write-Down of Marketable Equity Security
During the quarter and six months ended July 7, 2002 Actel recorded losses
of $1.0 million and $1.1 million, respectively, related to an investment in a
publicly traded company. These amounts are composed of a realized loss on the
shares sold during the quarter and a decline in market value deemed to be other
than temporary. During the second quarter of 2002, Actel sold a portion of an
investment in a publicly-traded equity security with a cost basis of $3.0
million for proceeds of $2.5 million, resulting in a realized loss on the sale
of $0.5 million. For the six months ended July 7, 2002, Actel sold shares of
this publicly-traded equity security with a cost basis of $3.8 million for
proceeds of $3.1 million, resulting in a realized losses on the sales of $0.7
million. Based on a number of factors, including the magnitude of the drop in
market value below Actel's cost, declining cash balances at the issuing company,
and general economic conditions, management concluded that the decline in value
of the publicly-traded equity security was other than temporary at the end of
the second quarter of 2002. Accordingly, the value of the security was written
down to the market value at July 7, 2002, and a loss on the write-down of $0.5
million was recorded. At July 7, 2002, Actel's remaining investment in the
equity security had a cost basis of $0.7 million (after adjustment for
impairment loss described above).
Tax Provision
Actel's effective rate was 10% for both the first and second quarters of
2002. The effective tax rates are based on the estimated annual tax rate in
compliance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Significant components affecting the effective tax rate
include federal R&D credits, income from tax-exempt securities, the state
composite rate, and recognition of certain deferred tax assets subject to
valuation allowances. Actel's relatively low level of taxable income for the
first and second quarters of 2002, combined with a relatively high level of
spending on R&D, permitted Actel to record R&D tax credits at a level sufficient
to significantly reduce the effective tax rate.
Liquidity and Capital Resources
Actel's cash, cash equivalents, and short-term investments at the end of
the second quarter of 2002 were $133.4 million, compared with $128.8 million at
the beginning of the year. The increase was the result of cash provided by
operating activities and cash provided by the sale of stock under employee stock
plans.
Net cash provided by operating activities was $3.0 million for the first
six months of 2002, compared with net use of $4.6 million for the first six
months of 2001. The increase in cash provided by operations resulted primarily
from changes in operating assets and liabilities that consumed less cash in the
first six months of 2002 than in the first six months of 2001. The most
significant changes in operating assets that consumed cash in 2001 were deferred
income, which decreased by $13.8 million in the first six months of 2001 and
increased 1.3 million in the first six months of 2002; reductions in accounts
payable and other short term liabilities, which consumed $11.7 million in the
first six months of 2001 compared with $0.9 million in the first six months of
2002; and inventories, which grew by $7.9 million in the first six months 2001
compared with $0.2 million in the first six months of 2002. Capital expenditures
for the first six months of 2002 were $3.7 million, compared with $4.7 million
for the first six months of 2001. Sales of common stock under employee stock
plans provided $5.1 million of cash during the first six months of 2002,
compared with $4.0 million for the first six months of 2001.
{Actel believes that existing cash, cash equivalents, and short-term
investments, together with cash from operations, will be sufficient to meet its
cash requirements for the next four quarters.} A portion of available cash may
be used for investment in or acquisition of complementary businesses, products,
or technologies. Wafer manufacturers are increasingly demanding financial
support from customers in the form of equity investments and advance purchase
price deposits, which can be substantial. If Actel requires additional capacity,
it may be required to incur significant expenditures to secure such capacity.
Actel believes that the availability of adequate financial resources is a
substantial competitive factor. To take advantage of opportunities as they
arise, or to withstand adverse business conditions when they occur, it may
become prudent or necessary for Actel to raise additional capital. Actel
monitors the availability and cost of potential capital resources, including
equity and debt with a view towards raising additional capital on terms that are
acceptable to Actel. There can be no assurance that additional capital will
become available on acceptable terms.
Investments in Other Companies
During the quarter and six months ended July 7, 2002 Actel recorded losses
of $1.0 million and $1.1 million, respectively, related to an investment in a
publicly traded company. These amounts are composed of a realized loss on the
shares sold during the quarter and a decline in market value deemed to be other
than temporary. During the second quarter of 2002, Actel sold a portion of an
investment in a publicly-traded equity security with a cost basis of $3.0
million for proceeds of $2.5 million, resulting in a realized loss on the sale
of $0.5 million. For the six months ended July 7, 2002, Actel sold shares of
this publicly-traded equity security with a cost basis of $3.8 million for
proceeds of $3.1 million, resulting in a realized losses on the sales of $0.7
million. Actel accounts for investments in marketable equity securities in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under SFAS No. 115, if the decline in value below cost is
determined to be other than temporary, the unrealized losses will be realized as
expense on the income statement in the period when that determination is made.
As a matter of policy, Actel determines a decline in market value to be other
than temporary when, in the absence of other overriding factors, a stock has
traded below cost for a consecutive six-month period. Overriding factors such as
general economic and industry specific trends may be either aggravating or
mitigating. When a decline in market value is determined to be other than
temporary, the investment is written down to the fair value at the time of
impairment, with the amount of the write-down realized as expense on the income
statement. Based on a number of factors, including the magnitude of the drop in
market value below Actel's cost, declining cash balances at the issuing company,
and general economic conditions, management concluded that the decline in value
of the publicly-traded equity security was other than temporary at the end of
the second quarter of 2002. Accordingly, the value of the security was written
down to the market value at July 7, 2002, and a loss on the write-down of $0.5
million was recorded. At July 7, 2002, Actel's remaining investment in the
equity security had a cost basis of $0.7 million (after adjustment for
impairment loss described above).
At July 7, 2002, Actel held an equity investment in a private company
located in the United Kingdom. This investment is carried at its cost of $2.2
million on the balance sheet as part of other assets. As this equity security is
not publicly traded, determining the fair value of this investment is judgmental
in nature and dependant on management's assessment of the performance of the
company, which includes, among other things, successfully developing and
introducing a new technology into the market as well as obtaining additional
funding to finance these activities until the company can generate positive cash
flows from the sale of the new products. This investment is subject to a
multitude of risks, including but not limited to the risks that the company may
not be successful in developing the planned technology, that the company may not
be able to secure necessary funding to continue operations, that a suitable
market for such technology may not develop, or that a competitor may develop a
superior product. If any of these risks materialize, or other indicators of
possible impairment arise, the investment will be evaluated for impairment and
written down to a balance equal to the fair value at the time of impairment,
with the amount of the write-down realized as an expense on the income
statement. Based on the progress made toward technological goals, the
expectation of future marketability of the technology under development, and
additional funding arrangements secured in March 2002, Actel concluded no
impairment of this investment existed at July 7, 2002.
Other Factors Affecting Future Operating Results
Actel's operating results are subject to general economic conditions and a
variety of risks characteristic of the semiconductor industry (including booking
and shipment uncertainties, wafer supply fluctuations, and price erosion) or
specific to Actel, any of which could cause Actel's operating results to differ
materially from past results. For a discussion of such risks, see "Risk Factors"
in Part I of Actel's 2001 Form 10-K, which is incorporated herein by this
reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of July 7, 2002, Actel's investment portfolio (other than strategic
investments) consisted primarily of corporate bonds, floating rate notes, and
federal and municipal obligations. The principal objectives of Actel's
investment activities are to preserve principal, meet liquidity needs, and
maximize yields. To meet these objectives, Actel invests only in high credit
quality debt securities with average maturities of less than two years. Actel
also limits the percentage of total investments that may be invested in any one
issuer. Corporate investments as a group are also limited to a maximum
percentage of Actel's investment portfolio.
Actel is exposed to financial market risks, including changes in interest
rates, and marketable equity security prices. All of the potential changes noted
below are based upon sensitivity analysis performed on Actel's financial
position and expected operating levels at July 7, 2002. Actual results may
differ materially.
Actel's investments are subject to interest rate risk. An increase in
interest rates could subject Actel to a decline in the market value of its
investments. These risks are mitigated by the ability of Actel to hold these
investments to maturity. A hypothetical 100 basis point increase in interest
rates would result in a reduction of approximately $1.1 million in the fair
value of Actel's available-for-sale securities held at July 7, 2002.
Actel's strategic investments in marketable equity securities are subject
to equity price risks. Actel typically does not attempt to reduce or eliminate
market exposure on these securities. Assuming a 10% adverse change, the
marketable strategic equity securities would decrease in value by approximately
$0.1 million, based on the value of the portfolio as of July 7, 2002.
Additional Quarterly Information
The following table presents certain unaudited quarterly results for each
of the eight quarters in the period ended July 7, 2002. In the opinion of
management, all necessary adjustments (consisting only of normal recurring
accruals) have been included in the amounts stated below to present fairly the
unaudited quarterly results when read in conjunction with the audited
consolidated condensed financial statements of Actel and notes thereto included
in Actel's 2001 Form 10-K. These quarterly operating results are not necessarily
indicative of the results for any future period.
Three Months Ended
-------------------------------------------------------------------------------------------
Jul. 7, Apr. 7, Jan. 6, Sep. 30, Jul. 1, Apr. 1, Dec. 31, Oct. 1,
2002* 2002* 2002 2001 2001 2001 2000 2000
----------- --------- --------- ---------- --------- --------- ---------- ----------
(in thousands except per share amounts)
Statements of Operations Data:
Net revenues........................ $ 34,293 $ 33,060 $ 32,059 $ 32,006 $ 36,460 $ 45,034 $ 60,129 $ 60,080
Gross profit........................ 21,337 20,276 19,567 16,734 18,888 28,160 38,060 37,626
Income (loss) from operations....... (282) (853) (4,086) (6,188) (4,233) 3,463 7,497 13,648
Net income (loss)................... 404 395 $ (2,531) $ (2,334) $ (2,631) $ 2,795 $ 3,455 $ 9,779
Net income (loss) per share:
Basic............................ $ 0.02 $ 0.02 $ (0.11) $ (0.10) $ (0.11) $ 0.12 $ 0.14 $ 0.41
=========== ========= ========= ========== ========= ========= ========== ==========
Diluted**........................ $ 0.02 $ 0.02 $ (0.11) $ (0.10) $ (0.11) $ 0.11 $ 0.13 $ 0.36
=========== ========= ========= ========== ========= ========= ========== ==========
Shares used in computing net income
(loss) per share:................
Basic............................ 24,382 24,170 23,987 23,852 23,642 23,472 23,890 23,869
=========== ========= ========= ========== ========= ========= ========== ==========
Diluted**........................ 26,036 25,388 23,987 23,852 23,642 25,126 26,107 26,999
=========== ========= ========= ========== ========= ========= ========== ==========
Three Months Ended
-------------------------------------------------------------------------------------------
Jul. 7, Apr. 7, Jan. 6, Sep. 30, Jul. 1, Apr. 1, Dec. 31, Oct. 1,
2002 2002 2002 2001 2001 2001 2000 2000
----------- --------- --------- ---------- --------- --------- ---------- ----------
As a Percentage of Net Revenues:
Net revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit........................ 62.2 61.3 61.0 52.3 51.8 62.5 63.3 62.6
Income (loss) from operations....... (0.8) (2.6) (12.7) (19.3) (11.6) 7.7 12.5 22.7
Net income (loss)................... 1.2 1.2 (7.9) (7.3) (7.2) 6.2 5.7 16.3
- --------------------------------------------------
* In the first quarter of 2002, Actel adopted Statement of Financial
Accounting Standards (SFAS) Nos. 141 and 142, which eliminated the
systematic amortization of goodwill. Please see footnote 2 for further
discussion of the impact of adopting these new pronouncements.
** For the second through fourth quarters of 2001, Actel incurred quarterly
net losses and the inclusion of stock options in the shares used for
computing diluted earnings per share would have been anti-dilutive and
reduced the loss per share. Accordingly, all common stock equivalents (such
as stock options) have been excluded from the shares used to calculate
diluted earnings per share for these respective periods.
- --------------------------------------------------------------------------------
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending legal proceedings of a material nature to which Actel
is a party or of which any of its property is the subject. There are no such
legal proceedings known by Actel to be contemplated by any governmental
authority.
As is typical in the semiconductor industry, Actel has been and expects to
be notified from time to time of claims that it may be infringing patents owned
by others. During 2002, Actel has held discussions regarding potential patent
infringement issues with several third parties, some of which have significantly
greater financial and intellectual property resources than Actel. When probable
and reasonably estimable, Actel has made provision for the estimated settlement
costs of claims for alleged infringement. In the absence of facts or
circumstances unique to a particular dispute, the provision is based on a
royalty rate applied to applicable and/or estimated shipments made in the
periods and to or from the geographic areas under dispute, and the royalty rate
is estimated based on Actel's understanding of royalty rates other technology
companies typically agree to pay in similar types of disputes. As it has in the
past, Actel may obtain licenses under patents that it is alleged to infringe.
While Actel believes that reasonable resolution will occur, there can be no
assurance that these claims will be resolved or that the resolution of these
claims will not have a materially adverse effect on Actel's business, financial
condition, or results of operations. In addition, Actel's evaluation of the
impact of these pending disputes could change based upon new information learned
by Actel. {Subject to the foregoing, Actel does not believe that any pending
patent dispute is likely to have a materially adverse effect on Actel's
business, financial condition, or results of operations.}
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
- --------------- ---------------------------------------------------------------
10.1 * 1986 Incentive Stock Option Plan, as amended and restated.
10.2 1995 Employee and Consultant Stock Plan, as amended and
restated.
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act Of 2002.
- ---------------------------------------------
* This Exhibit is a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACTEL CORPORATION
Date: August 7, 2002 /s/ Jon A. Anderson
--------------------------------------
Jon A. Anderson
Vice President of Finance
and Chief Financial Officer
(as principal financial officer
and on behalf of Registrant)