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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 4, 2004
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.)
2061 Stierlin Court
Mountain View, California 94043-4655
(Address of principal executive offices) (Zip Code)
(650) 318-4200
(Registrant's telephone number, including area code)
--------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
Number of shares of Common Stock outstanding as of August 3, 2004:
25,984,164.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
ACTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited, in thousands, except per share amounts)
Three Months Ended Six Months Ended
-------------------------------------- ------------------------
Jul. 4, Jul. 6, Apr. 4, Jul. 4, Jul. 6,
2004 2003 2004 2004 2003
---------- ---------- ---------- ---------- ----------
Net revenues................................ $ 43,688 $ 36,609 $ 42,153 $ 85,841 $ 70,950
Costs and expenses:
Cost of revenues......................... 17,054 14,584 16,497 33,551 29,313
Research and development................. 11,578 9,851 10,663 22,241 19,364
Selling, general, and
administrative........................ 11,852 11,070 11,811 23,663 22,102
Amortization of acquisition-related
intangibles........................... 663 663 663 1,326 1,344
---------- ---------- ---------- ---------- ----------
Total costs and expenses........... 41,147 36,168 39,634 80,781 72,123
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............... 2,541 441 2,519 5,060 (1,173)
Interest income and other, net.............. 676 815 656 1,332 1,807
---------- ---------- ---------- ---------- ----------
Income before tax (benefit) provision....... 3,217 1,256 3,175 6,392 634
Tax (benefit) provision..................... 713 (130) 635 1,348 (983)
---------- ---------- ---------- ---------- ----------
Net income.................................. $ 2,504 $ 1,386 $ 2,540 $ 5,044 $ 1,617
========== ========== ========== ========== ==========
Net income per share:
Basic.................................... $ 0.10 $ 0.06 $ 0.10 $ 0.20 $ 0.07
========== ========== ========== ========== ==========
Diluted.................................. $ 0.09 $ 0.05 $ 0.09 $ 0.19 $ 0.06
========== ========== ========== ========== ==========
Shares used in computing net income per
share:
Basic.................................... 25,749 24,550 25,620 25,685 24,444
========== ========== ========== ========== ==========
Diluted.................................. 26,584 25,776 27,324 26,954 25,453
========== ========== ========== ========== ==========
See Notes to Unaudited Consolidated Condensed Financial Statements
ACTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
Jul. 4, Jan. 4,
2004 2004*
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 17,816 $ 13,648
Short-term investments.............................................................. 148,324 144,765
Accounts receivable, net............................................................ 25,099 20,537
Inventories, net.................................................................... 36,240 38,664
Deferred income taxes............................................................... 18,786 18,786
Prepaid expenses and other current assets........................................... 4,153 3,561
------------ ------------
Total current assets................................................................... 250,418 239,961
Property and equipment, net............................................................ 21,174 19,935
Goodwill............................................................................... 32,142 32,142
Other assets, net...................................................................... 24,112 24,719
------------ ------------
$ 327,846 $ 316,757
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 9,163 $ 13,140
Accrued salaries and employee benefits.............................................. 5,842 7,081
Other accrued liabilities........................................................... 6,171 6,117
Deferred income on shipments to distributors........................................ 29,244 22,545
------------ ------------
Total current liabilities.............................................................. 50,420 48,883
Deferred compensation plan liability................................................... 2,845 2,658
Deferred rent liability................................................................ 914 783
------------ ------------
Total liabilities...................................................................... 54,179 52,324
Commitments and contingencies..........................................................
Shareholders' equity:
Common stock........................................................................ 26 25
Additional paid-in capital.......................................................... 189,323 184,674
Retained earnings .................................................................. 84,562 79,518
Unearned compensation cost ......................................................... - (44)
Accumulated other comprehensive income (loss) ...................................... (244) 260
------------ ------------
Total shareholders' equity............................................................. 273,667 264,433
------------ ------------
$ 327,846 $ 316,757
============ ============
* Derived from the consolidated audited financial statements included in our
report on Form 10-K for the fiscal year ended January 4, 2004.
See Notes to Unaudited Consolidated Condensed Financial Statements
ACTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Six Months Ended
--------------------------
Jul. 4, Jul. 6,
2004 2003
------------ ------------
Operating activities:
Net income......................................................................... $ 5,044 $ 1,617
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 5,073 5,103
Stock compensation cost recognized.............................................. 44 67
Changes in operating assets and liabilities:
Accounts receivable.......................................................... (4,562) (3,563)
Inventories.................................................................. 2,424 3,148
Deferred income taxes........................................................ 245 4,951
Prepaid expenses and other current assets.................................... (592) 1,152
Accounts payable, accrued salaries and employee benefits, and other accrued
liabilities.............................................................. (5,031) (5,436)
Deferred income on shipments to distributors................................. 6,699 (175)
------------ ------------
Net cash provided by operating activities.......................................... 9,344 6,864
Investing activities:
Purchases of property and equipment................................................ (4,986) (4,479)
Purchases of available-for-sale securities......................................... (81,560) (89,620)
Sales and maturities of available for sale securities.............................. 77,161 76,717
Changes in other long term assets.................................................. (441) 144
------------ ------------
Net cash used in investing activities.............................................. (9,826) (17,238)
Financing activities:
Issuance of common stock under employee stock plans................................ 4,650 5,424
------------ ------------
Net cash provided by financing activities.......................................... 4,650 5,424
------------ ------------
Net increase (decrease) in cash and cash equivalents................................... 4,168 (4,950)
Cash and cash equivalents, beginning of period......................................... 13,648 18,207
------------ ------------
Cash and cash equivalents, end of period............................................... $ 17,816 $ 13,257
============ ============
Supplemental disclosures of cash flow information and non-cash investing and
financing activities:
Cash paid (received) during the period for taxes, net.................................. $ 357 $ (4,777)
See Notes to Unaudited Consolidated Condensed Financial Statements
ACTEL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited consolidated condensed financial statements of
Actel Corporation 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 adjustments) considered necessary for a fair presentation have been
included.
Actel Corporation and its consolidated subsidiaries are referred to as
"we," "us," or "our." Management's Discussion and Analysis of Financial
Condition and Results of Operations is based upon our unaudited consolidated
condensed financial statements, which have been prepared in accordance with
accounting principles for interim financial statements generally accepted in the
United States.
These unaudited consolidated condensed financial statements include our
accounts and the accounts of our wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated on consolidation.
These unaudited consolidated condensed financial statements should be read in
conjunction with the audited financial statements included in our 2003 Form
10-K. The results of operations for the six months ended July 4, 2004, are not
necessarily indicative of results that may be expected for the entire fiscal
year, which ends January 2, 2005.
2. Stock Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure an Amendment of FASB
Statement No. 123." SFAS No. 148 provided alternative methods of transition for
companies making a voluntary change to fair value-based accounting for
stock-based employee compensation. We continue to account for our stock option
plans under the intrinsic value recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related FASB Interpretations (FINs). Effective for interim
periods beginning after December 15, 2002, SFAS No. 148 also requires disclosure
of pro-forma results on a quarterly basis as if the company had applied the fair
value recognition provisions of SFAS No. 123.
ACTEL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As the exercise price of all options granted under our stock option plans
was equal to the market price of the underlying common stock on the grant date,
no stock-based employee compensation cost, other than acquisition-related
compensation, is recognized in net income. The following table illustrates the
effect on net income and earnings per share if we had applied the fair value
recognition provisions of SFAS No. 123, as amended, to options granted under our
stock option plans and Employee Stock Purchase Plan. For purposes of pro forma
disclosures, the estimated fair value of our stock-based awards to employees is
amortized to expense using the graded method for options and during the purchase
periods for employee stock purchase rights. Our pro forma information is as
follows:
Three Months Ended Six Months Ended
-------------------------------------- ------------------------
Jul. 4, Jul. 6, Apr. 4, Jul. 4, Jul. 6,
2004 2003 2004 2004 2003
---------- ---------- ---------- ---------- ----------
(unaudited, in thousands except per share amounts)
Net income applicable to common stockholders,
as reported................................. $ 2,504 $ 1,386 $ 2,540 $ 5,044 $ 1,617
Add back:
Stock-based employee compensation included in
reported net income ........................ $ 11 $ 33 $ 33 $ 44 $ 67
Less:
Total stock-based employee compensation
expense determined under the fair value method
for all awards, net of tax.................. $ (2,745) $ (3,499) $ (2,547) $ (5,293) $ (7,113)
---------- ---------- ---------- ---------- ----------
Pro forma net income (loss) applicable to
common stockholders......................... $ (230) $ (2,080) $ 26 $ (205) $ (5,429)
========== ========== ========== ========== ==========
Earnings per share as reported:
Basic....................................... $ 0.10 $ 0.06 $ 0.10 $ 0.20 $ 0.07
========== ========== ========== ========== ==========
Diluted..................................... $ 0.09 $ 0.05 $ 0.09 $ 0.19 $ 0.06
========== ========== ========== ========== ==========
Pro forma earnings (loss) per share:
Basic....................................... $ (0.01) $ (0.08) $ 0.00 $ (0.01) $ (0.22)
========== ========== ========== ========== ==========
Diluted..................................... $ (0.01) $ (0.08) $ 0.00 $ (0.01) $ (0.22)
========== ========== ========== ========== ==========
SFAS No. 123 requires the use of option pricing models that were not
developed for use in valuing employee stock options. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
short-lived exchange traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including the option's expected life and the
price volatility of the underlying stock. Because our employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in our opinion the existing models do not necessarily
provide a reliable single measure of the fair value of employee stock options.
ACTEL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Goodwill and Other Acquisition-Related Intangibles
During 1999 and 2000, we completed the acquisitions of AutoGate Logic, Inc.
(AGL), Prosys Technology, Inc., and GateField Corporation (GateField), resulting
in a significant amount of goodwill and identified intangible assets. At July 4,
2004 and January 4, 2004, we had $32.1 million of net goodwill. At the beginning
of 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which
addresses the financial accounting and reporting standards for goodwill and
other intangible assets subsequent to their acquisition. This standard requires
that goodwill no longer be amortized, and instead goodwill is to be tested 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 as of January 4, 2004, and noted
no impairment. Our next annual impairment test will be performed in the fourth
quarter of 2004. No indicators of impairment were present during the six months
ended July 4, 2004.
At July 4, 2004, we have definite-lived intangible assets arising from our
acquisitions of AGL, Prosys Technology, Inc., and GateField with a net book
value of $3.2 million, which are being amortized on a straight line basis over
their estimated lives. In accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," we recognize impairment losses on
long-lived assets when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the net book
value of those assets. The impairment loss, if any, is measured by comparing the
fair value of the asset to its carrying value. Fair value is based on discounted
cash flows using present value techniques identified in SFAS No. 144. No
indicators of impairment were present during the six months ended July 4, 2004.
We made no acquisitions of intangible assets during the first two quarters
of 2004. Identified intangible assets as of July 4, 2004, consisted of the
following:
Gross Accumulated
Assets Amortization Net
---------- ---------- ----------
(unaudited, in thousands)
Acquisition-related developed technology................................ $ 11,454 $ (8,688) $ 2,766
Other acquisition-related intangibles................................... 2,600 (2,177) 423
Acquired patents........................................................ 516 (456) 60
---------- ---------- ----------
Total identified intangible assets............................. $ 14,570 $ (11,321) $ 3,249
========== ========== ==========
Identified intangible assets as of January 4, 2004, consisted of the following:
Gross Accumulated
Assets Amortization Net
---------- ---------- ----------
(unaudited, in thousands)
Acquisition-related developed technology................................ $ 11,454 $ (7,543) $ 3,911
Other acquisition-related intangibles................................... 2,600 (2,012) 588
Acquired patents........................................................ 516 (441) 75
---------- ---------- ----------
Total identified intangible assets............................. $ 14,570 $ (9,996) $ 4,574
========== ========== ==========
ACTEL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All of our identified intangible assets are subject to amortization.
Amortization of identified intangibles included the following:
Three Months Ended Six Months Ended
-------------------------------------- ------------------------
Jul. 4, Jul. 6, Apr. 4, Jul. 4, Jul. 6,
2004 2003 2004 2004 2003
---------- ---------- ---------- ---------- ----------
(unaudited, in thousands)
Acquisition-related developed technology.... $ 573 $ 573 $ 573 $ 1,146 $ 1,145
Other acquisition-related intangibles....... 83 83 83 166 166
Acquired patents............................ 7 7 7 14 33
---------- ---------- ---------- ---------- ----------
Total amortization expense......... $ 663 $ 663 $ 663 $ 1,326 $ 1,344
========== ========== ========== ========== ==========
Based on the carrying value of identified intangible assets recorded at July 4,
2004, and assuming no subsequent impairment of the underlying assets or
acquisition of other identified intangible assets, the annual amortization
expense is expected to be $2.7 million for 2004, $1.9 million for 2005, and none
thereafter.
4. Inventories
Inventories consist of the following:
Jul. 4, Jan. 4,
2004 2004
------------ ------------
(unaudited, in thousands)
Inventories, net:
Purchased parts and raw materials................................................... $ 5,251 $ 5,243
Work-in-process..................................................................... 25,077 29,243
Finished goods...................................................................... 5,912 4,178
------------ ------------
$ 36,240 $ 38,664
============ ============
Inventory is stated at the lower of cost (first-in, first-out) or market
(net realizable value). We believe that a certain level of inventory must be
carried to maintain an adequate supply of product for customers. This inventory
level may vary based upon orders received from customers or internal forecasts
of demand for these products. Other considerations in determining inventory
levels include the stage of products in the product life cycle, design win
activity, manufacturing lead times, customer demands, strategic relationships
with foundries, "last time buy" inventory purchases, and competitive situations
in the marketplace. Should any of these factors develop other than anticipated,
inventory levels may be materially and adversely affected.
ACTEL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated realizable value based upon assumptions about future demand and market
conditions. To address this difficult, subjective, and complex area of judgment,
we apply a methodology that includes assumptions and estimates to arrive at the
net realizable value. First, we identify any inventory that has been previously
written down in prior periods. This inventory remains written down until sold,
destroyed, or otherwise dispositioned. Second, our quality assurance personnel
examine inventory line items that may have some form of obsolescence due to
non-conformance with electrical and mechanical standards. Third, we assess the
inventory not otherwise identified to be written down against product history
and forecasted demand (typically for the next six months). Finally, we analyze
the result of this methodology in light of the product life cycle, design win
activity, and competitive situation in the marketplace to derive an outlook for
consumption of the inventory and the appropriateness of the resulting inventory
levels. If actual future demand or market conditions are less favorable than
those we have projected, additional inventory write-downs may be required.
During 2003, we modified our inventory valuation policies to account for
"last time buy" inventory purchases. Last time buys occur when a wafer supplier
is about to shut down the manufacturing line used to make a product and current
inventories are insufficient to meet foreseeable future demand. We made last
time buys of certain products from our wafer suppliers in 2003. Since this
inventory was not acquired to meet current demand, we did not believe the
application of our existing inventory write down policy was appropriate, so a
discrete write down policy was established for inventory purchased in last time
buy transactions. As a consequence, these transactions and the related inventory
are excluded from the standard excess and obsolescence write down policy.
Inventory purchased in last time buy transactions 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 could be written down in the future. Evaluations of last time buy
inventory during the first six months of 2004 did not result in any write downs.
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:
Three Months Ended Six Months Ended
-------------------------------------- ------------------------
Jul. 4, Jul. 6, Apr. 4, Jul. 4, Jul. 6,
2004 2003 2004 2004 2003
---------- ---------- ---------- ---------- ----------
(unaudited, in thousands except per share amounts)
Basic:
Weighted-average common shares outstanding.. 25,749 24,550 25,620 25,685 24,444
========== ========== ========== ========== ==========
Net income.................................. $ 2,504 $ 1,386 $ 2,540 $ 5,044 $ 1,617
========== ========== ========== ========== ==========
Net income per share........................ $ 0.10 $ 0.06 $ 0.10 $ 0.20 $ 0.07
========== ========== ========== ========== ==========
Diluted:
Weighted-average common shares outstanding.. 25,749 24,550 25,620 25,685 24,444
========== ========== ========== ========== ==========
Net effect of dilutive employee stock
options - based on the treasury stock
method.................................... 835 1,226 1,704 1,270 1,009
---------- ---------- ---------- ---------- ----------
Shares used in computing net income per
share..................................... 26,584 25,776 27,324 26,954 25,453
========== ========== ========== ========== ==========
Net income ................................. $ 2,504 $ 1,386 $ 2,540 $ 5,044 $ 1,617
========== ========== ========== ========== ==========
Net income per share........................ $ 0.09 $ 0.05 $ 0.09 $ 0.19 $ 0.06
========== ========== ========== ========== ==========
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. 4, Jul. 6, Apr. 4, Jul. 4, Jul. 6,
2004 2003 2004 2004 2003
---------- ---------- ---------- ---------- ----------
(unaudited, in thousands except per share amounts)
Net income.................................. $ 2,504 $ 1,386 $ 2,540 $ 5,044 $ 1,617
Change in gain on available-for-sale securities (544) 173 68 (476) 251
Less reclassification adjustment for gains
included in net income................... (4) (165) (23) (27) (332)
---------- ---------- ---------- ---------- ----------
Other comprehensive income (loss)........... (548) 8 45 (503) (81)
---------- ---------- ---------- ---------- ----------
Total comprehensive income.................. $ 1,956 $ 1,394 $ 2,585 $ 4,541 $ 1,536
========== ========== ========== ========== ==========
Accumulated other comprehensive income is presented on the accompanying
consolidated condensed balance sheets and consists of the accumulated net
unrealized gain (loss) on available-for-sale securities.
7. Product Warranty
Our product warranty accrual includes specific accruals for known product
issues and an accrual for an estimate of incurred but unidentified product
issues based on historical activity. Based on historical activity and the
related expense for known product issues, the warranty accrual was not
significant for any of the periods presented.
8. Contingencies
From time to time we are notified of claims, including claims that we may
be infringing patents owned by others, or otherwise become aware of conditions,
situations, or circumstances involving uncertainty as to the existence of
liability or the amount of the loss. When probable and reasonably estimable, we
make provision for estimated liabilities. 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, or results of operations. In addition, our evaluation of
the impact of these claims and contingencies could change based upon new
information learned by us. Subject to the foregoing, we do not believe that the
resolution of any pending or threatened legal claim or loss contingency is
likely to have a materially adverse effect on our business, financial condition,
or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
In this Quarterly Report on Form 10-Q, Actel Corporation and its
consolidated subsidiaries are referred to as "we," "us," "our," or "Actel." You
should read the information in this Quarterly Report with the Risk Factors at
the end of Part I. Unless otherwise indicated, the information in this Quarterly
Report is given as of August 5, 2004, and we undertake no obligation to update
any of the information, including forward-looking statements. All
forward-looking statements are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Statements containing words
such as "anticipates," "believes," "estimates," "expects," intends," "plans,"
"seeks," and variations of such words and similar expressions are intended to
identify the forward-looking statements. Our actual results may differ
materially from those projected in the forward-looking statements for many
reasons, including those set forth in the Risk Factors.
Overview
We design, develop, and market field programmable gate arrays (FPGAs) and
supporting products and services. FPGAs are integrated circuits that adapt the
processing and memory capabilities of electronic systems to specific
applications. FPGAs are used by designers of communications, computer, consumer,
industrial, military and aerospace, and other electronic systems to
differentiate their products and get them to market faster. We are the leading
supplier of FPGAs based on flash and antifuse technologies.
This overview summarizes several of the key trends, uncertainties, and
performance indicators on which our executives were focused during the second
quarter of 2004, and supplements the overview contained in our Annual Report on
Form 10-K. The overviews are intended to be selective (rather than
comprehensive) in scope and to provide context for the discussion and analysis
of our financial statements that follows.
High Reliability Technology and Market
We believe that we are the world's leading supplier of military, avionics,
and space-grade FPGAs. This is a market in which the customers are extremely
conscientious and demand the very highest levels of quality and reliability. To
that end, we have conducted analysis of and experiments on the reliability of
our RTSX-S space-qualified FPGAs for almost a year at the behest of an ad-hoc
industry group, and we anticipate that those investigations will continue for at
least several more months. During the second quarter, we released a new
programming algorithm that increases the reliability of RTSX-S FPGAs from the
original manufacturer and announced the availability of even more reliable
RTSX-S FPGAs from United Microelectronics Corporation (UMC). See the Risk
Factors set forth at the end of Part I of this Quarterly Report on Form 10-Q for
more information. During the second quarter, we also announced the availability
of engineering samples for all three devices in our new high-density RTAX-S
family of radiation-tolerant FPGAs.
The ongoing RTSX-S investigations have created a window of opportunity for
new competitors in this market. Since the beginning of the second quarter, Atmel
Corporation and Aeroflex Colorado Springs announced the availability of their
first radiation-hardened FPGAs. The Atmel product is an SRAM-based FPGA
developed for low gate count space applications. The Aeroflex part is
manufactured on antifuse process technologies from QuickLogic Corporation, which
also provides software and hardware tools. Like our RTSX-S devices, the Atmel
and Aeroflex parts will serve the low (or "glue logic") end of the
high-reliability market. We do not anticipate losing many (if any) existing
RTSX-S sockets to these parts. With respect to new designs, our RTAX-S FPGAs
have more memory and radiation specifications as good as or better than the
Atmel and Aeroflex parts. Unlike the Atmel and Aeroflex parts, our RTAX-S FPGAs
will also serve the high (or "ASIC replacement") end of the high-reliability
market, which we think is at least twice as large as the low end of the market.
For this reason, we believe that we will expand our share of the aerospace and
defense market over the next several years despite the RTSX-S investigations and
new competition.
Key Performance Indicators
We measure the condition and performance of our business in numerous ways,
but the key quantitative indicators that we generally use to manage the business
are bookings, design wins, margins, yields, and backlog. We also carefully
monitor the progress of our product development efforts. Of these, we think that
bookings and backlog are the best indicators of short-term performance and that
designs wins and product development progress are the best indicators of
long-term performance.
Measured as end-customer orders placed on us and our distributors, bookings
for the second quarter of 2004 were lower than the first quarter, but still the
second highest since the fourth quarter of 2000. Backlog was also lower at the
end of the second quarter of 2004 than at the end of the first quarter. Total
design wins were up again in the second quarter of 2004, as were the design wins
for both our flash and antifuse technologies. Product development progress
during the second quarter of 2004 was solid. As discussed above, we began
sampling our new high-density RTAX-S family of radiation-tolerant FPGAs, and we
remained on track to sample our third general flash family later this year.
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 (SEC) has
defined the most critical accounting policies as those that are most important
to the portrayal of our financial condition and results and also require us to
make the most difficult and subjective judgments, often as a result of the need
to make estimates of matters that are inherently uncertain. Based upon this
definition, our most critical policies include inventories, intangible assets
and goodwill, income taxes, and legal matters. These policies, as well as the
estimates and judgments involved, are discussed below. No significant changes to
critical accounting policies or to the related estimates and judgments involved
in applying these policies were made during the three or six months ended July
4, 2004. 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 changes in the income
statement.
Inventories
We believe that a certain level of inventory must be carried to maintain an
adequate supply of product for customers. This inventory level may vary based
upon orders received from customers or internal forecasts of demand for these
products. Other considerations in determining inventory levels include the stage
of products in the product life cycle, design win activity, manufacturing lead
times, customer demands, strategic relationships with foundries, and competitive
situations in the marketplace. Should any of these factors develop other than
anticipated, inventory levels may be materially and adversely affected.
We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated realizable value based upon assumptions about future demand and market
conditions. To address this difficult, subjective, and complex area of judgment,
we apply a methodology that includes assumptions and estimates to arrive at the
net realizable value. First, we identify any inventory that has been previously
written down in prior periods. This inventory remains written down until sold or
destroyed. Second, our quality assurance personnel examine inventory line items
that may have some form of obsolescence due to non-conformance with electrical
and mechanical standards. Third, we assess the inventory not otherwise
identified to be written down against product history and forecasted demand
(typically for the next six months). Finally, we analyze the result of this
methodology in light of the product life cycle, design win activity, and
competitive situation in the marketplace to derive an outlook for consumption of
the inventory and the appropriateness of the resulting inventory levels. If
actual future demand or market conditions are less favorable than those we have
projected, additional inventory write-downs may be required.
During 2003, we modified our inventory valuation policies to account for
"last time buy" inventory purchases. Last time buys occur when a wafer supplier
is about to shut down the manufacturing line used to make a product and current
inventories are insufficient to meet foreseeable future demand. We made last
time buys of certain products from our wafer suppliers in 2003. Since this
inventory was not acquired to meet current demand, we did not believe the
application of our existing inventory write down policy was appropriate, so a
discrete write down policy was established for inventory purchased in last time
buy transactions. As a consequence, these transactions and the related inventory
are excluded from the standard excess and obsolescence write down policy.
Inventory purchased in last time buy transactions 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 could be written down. Evaluations of last time buy inventory during
the first six months of 2004 did not result in any write downs.
Intangible Assets and Goodwill
In past years we made business acquisitions that resulted in the recording
of a significant amount of goodwill and identified intangible assets.
Historically and through the end of 2001, goodwill was amortized on a
straight-line basis over its useful life. At the beginning of 2002, we adopted
SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses the
financial accounting and reporting standards for goodwill and other intangible
assets subsequent to their acquisition. In accordance with SFAS No. 142, we
ceased to amortize goodwill and instead test for impairment annually or more
frequently if certain events or changes in circumstances indicate that the
carrying value may not be recoverable. We completed our annual goodwill
impairment tests during the fourth quarter of 2003 and noted no impairment. The
initial test of goodwill impairment requires us to compare our fair value with
our book value, including goodwill. We are a single reporting unit as defined by
SFAS 142 and use the entity wide approach to compare fair value to book value.
Based on our total market capitalization, which we believe represents the best
indicator of our fair value, we determined that our fair value was in excess of
our book value. Since we found no indication of impairment, we did not proceed
with the next step of the annual impairment analysis.
At July 4, 2004, we had identified intangible assets arising from prior
business acquisitions that are being amortized on a straight line basis over
their estimated lives. In accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," we recognize impairment losses on
identified intangible assets when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the net book value of those assets. The impairment loss is measured by comparing
the fair value of the asset to its carrying value. Fair value is based on
discounted cash flows using present value techniques identified in SFAS No. 144.
We assessed our identified intangible assets for impairment in accordance with
SFAS No. 144 as of the end of the second quarter of 2004, and noted no
impairment. If these estimates or their related assumptions change in the
future, it could result in lower estimated future cash flows that may not
support the current carrying value of these assets, which would require us to
record impairment charges for these assets.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes," which requires that deferred tax assets and liabilities be
recognized using enacted tax rates for the effect of temporary differences
between the book basis and the tax basis 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 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.
Legal Matters
From time to time we are notified of claims, including claims that we may
be infringing patents owned by others, or otherwise become aware of conditions,
situations, or circumstances involving uncertainty as to the existence of
liability or the amount of the loss. When probable and reasonably estimable, we
make provision for estimated liabilities. We can offer no assurance that any
pending or threatened claim or other loss contingency will be resolved or that
the resolution of any such claim or contingency will not have a materially
adverse effect on our business, financial condition, or results of operations.
In addition, our evaluation of the impact of these claims and contingencies
could change based upon new information learned by us. Subject to the foregoing,
we do not believe that the resolution of any pending or threatened legal claim
or loss contingency is likely to have a materially adverse effect on our
business, financial condition, or results of operations.
Results of Operations
Net Revenues
Net revenues were $43.7 million for the second quarter of 2004, a 4%
increase from the first quarter of 2004 and a 19% increase from the second
quarter of 2003. Quarterly net revenues increased sequentially due to a 14%
increase in unit shipments of field programmable gate arrays (FPGAs) offset by a
9% decrease in the overall average selling price (ASP) of FPGAs. Quarterly net
revenues increased from a year ago due to an 18% increase in unit shipments,
while ASP remained flat compared with the second quarter of 2003. Unit volumes
and ASP levels fluctuate principally because of changes in the mix of products
sold. Our product portfolio includes products ranging from devices with lower
ASPs, which typically sell in higher volumes, to devices with higher ASPs, which
typically sell in lower volumes. The sequential increase in units shipped and
decrease in average ASPs was based on a shift in demand for the quarter that
more heavily favored lower ASP products. The increase in units sold compared
with the second quarter of 2003 was the result of increased unit sales of our
newer product families.
Net revenues were $85.8 million for the first six months of fiscal 2004, an
increase of 21% from the first six months of fiscal 2003. Six-month net revenues
increased due to a 12% increase in unit shipments, combined with a 7% increase
in overall ASP. The increase in unit shipments for the six months was driven
primarily by increased sales of our new product families while the six month
increase in ASPs was the result of a shift toward higher ASP versions of our
mature product families.
Gross Margin
Gross margin was 61.0% of net revenues for the second quarter of 2004
compared with 60.9% for the first quarter of 2004 and 60.2% for the second
quarter of 2003. Gross margin in the first and second quarter of 2004 and the
second quarter of 2003 was within our expected range of 60% to 63% and
fluctuated primarily based on shifts in the mix of product sold.
Gross margin was 60.9% of net revenues for the first six months of 2004
compared with 58.7% for the first six months of 2003. Gross margin for the first
six months of 2003 was impacted by the mix of products sold during the first
quarter of 2003, which contained a heavier concentration of lower gross margin
product sales.
We seek to reduce costs by improving wafer yields, negotiating price
reductions with suppliers, increasing the level and efficiency of our testing
and packaging operations, achieving economies of scale by means of higher
production levels, and increasing the number of die produced per wafer,
principally by shrinking the die size of our products. No assurance can be given
that these efforts will continue to 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.
Research and Development (R&D)
R&D expenditures were $11.6 million, or 27% of net revenues, for the second
quarter of 2004 compared with $10.7 million, or 25% of net revenues, for the
first quarter of 2004 and $9.9 million, or 27% of revenues, for the second
quarter of 2003. R&D spending in the second quarter of 2004 increased compared
with the first quarter of 2004 due to spending on materials such as masks and
test chips related to new product development. The first Company-wide salary
increases since the year 2000 were paid during the second quarter of 2004, but
the impact on operating spending was generally offset during the quarter of 2004
by a mandatory Company shutdown during the last five days of the quarter.
R&D expenditures were $22.2 million, or 26% of net revenues, for the first
six months of 2004 compared with $19.4 million, or 27% of net revenues, for the
first six months of 2003. R&D spending increased in real dollars in the first
six months of 2004 compared with the first six months of 2003 primarily due to
spending for materials such as masks and test chips related to new product
development and increased costs for salaries, taxes and benefits associated with
increased headcount.
Selling, General, and Administrative (SG&A)
SG&A expenses were $11.9 million, or 27% of net revenues, for the second
quarter of 2004 compared with $11.8 million, or 28% of net revenues, for the
first quarter of 2004 and $11.1 million, or 30% of net revenues, for the second
quarter of 2003. SG&A expenses were $23.7 million, or 28% of net revenues, for
the first six months of 2004 compared with $22.1 million, or 31% of net
revenues, for the first six months of fiscal 2003.
The increase in SG&A spending during the three and six months ended July 4,
2004 compared with SG&A spending in the three and second six months ended July
6, 2003 was the result of increased selling expenses on higher revenue,
increased professional service fees related to Sarbanes-Oxley compliance and
increased costs for salaries, taxes and benefits associated with increased
headcount.
Amortization of Acquisition-Related Intangibles
Amortization of acquisition-related intangibles was $0.7 million for all
quarters presented and $1.3 million for the first six months of 2004 and 2003.
We did not consummate any business combinations during fiscal 2003 or during the
first two quarters of fiscal 2004. Amortization of acquisition-related
intangibles is recurring amortization of acquisition-related intangibles
purchased prior to fiscal 2003 over their estimated useful lives based on the
straight-line method. See Note 3 of Notes to Unaudited Consolidated Condensed
Financial Statements for further discussion of SFAS Nos. 142 and 144.
Interest Income and Other, Net
Interest income and other, net was $0.7 million for the second quarter of
2004 compared with $0.7 million for the first quarter of 2004 and $0.8 million
for the second quarter of 2003. Interest income and other, net was $1.3 million
for the first six months of 2004 compared with $1.8 million for the first six
months of 2003. The quarterly and six-month decreases compared with 2003 were
due to lower interest rates available in the market and lower gains realized on
our short-term investments, which were partially offset by increased cash
available for investment.
Tax (Benefit) Provision
The tax provision was $0.7 million for the second quarter of 2004 compared
with a provision of $0.6 million for the first quarter of 2004 and a benefit of
$0.1 million for the second quarter of 2003. The tax provision for the first six
months of 2004 is based on an annual tax rate which was calculated based on our
expected level of profitability and included items such as income from
tax-exempt securities, the state composite rate, and recognition of certain
deferred tax assets subject to valuation allowances. The estimated rate
calculated for 2004 only contains a half year of credit for the R&D tax credit
as the extension of the R&D tax credit past its expiration date in the second
quarter of 2004 has not been signed into law. If the R&D tax credit is extended,
we will experience a benefit to our tax rate due to the inclusion of a full
year's worth of R&D tax credits in the rate calculation. The $0.1 million and
$1.0 million tax credits for the second quarter and first six months of 2003,
respectively, were based on low amounts of tax arising from application of the
tax rate to the pre-tax income more than offset by the impact of tax credits for
R&D activities which resulted in a net tax credit.
Our tax position is based on the estimated annual tax rate in compliance
with SFAS 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.
Liquidity and Capital Resources
Our cash, cash equivalents, and short-term investments were $166.1 million
at the end of the second quarter of 2004 compared with $158.4 million at the
beginning of the year.
Cash provided by operating activities was $9.3 million for the first six
months of 2004 compared with $6.9 million for the first six months of 2003. The
increase in cash provided by operations resulted primarily from increased net
income and shipments to distributors in the first six months of 2004, partially
offset by an income tax refund of $5.0 million for taxes paid in prior years
that was received in the first quarter of 2003.
Capital expenditures were $5.0 million for the first six months of 2004
compared with $4.5 million for the first six months of 2003. Sales of common
stock under employee stock plans provided $4.7 million of cash for the first six
months of 2004 compared with $5.4 million for the first six months of 2003.
We currently 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 next four quarters. 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. If we require additional capacity, we may be required to incur
significant expenditures to secure such capacity.
Risk Factors
Our shareholders and prospective investors should carefully consider,
along with the other information in this Quarterly Report on Form 10-Q, the
following:
o Our future revenues and operating results are likely to fluctuate and may
fail to meet expectations, which could cause our stock price to decline.
Our quarterly revenues and operating results are subject to fluctuations
resulting from general economic conditions and a variety of risks specific to us
or characteristic of the semiconductor industry, including booking and shipment
uncertainties, supply problems, and price erosion. These and other factors make
it difficult for us to accurately project quarterly revenues and operating
results, which may fail to meet our expectations. Any failure to meet
expectations could cause our stock price to decline significantly.
o A variety of booking and shipping uncertainties may cause us to fall
short of our quarterly revenue expectations.
When we fall short of our quarterly revenue expectations, our
operating results are likely to be adversely affected because most of our
expenses are fixed and therefore do not vary with revenues.
o We derive a large percentage of our quarterly revenues from
bookings received during the quarter, making quarterly revenues
difficult to predict.
Our backlog (which generally may be cancelled or deferred by
customers on short notice without significant penalty) at the
beginning of a quarter typically accounts for about half of our
revenues during the quarter. This means that we generate about half of
our quarterly revenues from orders received during the quarter and
"turned" for shipment within the quarter, and that any shortfall in
"turns" orders will have an immediate and adverse impact on quarterly
revenues. There are many factors that can cause a shortfall in turns
orders, including declines in general economic conditions or the
businesses of our customers, excess inventory in the distribution
channel, or conversion of our products to hard-wired ASICs or other
competing products for price or other reasons.
o We derive a significant percentage of our quarterly revenues from
shipments made in the final weeks of the quarter, making
quarterly revenues difficult to predict.
Historically, we have shipped 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.
o Our military and aerospace shipments tend to be large and are
subject to complex scheduling uncertainties, making quarterly
revenues difficult to predict.
Orders from the military and aerospace customers tend to be large
and irregular, which contributes to fluctuations in our net revenues
and gross margins. These sales are also subject to more extensive
governmental regulations, including greater import and export
restrictions. Historically, it has been difficult to predict if and
when export licenses will be granted, if required. In addition,
products for military and aerospace applications require processing
and testing that is more lengthy and stringent than for commercial
applications, which increases the complexity of scheduling and
forecasting as well as the risk of failure. It is often impossible to
determine before the end of processing and testing whether products
intended for military or aerospace applications will fail and, if they
do fail, it is generally not possible for replacements to be processed
and tested in time for shipment during the same quarter. All of these
factors make it difficult to accurately estimate quarterly revenues.
o We derive a majority of our quarterly revenues from products
resold by our distributors, making quarterly revenues difficult
to predict.
We typically generate more than half of our quarterly revenues
from sales made through distributors. Since we do not recognize
revenue on the sale of a product to a distributor until the
distributor resells the product, our quarterly revenues are dependent
on, and subject to fluctuations in, shipments by our distributors. We
are also highly dependent on the timeliness and accuracy of our resale
reports from our distributors. Late or inaccurate resale reports,
particularly in the last month of the quarter, contribute to our
difficulty in predicting and reporting our quarterly revenues and
results of operations.
o An unanticipated shortage of products available for sale may cause us
to fall short of expected quarterly revenues and operating results.
In a typical semiconductor manufacturing process, silicon wafers
produced by a foundry are sorted and cut into individual die, which are
then assembled into individual packages and tested. The manufacture,
assembly, and testing of semiconductor products is highly complex and
subject to a wide variety of risks, including defects in masks, impurities
in the materials used, contaminants in the environment, and performance
failures by personnel and equipment. Semiconductor products intended for
military and aerospace applications and new products, such as our ProASIC
Plus and Axcelerator FPGA families, are often more complex and/or more
difficult to produce, increasing the risk of manufacturing-related defects.
In addition, we may not discover defects or other errors in new products
until after we have commenced volume production. Our failure to effect
scheduled shipments by the end of a quarter due to unexpected supply
constraints would have an immediate and adverse impact on quarterly
revenues.
o Unanticipated increases, or the failure to achieve anticipated
reductions, in the cost of our products may cause us to fall short of
expected quarterly operating results.
As is also common in the semiconductor industry, our independent wafer
suppliers from time to time experience lower than anticipated yields of
usable die. Wafer yields can decline without warning and may take
substantial time to analyze and correct, particularly for a company (like
us) that does not operate a manufacturing facility but instead utilizes
independent facilities, almost all of which are offshore. Yield problems
are most common on new processes or at new foundries, particularly when new
technologies are involved. Our FPGAs are also manufactured using customized
processing steps, which may increase the incidence of production yield
problems as well as the amount of time needed to achieve satisfactory,
sustainable wafer yields on new processes and new products. Lower than
expected yields of usable die could reduce our gross margin, which would
adversely affect our quarterly operating results. In addition, in order to
win designs, we generally must price new products on the assumption that
manufacturing cost reductions will be achieved, which often do not occur as
soon as expected. The failure to achieve expected manufacturing cost
reductions could reduce our gross margin, which would adversely affect our
quarterly operating results.
o Unanticipated reductions in the average selling prices of our products
may cause us to fall short of expected quarterly revenues and
operating results.
The semiconductor industry is characterized by intense price
competition. The average selling price of a product typically declines
significantly between introduction and maturity. We sometimes are required
by competitive pressures to reduce the prices of our new products more
quickly than cost reductions can be achieved. We also sometimes approve
price reductions on specific sales for strategic or other reasons. Declines
in the average selling prices of our products will reduce quarterly
revenues unless offset by greater unit sales or a shift in the mix of
products sold toward higher-priced products. Declines in the average
selling prices of our products will also reduce quarterly gross margin
unless offset by reductions in manufacturing costs or by a shift in the mix
of products sold toward higher-margin products.
o In preparing our financial statements, we make good faith estimates and
judgments that may change or turn out to be erroneous.
In preparing our financial statements in conformity with accounting
principles generally accepted in the United States, we must make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues, and
expenses and the related disclosure of contingent assets and liabilities. The
most difficult estimates and subjective judgments that we make concern
inventories, intangible assets and goodwill, income taxes, and legal matters. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ materially from these estimates. In addition, if these estimates or their
related assumptions change in the future, our operating results for the periods
in which we revise our estimates or assumptions could be adversely and perhaps
materially affected.
o Our gross margin may decline as we increasingly compete with hard-wired
ASICs and serve the value-based market.
The price we can charge for our products is constrained principally by our
competition. While it has always been intense, we believe that price competition
for new designs is increasing. This may be due in part to the transition toward
high-level design methodologies. Designers can now wait until later in the
design process before selecting a PLD or hard-wired ASIC, and it is easier to
convert between competing PLDs or between PLDs and hard-wired ASICs. The
increased price competition may also be due in part to the increasing
penetration of PLDs into price-sensitive markets previously dominated by
hard-wired ASICs. We have strategically targeted many of our products at the
value-based marked, which is defined by low prices. If our strategy is
successful, low-price products will constitute increasingly greater percentages
of our net revenues, which may make it more difficult to maintain our gross
margin at our historic levels. Any long-term decline in our gross margin would
have an adverse effect on our operating results.
o We may not win sufficient designs, or the designs we win may not generate
sufficient revenues, for us to maintain or expand our business.
In order for us to sell an FPGA to a customer, the customer must
incorporate our FPGA into the customer's product in the design phase. We devote
substantial resources, which we may not recover through product sales, to
persuade potential customers to incorporate our FPGAs into new or updated
products and to support their design efforts (including, among other things,
providing development systems). These efforts usually precede by many months
(and often a year or more) the generation of FPGA sales, if any. The value of
any design win, moreover, depends in large part upon the ultimate success of our
customer's product in its market. Our failure to win sufficient designs, or the
failure of the designs we win to generate sufficient revenues, could have a
materially adverse effect on our business, financial condition, or results of
operations.
o Ongoing investigations regarding the reliability of our RTSX-S
space-qualified FPGAs could have a material adverse effect on our financial
results and business in both the short and long term.
Our RTSX-S family was designed specifically to address heavy ion-induced
single-event upsets in space. First shipped in 2001, the family accounted for
approximately 15% of our net revenues for 2003 and 2002. Some of the potential
risks associated with ongoing investigations regarding the reliability of our
RTSX-S space-qualified FPGAs are discussed below.
o Background
During 2003, several U.S. government contractors reported a small
percentage of functional failures in our RTSX-S and SX-A antifuse devices
manufactured on a 0.25 micron antifuse process at the original manufacturer
of those FPGAs.
o Actel Failure Analyses
Four of the U.S. government contractors reporting functional
failures submitted their devices to us for failure analysis. Our
failure analyses concluded that each of the submitted devices had been
damaged by electrical overstress.
o Other Actel Experiments
In addition to the failure analyses, we have conducted numerous
experiments to (among other things) characterize the vulnerability of
programmed 0.25-micron antifuses from the manufacturer to electrical
overstress and determine if we can detect and screen-out 0.25-micron
antifuse devices from the original manufacturer that are particularly
vulnerable to electrical overstress.
o Industry Group and Tiger Team
An ad-hoc industry group lead by The Aerospace Corporation
(Aerospace) was established to examine the electrical overstress
problem. The industry group formed a "Tiger Team" to develop and
analyze experimental data, characterize antifuse electrical overstress
damage, and identify the root cause of the antifuse electrical
overstress damage.
o Aerospace Closure Plan
On February 13, 2004, Aerospace presented to the industry group a
plan consisting of 12 projects to resolve the electrical overstress
issue (Closure Plan). To date, four of the projects have been
completed, one project has not yet begun, and the remaining projects
are ongoing. The data from one of the completed experiments indicates
that our 0.25-micron antifuse devices from the original manufacturer
fail due to electrical overstress damage at the rate of 4.6% when they
are programmed with an extremely stressful design and exposed to
voltages only slightly outside of our published datasheet limits (P7
test). We estimate that the design used in the P7 test increases the
failure rate by almost an order of magnitude (5x-10x) compared with
normal customer designs. We also believe that the data from the P7
test evidences failures of an infant mortality type, but at least some
members of the Tiger Team may believe otherwise. If the failures are
of an infant mortality type, confidence in the reliability of the
parts increases after a period of in-system operation. If the failures
are not of an infant mortality type, this kind of screen may not be
feasible.
o New Programming Algorithm
On May 19, 2004, we released a new programming algorithm that
generally makes our 0.25-micron antifuse devices from the original
manufacturer less vulnerable to electrical overstress damage. In the
P7 test, the rate at which antifuses fail due to electrical overstress
damage in parts using the new algorithm is about six times (6x) better
than in parts using the original algorithm. We have also tested
numerous additional parts using our standard qualification design,
with no failures. We believe that the new algorithm fixes the bulk of
problems observed with the old algorithm and are seeking to fix the
rest.
o UMC
On June 21, 2004, we announced the availability of RTSX-S devices
from UMC, which has run our 0.25-micron antifuse process since 2000.
Analysis and testing is continuing, but to date we have found no
antifuse failures due to electrical overstress damage in the UMC parts
that have been tested using either the P7 test or our standard
qualification design.
o Conclusions to Date
The experiments and analysis are ongoing, but at this time we:
have concluded that a small percentage of our 0.25-micron
antifuses from the original manufacturer are particularly
vulnerable to electrical overstress damage;
think that the vulnerable 0.25-micron antifuses could fail
from electrical overstress damage even when the devices are
not exposed to voltages outside of our published datasheet
limits;
believe that, irrespective of whether vulnerable 25-micron
antifuses are exposed to voltages outside of our published
datasheet limits, any failures that occur as a result of
electrical overstress damage are of the infant mortality
type (but at least some members of the Tiger Team may
believe otherwise);
have released a new programming algorithm that greatly
reduces the percentage of our 0.25-micron antifuses from the
original manufacturer that are particularly vulnerable to
electrical overstress damage; and
have qualified UMC to manufacture our RTSX-S and SX-A
devices on a 0.25-micron process that does not appear to
create antifuses that are particularly vulnerable to
electrical overstress damage.
o A recall of our 0.25-micron antifuse FPGAs could have a materially
adverse effect on our revenues and operating results.
At this time we think there is only a slight chance that we will
recall RTSX-S FPGAs or 0.25-micron SX-A FPGAs from the original
manufacturer. In any recall, we would try to replace the recalled parts.
The expenses associated with a recall and the replacement of parts would
adversely and perhaps materially affect our operating results. If we were
unable to replace the recalled parts, we would offer refunds to our
customers, which would have a materially adverse affect on our operating
results. Any recall would also adversely and perhaps materially affect our
revenues if new shipments were constrained by supply and/or demand.
o A significant number of warranty returns or the write-off of inventory
could have a materially adverse effect on our revenues and/or
operating results.
Our warranty obligation, when it exists, is to repair or replace
defective parts or refund the purchase price. Our revenues and operating
results could be adversely affected by a significant number of warranty
returns if we were unable to replace the returned parts and had to make
refunds or if parts were not available for new shipments. In addition, if
we determined that parts from the original manufacturer were no longer
salable, we would write-down our inventory of such products, which would
adversely and perhaps materially affect our operating results for the
period in which such determination was made.
o While the investigations are continuing, our customers may defer
placing new orders, defer the shipment of existing orders, or cancel
existing orders.
The electrical overstress problem has caused more anxiety among some
members of the industry group than others. While most members have
continued to order parts from us, some have behaved more cautiously. To
whatever extent our customers take a "wait-and-see" attitude while the
investigations are continuing, our revenues and operating results could be
adversely affected. Some customers may also explore alternatives, which
might cause us to lose existing or future orders irrespective of any
conclusions reached about the root cause of the electrical overstress
problem.
o The electrical overstress problem may harm our reputation in the
industry, which could have a long-term materially adverse affect on
our business.
The questions raised by the electrical overstress problem concerning
the reliability of our space-grade RTSX-S devices may undermine our
reputation in an industry to which we have been a major supplier. To
whatever extent our customers have doubts about the reliability of our
parts, they may seek to use other suppliers, which could harm our business
irrespective of any conclusions reached about the root cause of the
electrical overstress problem.
o We may be unsuccessful in defining, developing, or selling competitive new
or improved products at acceptable margins.
The market for our products is characterized by rapid technological change,
product obsolescence, and price erosion, making the timely introduction of new
or improved products critical to our success. Our failure to design, develop,
and sell new or improved products that satisfy customer needs, compete
effectively, and generate acceptable margins may adversely affect our business,
financial condition, and results of operations. While most of our product
development programs have achieved a level of success, some have not. For
example, we introduced our VariCore embeddable reprogrammable gate array (EPGA)
logic core based on SRAM technology in 2001. Revenues from VariCore EPGAs did
not materialize and the development of a more advanced VariCore EPGA has been
cancelled.
o Numerous factors can cause the development or introduction of new
products to fail or be delayed.
To develop and introduce a product, we must successfully accomplish
all of the following:
anticipate future customer demand and the technology that will be
available to meet the demand;
define the product and its architecture, including the
technology, silicon, programmer, IP, software, and packaging
specifications;
obtain access to advanced manufacturing process technologies;
design and verify the silicon;
develop and release evaluation software;
lay out the architecture and implement programming;
tape out the product;
generate a mask of the product and evaluate the software;
manufacture the product at the foundry;
verify the product; and
qualify the process, characterize the product, and release
production software.
Each of these steps is difficult and subject to failure or delay. In
addition, the failure or delay of any step can cause the failure or delay
of the entire development and introduction. We can offer you no assurance
that our development and introduction schedules for new products or the
supporting software or hardware will be met, that new products will gain
market acceptance, or that we will respond effectively to new technological
changes or new product announcements by others. Any failure to successfully
define, develop, market, manufacture, assemble, test, or program
competitive new products could have a materially adverse effect on our
business, financial condition, and results of operations.
o New products are subject to greater operational and design risks.
Our future success is highly dependent upon the timely development and
introduction of competitive new products at acceptable margins. However,
there are greater operational and design 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 inventory write downs or product
returns could each have a materially adverse effect on our business,
financial condition, or results of operation.
o New products are subject to greater technology risks.
As is common in the semiconductor industry, we have experienced from
time to time in the past, and expect to experience in the future,
difficulties and delays in achieving satisfactory, sustainable yields on
new products. The fabrication of antifuse and flash wafers is a complex
process that requires a high degree of technical skill, state-of-the-art
equipment, and effective cooperation between us and the foundry to produce
acceptable yields. Minute impurities, errors in any step of the fabrication
process, defects in the masks used to print circuits on a wafer, and other
factors can cause a substantial percentage of wafers to be rejected or
numerous die on each wafer to be non-functional. Yield problems increase
the cost of as well as the time it takes us to bring our new products to
market, which can create inventory shortages and dissatisfied customers.
Any prolonged inability to obtain adequate yields or deliveries of new
products could have a materially adverse effect on our business, financial
condition, or results of operations.
o New products generally have lower gross margins.
Our gross margin is the difference between the cost of our products
and the revenues we receive from the sale of our products. One of the most
important variables affecting the cost of our products is manufacturing
yields. With our customized antifuse and flash manufacturing process
requirements, we almost invariably experience difficulties and delays in
achieving satisfactory, sustainable yields on new products. Until
satisfactory yields are achieved, gross margins on new products are
generally lower than on mature products. Depending upon the rate at which
sales of new products ramp and the extent to which they displace mature
products, the lower gross margins typically associated with new products
could have a materially adverse effect on our operating results.
o We face intense competition and have some competitive disadvantages that we
may not be able to overcome.
The semiconductor industry is intensely competitive. Our competitors
include suppliers of hard-wired ASICs, CPLDs, and FPGAs. Our direct competitors
are Xilinx, a supplier of SRAM-based FPGAs; Altera, a supplier of CPLDs and
SRAM-based FPGAs; Lattice, a supplier of CPLDs and SRAM-based FPGAs; and
QuickLogic, a supplier of antifuse-based FPGAs. We also face competition from
companies that specialize in converting our products into hard-wired ASICs. In
addition, we may face competition from suppliers of logic products based on new
or emerging technologies. While we seek to monitor developments in existing and
emerging technologies, our technologies may not remain competitive.
o Most of our current and potential competitors are larger and have more
resources.
Many of our current competitors have broader product lines, more
extensive customer bases, and significantly greater financial, technical,
manufacturing, and marketing resources than us. Additional competition is
possible from major domestic and international semiconductor suppliers. All
such companies are larger and have broader product lines, more extensive
customer bases, and substantially greater financial and other resources
than us, including the capability to manufacture their own wafers. We may
not be able to overcome these competitive disadvantages.
o Our antifuse technology is not reprogrammable, which is a competitive
disadvantage in most cases.
All existing FPGAs not based on antifuse technology and certain CPLDs
are reprogrammable. The one-time programmability of our antifuse FPGAs is
necessary or desirable in some applications, but logic designers generally
prefer to prototype with a reprogrammable logic device. This is because the
designer can reuse the device if an error is made. The visibility
associated with discarding a one-time programmable device often causes
designers to select a reprogrammable device even when an alternative
one-time programmable device offers significant advantages. This bias in
favor of designing with reprogrammable logic devices appears to increase as
the size of the design increases. Although we now offer reprogrammable
flash devices, we may not be able to overcome this competitive
disadvantage.
o Our flash and antifuse technologies are not manufactured on standard
processes, which is a competitive disadvantage.
Our antifuse-based FPGAs and (to a lesser extent) flash-based ProASIC
FPGAs are manufactured using customized steps that are added to otherwise
standard manufacturing processes of independent wafer suppliers. There is
considerably less operating history for the customized process steps than
for the foundries' standard manufacturing processes. Our dependence on
customized processing steps means that, in contrast with competitors using
standard manufacturing processes, we generally have more difficulty
establishing relationships with independent wafer manufacturers; take
longer to qualify a new wafer manufacturer; take longer to achieve
satisfactory, sustainable wafer yields on new processes; may experience a
higher incidence of production yield problems; must pay more for wafers;
and will not obtain early access to the most advanced processes. Any of
these factors could be a material disadvantage against competitors using
standard manufacturing processes. As a result of these factors, our
products typically have been fabricated using processes one or two
generations behind the processes used by competing products. As a
consequence, we generally have not fully realized the benefits of our
technologies. Although we are attempting to accelerate the rate at which
our products are reduced to finer process geometries and obtain earlier
access to advanced processes, we may not be able to overcome these
competitive disadvantages.
o Our business and operations may be disrupted by events that are beyond our
control or the control of our business partners.
Our performance is subject to events or conditions beyond our control, and
the performance of each of our foundries, suppliers, subcontractors,
distributors, agents, and customers is subject to events or conditions beyond
their control. These events or conditions include labor disputes, acts of public
enemies or terrorists, war or other military conflicts, blockades,
insurrections, riots, epidemics, quarantine restrictions, landslides, lightning,
earthquakes, fires, storms, floods, washouts, arrests, civil disturbances,
restraints by or actions of governmental bodies acting in a sovereign capacity
(including export or security restrictions on information, material, personnel,
equipment, or otherwise), breakdowns of plant or machinery, and inability to
obtain transport or supplies. This type of disruption could impair our ability
to ship products in a timely manner, which may have a materially adverse effect
on our business, financial condition, and results of operations.
Our corporate offices are located in California, which was subject to power
outages and shortages during 2001 and 2002. More extensive power shortages in
the state could disrupt our operations and interrupt our research and
development activities. Our foundry partners in Japan and Taiwan and our
operations in California are located in areas that have been seismically active
in the recent past. In addition, many of the countries outside of the United
States in which our foundry partners and assembly and other subcontractors are
located have unpredictable and potentially volatile economic, social, or
political conditions, including the risks of conflict between Taiwan and the
People's Republic of China or between North Korea and South Korea. In addition,
an outbreak of Severe Acute Respiratory Syndrome (SARS) occurred in Hong Kong,
Singapore, and China in 2003. The occurrence of these or similar events or
circumstances could disrupt our operations and may have a materially adverse
effect on our business, financial condition, and results of operations.
o Our business depends on numerous independent third parties whose interests
may diverge from our interests.
We rely heavily on, but generally have little control over, our independent
foundries, suppliers, subcontractors, and distributors.
o Our independent wafer manufacturers may be unable or unwilling to
satisfy our needs in a timely manner, which could harm our business.
We do not manufacture any of the semiconductor wafers used in the
production of our FPGAs. Our wafers are currently manufactured by Chartered
in Singapore, Infineon in Germany, MEC in Japan, UMC in Taiwan, and Winbond
in Taiwan. Our reliance on independent wafer manufacturers to fabricate our
wafers involves significant risks, including lack of control over capacity
allocation, delivery schedules, the resolution of technical difficulties
limiting production or reducing yields, and the development of new
processes. Although we have supply agreements with several of our wafer
manufacturers, a shortage of raw materials or production capacity could
lead any of our wafer suppliers to allocate available capacity to other
customers, or to internal uses, which could impair our ability to meet our
product delivery obligations and may have a materially adverse effect on
our business, financial condition, and results of operations.
o Our limited volume and customized process requirements generally
make us less attractive to independent wafer manufacturers.
The semiconductor industry has from time to time experienced
shortages of manufacturing capacity, and may again be entering a
period in which capacity is constrained. When production capacity is
tight, the relatively small amount of wafers that we purchase from any
foundry and the customized process steps that are necessary for our
technologies put us at a disadvantage to foundry customers who
purchase more wafers manufactured on standard processes. To secure an
adequate supply of wafers, we may consider various transactions,
including the use of substantial nonrefundable deposits, contractual
purchase commitments, equity investments, or the formation of joint
ventures. Any of these transactions may have a materially adverse
effect on our business, financial condition, and results of
operations.
o Identifying and qualifying new independent wafer manufacturers is
difficult and might be unsuccessful.
If our current independent wafer manufacturers were unable or
unwilling to manufacture our products as required, we would have to
identify and qualify additional foundries. No additional wafer
foundries may be able or available to satisfy our requirements on a
timely basis. Even if we are able to identify a new third party
manufacturer, the costs associated with manufacturing our products may
increase. In any event, the qualification process typically takes one
year or longer, which could cause product shipment delays, and
qualification may not be successful.
o Our independent assembly subcontractors may be unable or unwilling to
meet our requirements, which could delay product shipments and result
in the loss of customers or revenues.
We rely primarily on foreign subcontractors for the assembly and
packaging of our products and, to a lesser extent, for testing of our
finished products. Our reliance on independent subcontractors involves
certain risks, including lack of control over capacity allocation and
delivery schedules. We generally rely on one or two subcontractors to
provide particular services and have from time to time experienced
difficulties with the timeliness and quality of product deliveries. We have
no long-term contracts with our subcontractors and certain of those
subcontractors sometimes operate at or near full capacity. Any significant
disruption in supplies from, or degradation in the quality of components or
services supplied by, our subcontractors could have a materially adverse
effect on our business, financial condition, and results of operations.
o Our independent software and hardware developers and suppliers may be
unable or unwilling to satisfy our needs in a timely manner, which
could impair the introduction of new products or the support of
existing products.
We are dependent on independent software and hardware developers for
the development, supply, maintenance, and support of some of our IP cores,
development systems, programming hardware, design diagnostics and debugging
tool kits, demonstration boards, and ASIC conversion products (or certain
elements of those products). Our reliance on independent software and
hardware developers involves certain risks, including lack of control over
delivery schedules and customer support. Any failure of or significant
delay by our independent developers to complete software and/or hardware
under development in a timely manner could disrupt the release of our
software and/or the introduction of our new FPGAs, which might be
detrimental to the capability of our new products to win designs. Any
failure of or significant delay by our independent suppliers to provide
updates or customer support could disrupt our ability to ship products or
provide customer support services, which might result in the loss of
revenues or customers. Any of these disruptions could have a materially
adverse effect on our business, financial condition, or results of
operations.
o Our future performance will depend in part on the effectiveness of our
independent distributors in marketing, selling, and supporting our
products.
In 2003, sales made through distributors accounted for 69% of our net
revenues. Our distributors offer products of several different companies,
so they may reduce their efforts to sell our products or give higher
priority to other products. A reduction in sales effort, termination of
relationship, failure to pay for products, or discontinuance of operations
because of financial difficulties or for other reasons by one or more of
our current distributors could have a materially adverse effect on our
business, financial condition, and results of operations.
o Distributor contracts generally can be terminated on short
notice.
Although we have contracts with our distributors, the agreements
are terminable by either party on short notice. On March 1, 2003, we
consolidated our distribution channel by terminating our agreement
with Pioneer, which accounted for 26% of our net revenues in 2002. We
also consolidated our distribution channel in 2001 by terminating our
agreement with Arrow, which accounted for 13% of our net revenues in
2001. Unique, which accounted for 41% of our net revenues in 2003, has
been our sole distributor in North America since March 1, 2003. The
loss of Unique as a distributor could have a materially adverse effect
on our business, financial condition, or results of operations.
o Fluctuations in inventory levels at our distributors can affect
our operating results.
Our distributors have occasionally built inventories in
anticipation of significant growth in sales and, when such growth did
not occur as rapidly as anticipated, substantially reduced the amount
of product ordered from us in subsequent quarters. Such a slowdown in
orders generally reduces our gross margin on future sales of newer
products because we are unable to take advantage of any manufacturing
cost reductions while the distributor depletes its inventory at lower
average selling prices.
o We are subject to all of the risks and uncertainties associated with the
conduct of international business.
o We depend on international operations for almost all of our products.
We purchase almost all of our wafers from foreign foundries and have
almost all of our commercial products assembled, packaged, and tested by
subcontractors located outside the United States. These activities are
subject to the uncertainties associated with international business
operations, including trade barriers and other restrictions, changes in
trade policies, governmental regulations, currency exchange fluctuations,
reduced protection for intellectual property, war and other military
activities, terrorism, changes in social, political, or economic
conditions, and other disruptions or delays in production or shipments, any
of which could have a materially adverse effect on our business, financial
condition, or results of operations.
o We depend on international sales for a substantial portion of our
revenues.
Sales to customers outside North America accounted for 39% of net
revenues in 2003, and we expect that international sales will continue to
represent a significant portion of our total revenues. International sales
are subject to the risks described above as well as generally longer
payment cycles, greater difficulty collecting accounts receivable, and
currency restrictions. We also maintain foreign sales offices to support
our international customers, distributors, and sales representatives, which
are subject to local regulation.
In addition, international sales are subject to the export laws and
regulations of the United States and other countries. The Strom Thurmond
National Defense Authorization Act for 1999 required, among other things,
that communications satellites and related items (including components) be
controlled on the U.S. Munitions List. The effect of the Act was to
transfer jurisdiction over commercial communications satellites from the
Department of Commerce to the Department of State and to expand the scope
of export licensing applicable to commercial satellites. The need to obtain
additional export licenses has caused significant delays in the shipment of
some of our FPGAs. Any future restrictions or charges imposed by the United
States or any other country on our international sales could have a
materially adverse effect on our business, financial condition, or results
of operations.
o Our revenues and operating results have been and may again be adversely
affected by downturns or other changes in the general economy, in the
semiconductor industry, in our major markets, or at our major customers.
We have experienced substantial period-to-period fluctuations in revenues
and results of operations due to conditions in the overall economy, in the
general semiconductor industry, in our major markets, or at our major customers.
We may again experience these fluctuations, which could be adverse and may be
severe.
o Our revenues and operating results may be adversely affected by future
downturns in the semiconductor industry.
The semiconductor industry historically has been cyclical and
periodically subject to significant economic downturns, which are
characterized by diminished product demand, accelerated price erosion, and
overcapacity. Beginning in the fourth quarter of 2000, we experienced (and
the semiconductor industry in general experienced) reduced bookings and
backlog cancellations due to excess inventories at communications,
computer, and consumer equipment manufacturers and a general softening in
the overall economy. During this downturn, which was severe and prolonged,
we experienced lower revenues, which had a substantial negative effect on
our results of operations. Any future downturns in the semiconductor
industry may likewise have an adverse effect on our revenues and results of
operations.
o Our revenues and operating results may be adversely affected by future
downturns in the communications market.
We estimate that sales of our products to customers in the
communications market accounted for 26% of our net revenues for 2003 and
25% for 2002, compared with 49% for 2001 and 56% for 2000. Like the
semiconductor industry in general, the communications market has been
cyclical and periodically subject to significant downturns. Beginning with
the fourth quarter of 2000, the communications market suffered its worst
downturn in recent history. As a result, we experienced reduced revenues
and results of operations. Any future downturns in the communications
market may likewise have an adverse effect on our revenues and results of
operations.
o Our revenues and operating results may be adversely affected by future
downturns in the military and aerospace market.
We estimate that sales of our products to customers in the military
and aerospace industries, which carry higher overall gross margins than
sales of products to other customers, accounted for 36% of our net revenues
for 2003, compared with 41% for 2002 and 26% for 2001. In general, we
believe that the military and aerospace industries have accounted for a
significantly greater percentage of our net revenues since the introduction
of our Rad Hard FPGAs in 1996 and our Rad Tolerant FPGAs in 1998. Any
future downturn in the military and aerospace market may have an adverse
effect on our revenues and results of operations.
o Our revenues and operating results may be adversely affected by
changes in the military and aerospace market.
In 1994, Secretary of Defense William Perry directed the Department of
Defense to avoid government-unique requirements when making purchases and
rely more on the commercial marketplace. Under the "Perry initiative," the
Department of Defense must strive to increase access to commercial
state-of-the-art technology and facilitate the adoption by its suppliers of
business processes characteristic of world-class suppliers. Integration of
commercial and military development and manufacturing facilitates the
development of "dual-use" processes and products and contributes to an
expanded industrial base that is capable of meeting defense needs at lower
costs. To that end, many of the cost-driving specifications that had been
part of military procurements for many years were cancelled in the interest
of buying best-available commercial products. We believe that this trend
toward the use of commercial off-the-shelf products has on balance helped
our business. However, if this trend continued to the point where defense
contractors customarily purchased commercial-grade parts rather than
military-grade parts, the revenues and gross margins that we derive from
sales to customers in the military and aerospace industries would erode,
which could have a materially adverse effect on our business, financial
condition, and results of operations. On the other hand, there are some
signs that this trend toward the use of commercial off-the-shelf products
is reversing. If defense contractors were to begin using more customized
ASICs and fewer commercial off-the-shelf products, the revenues and gross
margins that we derive from sales to customers in the military and
aerospace industries may erode, which could have a materially adverse
effect on our business, financial condition, and results of operations.
o Our revenues and operating results may be adversely affected by future
downturns at of any our major customers.
A relatively small number of customers are responsible for a
significant portion our net revenues. Lockheed Martin accounted for 11% of
our net revenues during 2003, compared with 3% during 2002 and 2001. We
have experienced periods in which sales to our major customers declined as
a percentage of our net revenues due to push-outs or cancellations of
orders, or delays or failures to place expected orders. For example, Nortel
accounted for 11% of our net revenues in 2000, compared with 2% in 2001. We
believe that sales to a limited number of customers will continue to
account for a substantial portion of net revenues in future periods. The
loss of a major customer, or decreases or delays in shipments to major
customers, could have a materially adverse effect on our business,
financial condition, and results of operations.
o Any acquisition we make may harm our business, financial condition, or
operating results.
We have a mixed history of success in our acquisitions. For example:
In 2000, we acquired Prosys Technology, Inc. (Prosys) for
consideration valued at $26.2 million. We acquired Prosys for
technology used in our VariCore EPGA logic core, which was introduced
in 2001 but for which no market emerged.
Also in 2000, we completed our acquisition of GateField for
consideration valued at $45.7 million. We acquired GateField for its
flash technology and ProASIC FPGA family, and introduced the
next-generation ProASIC Plus product family in 2002. Design wins from
our flash devices now constitute more than half of our total design
wins.
In pursuing our business strategy, we may acquire other products,
technologies, or businesses from third parties. Identifying and negotiating
these acquisitions may divert substantial management time away from our
operations. An acquisition could absorb substantial cash resources, require us
to incur or assume debt obligations, and/or involve the issuance of additional
our equity securities. The issuance of additional equity securities may dilute,
and could represent an interest senior to the rights of, the holders of our
Common Stock. An acquisition could involve significant write-offs (possibility
resulting in a loss for the fiscal year(s) in which taken) and would require the
amortization of any identifiable intangibles over a number of years, which would
adversely affect earnings in those years. Any acquisition would require
attention from our management to integrate the acquired entity into our
operations, may require us to develop expertise outside our existing business,
and could result in departures of management from either us or the acquired
entity. An acquired entity may have unknown liabilities, and our business may
not achieve the results anticipated at the time it is acquired by us. The
occurrence of any of these circumstances could disrupt our operations and may
have a materially adverse effect on our business, financial condition, or
results of operations.
o We may face significant business and financial risk from claims of
intellectual property infringement asserted against us, and we may be
unable to adequately enforce our intellectual property rights.
As is typical in the semiconductor industry, we are notified from time to
time of claims that we may be infringing patents owned by others. During 2003,
we held discussions regarding potential patent infringement issues with several
third parties. As we sometimes have in the past and did during 2003, we may
obtain licenses under patents that we are alleged to infringe. Although patent
holders commonly offer licenses to alleged infringers, no assurance can be given
that licenses will be offered or that we will find the terms of any offered
licenses acceptable. We cannot assure you that any claim of infringement will be
resolved or that the resolution of any claims will not have a materially adverse
effect on our business, financial condition, or results of operations.
Our failure to obtain a license for technology allegedly used by us could
result in litigation. In addition, we have agreed to defend our customers from
and indemnify them against claims that our products infringe the patent or other
intellectual rights of third parties. All litigation, whether or not determined
in favor of us, can result in significant expense and divert the efforts of our
technical and management personnel. In the event of an adverse ruling in any
litigation involving intellectual property, we could suffer significant (and
possibly treble) monetary damages, which could have a materially adverse effect
on our business, financial condition, or results of operations. We may also be
required to discontinue the use of infringing processes; cease the manufacture,
use, and sale or licensing of infringing products; expend significant resources
to develop non-infringing technology; or obtain licenses under patents that we
are infringing. In the event of a successful claim against us, our failure to
develop or license a substitute technology on commercially reasonable terms
could also have a materially adverse effect on our business, financial
condition, and results of operations.
We have devoted significant resources to research and development and
believe that the intellectual property derived from such research and
development is a valuable asset important to the success of our business. We
rely primarily on patent, trademark, and copyright laws combined with
nondisclosure agreements and other contractual provisions to protect our
proprietary rights. We cannot assure you that the steps we have taken will be
adequate to protect our proprietary rights. In addition, the laws of certain
territories in which our products are developed, manufactured, or sold,
including Asia and Europe, may not protect our products and intellectual
property rights to the same extent as the laws of the United States. Our failure
to enforce our patents, trademarks, or copyrights or to protect our trade
secrets could have a materially adverse effect on our business, financial
condition, or results of operations.
o We may be unable to retain or attract the personnel necessary to
successfully operate, manage, or grow our business.
Our success is dependent in large part on the continued service of our key
managerial, engineering, marketing, sales, and support employees. Particularly
important are highly skilled design, process, software, and test engineers
involved in the manufacture of existing products and the development of new
products and processes. The loss of our key employees could have a materially
adverse effect on our business, financial condition, or results of operations.
In the past we have experienced growth in the number of our employees and the
scope of our operations, resulting in increased responsibilities for management
personnel. To manage future growth effectively, we will need to attract, hire,
train, motivate, manage, and retain a growing number of employees. During strong
business cycles, we expect to experience difficulty in filling our needs for
qualified engineers and other personnel. Any failure to attract and retain
qualified employees, or to manage our growth effectively, could delay product
development and introductions or otherwise have a materially adverse effect on
our business, financial condition, or results of operations.
o We have some arrangements that may not be neutral toward a potential change
of control and our Board of Directors could adopt others.
We have adopted an Employee Retention Plan that provides for payment of a
benefit to our employees who hold unvested stock options in the event of a
change of control. Employees receive the payment if they remain employed for six
months after the change of control or are terminated without cause during the
six months. Each of our executive officers has also entered into a Management
Continuity Agreement, which provides for the acceleration of stock options
unvested at the time of a change of control in the event the executive officer's
employment is actually or constructively terminated other than for cause
following the change of control. While these arrangements are intended to make
executive officers and other employees neutral towards a potential change of
control, they could have the effect of biasing some or all executive officers or
employees in favor of a change of control.
Our Articles of Incorporation authorize the issuance of up to 5,000,000
shares of "blank check" Preferred Stock with designations, rights, and
preferences determined by our Board of Directors. Accordingly, our Board is
empowered, without approval by holders of our Common Stock, to issue Preferred
Stock with dividend, liquidation, redemption, conversion, voting, or other
rights that could adversely affect the voting power or other rights of the
holders of our Common Stock. Issuance of Preferred Stock could be used to
discourage, delay, or prevent a change in control. In addition, issuance of
Preferred Stock could adversely affect the market price of our Common Stock.
On October 17, 2003, we announced that our Board of Directors adopted a
Shareholder Rights Plan. Under the Plan, we issued a dividend of one right for
each share of Common Stock held by shareholders of record as of the close of
business on November 10, 2003. The provisions of the Plan can be triggered only
in certain limited circumstances following the tenth day after a person or group
announces acquisitions of, or tender offers for, 15% or more of our Common
Stock. The Shareholder Rights Plan is designed to guard against partial tender
offers and other coercive tactics to gain control of Actel without offering a
fair and adequate price and terms to all shareholders. Nevertheless, the Plan
could make it more difficult for a third party to acquire us, even if our
shareholders support the acquisition.
o Our stock price may decline significantly, possibly for reasons unrelated
to our operating performance.
The stock markets broadly, technology companies generally, and our Common
Stock in particular have experienced extreme price and volume volatility in
recent years. Our Common Stock may continue to fluctuate substantially on the
basis of many factors, including:
quarterly fluctuations in our financial results or the financial
results of our competitors or other semiconductor companies;
changes in the expectations of analysts regarding our financial
results or the financial results of our competitors or other
semiconductor companies;
announcements of new products or technical innovations by us or by our
competitors; and
general conditions in the semiconductor industry, financial markets,
or economy.
Additional Quarterly Information
The following table presents certain unaudited quarterly results for each
of the eight quarters in the period ended July 4, 2004. In our opinion, all
necessary adjustments (consisting only of normal recurring accruals) have been
included in the amounts stated below to present fairly the unaudited quarterly
results when read in conjunction with our audited consolidated condensed
financial statements and notes thereto included in our 2003 Form 10-K. However,
these quarterly operating results are not indicative of the results for any
future period.
Three Months Ended
---------------------------------------------------------------------------------------------
Jul. 4, Apr. 4, Jan. 4, Oct. 5, Jul. 6, Apr. 6, Jan. 5, Oct. 6,
2004 2004 2004 2003 2003 2003 2003 2002
--------- --------- --------- --------- --------- --------- --------- ---------
(unaudited, in thousands except per share amounts)
Statements of Operations Data:
Net revenues........................ $ 43,688 $ 42,153 $ 40,555 $ 38,405 $ 36,609 $ 34,341 $ 34,103 $ 32,912
Gross profit........................ 26,634 25,656 25,220 23,319 22,025 19,612 20,591 19,229
Income (loss) from operations....... 2,541 2,519 2,462 1,965 441 (1,614) (951) (1,587)
Net income (loss)................... 2,504 2,540 2,328 2,283 1,386 231 (1,831) 1,107
Net income (loss) per share:
Basic............................ $ 0.10 $ 0.10 $ 0.09 $ 0.09 $ 0.06 $ 0.01 $ (0.08) $ 0.05
========= ========= ========= ========= ========= ========= ========= =========
Diluted.......................... $ 0.09 $ 0.09 $ 0.09 $ 0.08 $ 0.05 $ 0.01 $ (0.08) $ 0.04
========= ========= ========= ========= ========= ========= ========= =========
Shares used in computing net income
(loss) per share:
Basic............................ 25,749 25,620 25,339 25,005 24,550 24,338 24,126 24,531
========= ========= ========= ========= ========= ========= ========= =========
Diluted.......................... 26,584 27,324 27,235 27,101 25,776 25,087 24,126 24,959
========= ========= ========= ========= ========= ========= ========= =========
Three Months Ended
---------------------------------------------------------------------------------------------
Jul. 4, Apr. 4, Jan. 4, Oct. 5, Jul. 6, Apr. 6, Jan. 5, Oct. 6,
2004 2004 2004 2003 2003 2003 2003 2002
--------- --------- --------- --------- --------- --------- --------- ---------
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........................ 61.0 60.9 62.2 60.7 60.2 57.1 60.4 58.4
Income (loss) from operations....... 5.8 6.0 6.1 5.1 1.2 (4.7) (2.8) (4.8)
Net income (loss)................... 5.7 6.0 5.7 5.9 3.8 0.7 (5.4) 3.4
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of July 4, 2004, our investment portfolio (other than strategic
investments) consisted primarily of corporate bonds, floating rate short term
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 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.
We are exposed to financial market risks, including changes in interest
rates. All of the potential changes noted below are based on sensitivity
analysis performed on our financial position and expected operating levels at
July 4, 2004. Actual results may differ materially.
Our investments are subject to interest rate risk. During the six months
ended July 4, 2004, interest rates available in the market for government and
corporate bonds experienced an increase. During that time our investment
portfolio consisting of government and corporate bonds decreased $0.8 million. A
further increase in interest rates could subject us to a decline in the market
value of our investments. These risks are mitigated by our ability to hold these
investments to maturity. A hypothetical 100 basis point increase in interest
rates would result in a reduction of approximately $1.5 million in the fair
value of our available-for-sale securities held at July 4, 2004.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management evaluated, with the participation of our Chief Executive
Officer and our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and
our Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
Changes in internal control over financial reporting.
There was no change in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
---------------- ------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On April 23, 2004, we announced our financial results for the three months
ended April 4, 2004. The full text of the press release issued in connection
with the announcement was attached as Exhibit 99.1 to our Current Report on Form
8-K furnished to the SEC on April 23, 2004.
On June 9, 2004, we posted on our website a financial update regarding our
expectations for the second quarter of 2004. The full text of the financial
update was attached as Exhibit 99.1 to our Current Report on Form 8-K furnished
to the SEC on June 9, 2004.
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 4, 2004 /s/ Jon A. Anderson
-------------------------------
Jon A. Anderson
Vice President of Finance
and Chief Financial Officer
(as principal financial officer
and on behalf of Registrant)