ITEM 1. BUSINESS
Overview
Actel designs, develops, and markets field programmable gate arrays ("FPGAs") and associated development system software and programming hardware. FPGAs are used by designers of communications, computer, industrial, military/aerospace, and other electronic systems to differentiate their products and get them to market faster. The Company is the leading supplier of FPGAs based on antifuses, and anticipates introducing FPGAs based on static random access memory ("SRAM") and flash technologies during 1999. Actel's strategy is to provide logic designers with the broadest range of programmable technology choices.
Actel shipped its first products in 1988 and thousands of its development systems are in the hands of customers, including Allen Bradley/Rockwell, AST Computer, Alcatel, Bay Networks, Cabletron, DSC Communications, Hughes Aircraft, Lockheed-Martin, Lucent Technologies, and Siemens. The Company has foundry relationships with Chartered Semiconductor Manufacturing Pte Ltd ("Chartered Semiconductor") in Singapore, Lockheed-Martin Federal Systems Company ("Lockheed-Martin FSC") in the United States, Matsushita Electronics Company ("Matsushita") in Japan, UMC Corp. ("UMC") in Taiwan, and Winbond Electronics Corp. ("Winbond") in Taiwan, permitting Actel to focus its resources on its core strengths of designing, developing, and marketing FPGAs.
Actel's product line consists of ten families of antifuse-based FPGAs; Designer Series Development System, DeskTOP, and CoreHDL software; Silicon Explorer debugging and diagnostic tools; Activator and Silicon Sculptor device programmers; and sockets. To meet the diverse customer requirements in the broad FPGA market, each member of a product family generally is offered in a variety of speed grades, package types, reliability screenings, and ambient temperature tolerances. Designers can use Actel's integrated suite of design tools (DeskTOP) or third-party software for circuit design and then translate the design into a programmed FPGA using Actel's proprietary, highly automated software (Designer Series Development System) and device programmers (Activator and Silicon Sculptor). CoreHDL blocks or "cores" that can be used to reduce development time by being "dropped into" designs, and Silicon Explorer can be used to reduce design-verification time by enabling the user to monitor the functionality of a programmed FPGA in "real time." Sockets permit designers to replace a chip without damaging the board.
In a strategic move to position Actel as a complete solution provider for reprogrammable application specific integrated circuit ("ASIC") systems, the Company and GateField Corporation ("GateField") entered into a multi-year strategic alliance in August 1998. In establishing the alliance, Actel purchased marketing and license rights, the assets of GateField's Design Services Business Unit, and preferred stock. Pursuant to a Product Marketing Agreement, Actel acquired the exclusive right to market and sell GateField's standard ProASIC products in process geometries of 0.35-micron and smaller, as well as GateField's ASICmaster design tool software, as part of Actel's programmable logic device ("PLD") and design suite product families. Under the terms of the Agreement, GateField is to provide Actel with a 0.25-micron ProASIC product family that is expected to support densities of up to half a million programmable logic gates. The Agreement further provides for migration to smaller process technologies, with the potential to produce multi-million gate devices. The non-volatile, single-device, reprogrammable standard ProASIC products are being developed from GateField's patented, flash-based reprogrammable ASIC technology and architecture. ProASIC devices exhibit a high level of portability between PLD and ASIC design flows. The Company also offers design, prototyping, and consulting services through its new Design Services Group.
Actel markets its products through a worldwide, multi-tiered sales and distribution network. The North American network includes 21 sales management and/or technical sales offices, 19 manufacturers' representative firms, and three major industrial distributors. The European network includes four sales management offices and 26 distributors. The Pan-Asia network includes four sales management offices and 12 distributors. Two additional distributors serve the remaining international markets in which Actel offers its products.
The Company was incorporated in California in 1985, and intends to reincorporate as a Nevada corporation during the second quarter of 1999. Actel's principal facilities and executive offices are located at 955 East Arques Avenue, Sunnyvale, California 94086-4533, and its telephone number at that address is (408) 739-1010. The Company's World Wide Web address is http://www.actel.com. As used in this Annual Report on Form 10-K, "Actel" and the "Company" mean Actel Corporation and its consolidated subsidiaries. Unless otherwise indicated, "gate" or "gates" means "ASIC equivalent gates."
"Actel" and the Actel logo are registered trademarks of the Company; "ProASIC" and "ASICmaster" are registered trademarks of GateField; and "RAD-PAK" is a registered trademark of . Space Electronics, Inc. This Annual Report on Form 10-K also includes unregistered trademarks of the Company and trademarks of companies other than Actel.
Industry Background
The three principal types of integrated circuits used in most digital electronic systems are microprocessor, memory, and logic circuits. Microprocessors are used for control and computing tasks; memory devices are used to store program instructions and data; and logic devices are used to adapt these processing and storage capabilities to a specific application. Logic circuits are found in virtually every electronic system.
The logic design of competing electronic systems is often a principal area of differentiation. Unlike the microprocessor and memory markets, which are dominated by a relatively few standard designs, the logic market is highly fragmented and includes, among many other segments, low-density standard transistor-transistor logic circuits ("TTLs") and custom-designed ASICs. TTLs are standard logic circuits that can be purchased "off the shelf" and interconnected on a printed circuit board, but they tend to limit system performance and increase system size and cost compared with logic functions integrated at the circuit (rather than the board) level. ASICs are customized circuits that offer electronic system manufacturers the benefits of higher levels of circuit integration: improved system performance, reduced system size, and lower system cost.
ASICs include conventional gate arrays, standard cells, and programmable logic circuits. Conventional gate arrays and standard cell circuits are customized to perform desired logical functions at the time the device is manufactured. Since they are "hard wired" at the wafer foundry, conventional gate arrays and standard cells are subject to the time and expense risks associated with any development cycle involving a foundry. Typically, conventional gate arrays and standard cells are first delivered in production volumes months after the successful production of acceptable prototypes. In addition, conventional gate arrays and standard cells cannot be modified after they are manufactured, which subjects them to the risk of inventory obsolescence and constrains the system manufacturer's ability to change the logic design. Programmable logic circuits, on the other hand, are manufactured as standard devices and customized "in the field" by electronic system manufacturers using computer-aided engineering ("CAE") design and programming systems. Programmable logic circuits are being used by a growing number of electronic system manufacturers as a solution to their increasing demands for differentiation, rapid time to market, and manufacturing flexibility. While conventional gate array and standard cell designs are generally more complex than programmable logic circuit designs, the average capacity (or "gates" per circuit) of conventional gate arrays, standard cells, and programmable logic circuits have all increased over time. This indicates that long-term growth in sales within each market segment has increased faster for circuits with higher capacities.
Programmable logic circuits include PLDs and FPGAs. The market for complex PLDs ("CPLDs") and FPGAs has grown rapidly because they generally offer greater capacity, lower total cost per usable logic gate, and lower power consumption than TTLs and simple PLDs, and faster time to market and lower development costs than conventional gate arrays and standard cells. For many electronic system manufacturers, the time-to-market and manufacturing-flexibility benefits of CPLDs and FPGAs outweigh their price premium over conventional gate arrays or standard cells of comparable capacity. This is particularly true with respect to communications applications.
Electronic system manufacturers customize programmable logic circuits to perform the desired logical functions by using CAE systems to define a device's function and then a device programmer to change the state of the device's programming elements (such as antifuses or memory cells) through the application of an electrical signal. Most CPLDs are programmed with erasable programmable read only memories ("EPROM") or other "floating gate" technologies. Many FPGAs are programmed with SRAM technology. FPGAs based on antifuse programming elements are one-time programmable, meaning they will retain their circuit configurations permanently, even in the absence of electrical power. FPGAs and CPLDs based on programming elements controlled by floating gates or SRAMs are reprogrammable.
Before an FPGA can be programmed there are various steps that must be accomplished by a designer using CAE design software. These steps include defining the function of the FPGA, verifying the design, and laying out the circuit. Traditionally, logic functions have been defined using schematic capture tools, which essentially permit the designer to construct a circuit diagram on the computer. As FPGA designers have begun to design higher capacity circuits, the time required to create schematic diagrams using schematic capture tools has become prohibitive. To address this problem, designers are increasingly turning to hardware description languages ("HDLs"), also known as high-level description. VHDL and Verilog are the most common HDLs, which permit the designer to describe the circuit functions at an abstract level and to verify the performance of logic functions at that level. The HDL can then be fed into logic synthesis software that automatically converts the abstract or high-level description to a gate-level representation equivalent to that produced by schematic capture tools. After a gate-level representation of the logic function has been created and verified, it must be translated or "laid out" onto the generic logic modules of the FPGA. This is achieved by placing the logic gates and routing their interconnections, a process referred to as "place and route." As designers have begun to design higher capacity circuits, the need for automatic (instead of manual) place and route capability has become increasingly important. This transition to the use of HDLs presents a challenge to the designer to learn new design methods and to use new design tools. In addition, not all programmable logic circuit architectures are equally well suited for use with logic synthesis and place and route tools.
Actel Strategy
Actel believes that the demand for higher capacity devices will increase faster than that for programmable devices as a whole. Accordingly, the Company is focusing its attention on the transition to higher capacity devices and the associated high-level design methodologies. Actel's strategy is to be the complete provider of high-density programmable logic by giving designers the capability to make the best technology choice. The Company is implementing this strategy by enhancing the functionality, usability, and accessibility of high-level design tools for its antifuse-based architecture; and by developing new products based on SRAM and flash technologies using a variety of architectures that Actel believes will be better suited for this market than existing reprogrammable architectures.
Products and Services
Actel's product line consists of ten families of antifuse-based FPGAs; Designer Series Development System, DeskTOP, and CoreHDL software; Silicon Explorer debugging and diagnostic tools; Activator and Silicon Sculptor device programmers; and sockets. In 1998, the first members of the SX family of FPGAs were shipped for revenue and the Company continued to implement its strategy of offering a series of integrated, high-level design FPGA development tools suites at aggressive pricing, including a free entry-level suite. In 1998, Actel also acquired its Design Services Group, which offers system-level design, prototyping, and consulting services.
FPGAs
To meet the diverse customer requirements in the broad high-capacity programmable logic market, each of the Company's FPGAs (except members of the RadHard family) is offered in a variety of speed grades, package types, reliability screenings, and ambient temperature tolerances. The five members of the ACT 1 and ACT 2 families, for example, can be ordered in more than 100 speed, packaging, screening, and tolerance variations.
ACT 1
The ACT 1 family of FPGAs consists of two products: the 1,200-gate A1010, which was first shipped for revenue in 1988; and the 2,000-gate A1020, which was first shipped for revenue in 1989. This family of circuits was introduced at 2.0 micron and is manufactured using 1.0 micron design rules. The Company offers 5.0- and 3.3-volt versions of both ACT 1 products.
ACT 2
The ACT 2 family of FPGAs consists of three products: the 4,000-gate A1240 and the 8,000-gate A1280, which were first shipped for revenue in 1991; and the 2,500-gate A1225, which was first shipped for revenue in 1992. This family of circuits was introduced at 1.2 micron and is manufactured using 1.0 micron design rules.
ACT 3
The ACT 3 family of FPGAs consists of five products: the 2,500-gate A1425 and the 6,000-gate A1460, which were first shipped for revenue in 1993; and the 1,500-gate A1415, the 4,000-gate A1440, and the 10,000-gate A14100, which were first shipped for revenue in 1994. The ACT 3 family was designed for applications requiring high speed and a high number of inputs and outputs ("I/Os"). The five members of the ACT 3 family can be ordered in approximately 150 speed, packaging, screening, and tolerance variations. The Company offers 5.0- and 3.3-volt versions of all five ACT 3 products, as well as versions (A1460BP and A14100BP) that are compliant with the peripheral component interconnect (PCI) standard. The ACT 3 family was introduced at 0.8 micron and is manufactured using 0.6 micron design rules.
XL
The 1200XL family of FPGAs, which was first shipped for revenue in 1995, consists of three products: the 2,500-gate A1225XL, the 4,000-gate A1240XL, and the 8,000-gate A1280XL. Taking advantage of 0.6 micron design rules and redesigned I/O modules and clock distribution networks, 1200XL products offer system performance significantly in excess of that offered by pin-compatible ACT 2 devices. The Company offers 5.0- and 3.3-volt versions of all three members of the 1200XL family, which can be ordered in approximately 100 speed, packaging, screening, and tolerance variations.
DX
The 3200DX family of FPGAs consists of five products: the 6,500-gate A3265DX, which was first shipped for revenue in 1995; the 14,000-gate A32140DX and the 20,000-gate A32200DX, which were first shipped for revenue in 1996; and the 10,000-gate A32100DX and the 30,000-gate A32300DX, which were first shipped for revenue in 1997. The 3200DX family permits designers to integrate the register-intensive datapath functions of FPGAs, the control and decode modules commonly implemented in CPLDs, and the fast dual-port SRAM typically used for high-speed buffering. Supported by the Company's extensive selection of automated design tools, the 3200DX family is optimized for synthesis design methodologies to yield predictable performance for system logic integration. To further assist designers, most members of the family offer JTAG boundary scan logic, which permits testing of the design during manufacture. The Company offers 5.0- and 3.3-volt versions of all five members of the 3200DX family, which is manufactured using 0.6 micron design rules and can be ordered in approximately 150 speed, packaging, screening, and tolerance variations.
MX
The MX family of FPGAs consists of six products: the 4,000-gate A40MX04 and the 16,000-gate A42MX16, which were first shipped for revenue in 1997; and the 2,000-gate A40MX02, the 9,000-gate A42MX09, the 24,000-gate A42MX24, and the 36,000-gate A42MX36, which were first shipped for revenue in 1998. The MX family includes the best features from Actel's earlier ACT 1, ACT2, 1200XL, and 3200DX families and is manufactured using 0.45 micron design rules, which permits the MX family to work in pure 5.0-volt, pure 3.3-volt, and mixed 5.0- and 3.3-volt systems. Actel believes that, at the time of its introduction in January 1998, the A42MX09 was the world's fastest FPGA. In May 1998, the Company announced the availability of the A42MX09 and the A42MX16 in the popular VQFP-100 pin package, which provides a very small footprint and is particularly useful in handheld and portable computing applications that require high speed, low power consumption, and design flexibility on limited in board space. Designers can achieve 5.0- or 3.3-volt 33MHz PCI-compliant output drives on the A42MX24 and A42MX36, which were introduced in June 1998, by programming a PCI-enable fuse.
Like ASICs and all previous Actel FPGAs, MX devices are nonvolatile and do not require any external configuration devices or circuitry. The MX family was introduced with volume production pricing that the Company believed, in combination with its performance and functionality, should make it attractive as a single-chip ASIC alternative. In October 1998, Actel announced list price reductions of up to 50 percent for its MX FPGAs, enhancing the MX family's appeal as an ASIC alternative. In March 1999, the Company announced that it had shipped the two-millionth MX FPGA. This milestone was achieved just thirteen months after the availability of production devices and only eighteen months after the introduction of the first member of the family. This means the MX family ramped to volume faster than any family in Actel's history. Over time, the MX family, which can be ordered in more than 200 speed, packaging, screening, and tolerance variations, and the new SX family (discussed below) should replace all of Actel's earlier FPGA families in new commercial designs.
SX
The SX family of FPGAs consists of four products, all of which were first shipped for revenue in 1998: the 8,000-gate A54SX08, the 16,000-gate A54SX16 and A54SX16P, and the 32,000-gate A54SX32. The SX family is manufactured using three layers of metal and 0.35 micron design rules, and is scheduled to migrate to 0.25-micron process technology by the end of 1999. SX is the first family to be built on Actel's new triple layer metal, sea of modules architecture that will serve as the foundation for the Company's future antifuse product releases. In Actel's new metal-to-metal antifuse technology, interconnect resources have been moved from the area between logic modules to the Metal 2 and Metal 3 layers. The result is dramatically decreased die size (regardless of density) that increases device performance and reduces cost. The new architecture has been developed for high device performance and features new logic module and interconnect construction. The foundation for the new architecture is a "sea" of logic modules, laid out as a grid across the entire silicon floor. The sea of modules design maximizes the chip area by covering almost the entire silicon substrate with logic resources. To further increase design efficiency and device performance, these modules have been organized into "superclusters." Two different levels of local routing resources within superclusters give designers the ability to achieve very fast performance.
SX debuted in April 1998 as the industry's fastest family of FPGAs with the introduction of the A54SX16. The A54SX32, which was introduced in August 1998, is well suited for use in networking, telecommunications, data acquisition, instrumentation, medical electronics and high-speed computer peripheral applications. The A54SX08, which was introduced in October 1998, is optimally compatible with leading-edge applications such as 8b/10b encoding for gigabit Ethernet routers and high-speed interface for DS3 networks. The A54SX16P, which was also introduced in October 1998, meets the PCI AC/DC drive specifications, making it suitable for high-speed applications such as graphic controllers, multimedia and networking cards, communications equipment, and other fully compliant 66MHz PCI designs. All SX devices have full pin compatibility within the family and provide mixed 5/3.3-volt support with 3.3-volt output drive and 5-volt tolerant inputs. The SX family can be ordered in more than 50 speed, packaging, screening, and tolerance variations, and approximately 50 more variations are planned.
As discussed above, the SX family achieves high performance by means of the new low-impedance, metal-to-metal antifuse and several innovative architectural features, including a hard-wired clock (320MHz maximum clock frequency), fast I/Os (4ns clock-to-out), and rapid local interconnects (direct connect 0.1ns, fast connect 0.4ns). This combination permits the SX family to often exceed the performance of CPLDs. The SX family's combination of performance and capacity enables designers to combine multiple high performance CPLDs into a single FPGA, thereby cutting power consumption, saving board space, and reducing costs. In November 1998, Actel announced that list prices for SX FPGAs will be reduced by up to 63 percent in the second half of 1999, based on migration to 0.25-micron process technology, backend cost reductions, and increased market demand. These significant SX price reductions should permit customers to use the fastest FPGA on the market and get ASIC-like pricing for volume production.
HiRel/Military
HiRel and military devices are designed for use in military and extreme temperature environments. All Actel devices offered in plastic packages are certified for commercial (0 to +70(0)C), industrial (-40 to +850(0)C), or military (-55 to +125(0)C) temperature ranges. The Company's HiRel devices offered in ceramic packages are certified for commercial or military temperature ranges or with Class B (MIL-STD-883) qualification.
The HiRel family of plastic FPGAs consists of all devices and packages offered commercially. The HiRel family of ceramic FPGAs consists of thirteen products: the 1,200-gate A1010B, the 2,000-gate A1020B, the 2,500-gate A1425A, the 4,000-gate A1240A, the 6,000-gate A1460A, the 8,000-gate A1280A and A1280XL, the 10,000-gate A14100A and A32100DX, the 16,000-gate A54SX16, the 20,000-gate A32200DX, the 32,000-gate A54SX32, and the 36,000-gate A42MX36.
In September 1998, Actel announced it had achieved MIL-PRF-38535 Qualified Manufacturer Listing ("QML") certification for its plastic FPGAs. The certification from the Defense Supply Center Columbus ("DSCC") covers international packaging subcontractors ASAT in Hong Kong and ANAM in South Korea. ASAT and ANAM produce PLCC, PQFP, TQFP, VQFP, and RQFP packages for the Company's ACT1, ACT2, ACT3, 1200XL, and 3200DX device families, which have capacities ranging from 2,000 to 36,000 gates. These QML certified components are available at commercial, industrial, and military temperature levels. In November 1998, the Company announced that the MX family had been added to its MIL-PRF-38535 QML certification for plastic components. The additional listing included international packaging subcontractor STATS in Singapore, and the listed packages included PLCCs, PQFPs, a VQFP, and a TQFP. In March 1999, Actel announced it has been awarded full certification to QML status for all military, HiRel, and space products.
QML certification qualifies processes and materials rather than individual products or production lots. With QML certification, devices with plastic packages can be integrated into design applications that would otherwise require higher-cost ceramic packages, thereby providing designers with a lower-cost solution. The certification also permits the integration of commercial and military production without compromising quality or reliability. Many suppliers of microelectronic components have implemented QML as their primary worldwide business standard. Appropriate use of this standard helps not only in the implementation of advanced technologies, but also in providing more effective logistical support throughout the life cycle of the product.
RT/RP
RadTolerant devices are specifically designed for use in space applications, including commercial, military, and civilian satellites and deep-space probes. Actel's RadTolerant devices are offered in ceramic packages and certified for military temperature ranges with either Class B or Class E (extended flow/space) qualification. The RadTolerant family of FPGAs consists of five products: the 2,000-gate RT1020, the 2,500-gate RT1425A, the 6,000-gate RT1460A, the 8,000-gate RT1280A, and the 10,000-gate RT14100A. In September 1998, the Company announced the addition of RT54SX16 and RT54SX32 to the RadTolerant product line, which should be qualified in 1999. The RT54SX16 and RT54SX32 are manufactured at the Matsushita fabrication facility in Japan, which has produced devices with better total dose capabilities than typical commercial fabrication facilities.
In February 1998, Actel announced that it had signed a memorandum of understanding with Space Electronics, Inc. ("SEi") to develop and market a new line of high-reliability, radiation-tolerant FPGA products. The agreement called for the two companies to link Actel's commercial FPGA products with SEi's RAD-PAK package shielding technology, which can significantly increase the total dose survivability of commercial FPGA devices. The RAD-PAK family of FPGAs consists of two products: the 8,000-gate RP1280A and the 10,000-gate RP14100A. Actel's RAD-PAK devices are offered in ceramic packages and certified for commercial or military temperature ranges or with Class B or Class E qualification.
RadTolerant and RAD-PAK FPGAs provide cost-effective alternatives to radiation hardened devices for applications that require high reliability. One such application is the growing commercial satellite market, widely used in telecommunications for cellular phones, pagers, and global positioning system products and services.
RH
The RadHard family of FPGAs consists of two products: the 8,000-gate RH1280, which was first shipped for revenue in 1996; and the 2,000-gate RH1020. In March 1998, the Company announced the availability of the RH1020. RadHard devices are offered in ceramic packages and certified with Class VQ (QML) qualification. Actel's RadHard FPGAs are manufactured by Lockheed Martin FSC at its QML facility in Manassas, Virginia, using a high-reliability, radiation-hardened 0.8 micron process. The Company and LMFSC are jointly developing the RadHard family to meet the demands of applications requiring guaranteed levels of performance and radiation survivability, including the growing telecommunications satellite market. Additional applications for RadHard FPGAs include satellites for military use, deep space probes and planetary missions, and ground-based military applications in which radiation survivability is required.
Software
A key element of the Company's strategy is to support users' electronic design automation ("EDA") tools of choice by establishing and maintaining relationships with leading synthesis software vendors for the purpose of permitting such tools to be used as a "front end" to Actel's proprietary Designer Series Development System. Rather than developing this capability alone, the Company has established the Actel Industry Alliance, which Actel uses to establish relationships with EDA vendors for the purpose of developing interfaces between such vendors' EDA tools and Actel's proprietary software. Under the Alliance program, Actel provides members with, among other things, access to its proprietary software specifications, early access to software revisions, verification services, and participation in joint marketing efforts. The Alliance currently has more than 20 members, including all major EDA vendors supporting high-level design for both VHDL and Verilog. The Company provides comprehensive HDL solutions for the EDA environments of Cadence Design Systems, Exemplar Logic, Mentor Graphics, Synopsys, and Synplicity.
Designer Series Development System
In 1995, Actel introduced the Designer Series Development System toolset, a revolutionary software suite built on an object-oriented database that helps optimize and simplify FPGA circuit design, implementation, and testing. The Designer Series has continuously evolved since its introduction and has recently been integrated into the Actel DeskTOP integrated software tools to efficiently perform the suite's place and route tasks.
In August 1998, Actel announced the latest revision to its Designer Series FPGA design software, version R2-1998. This new version enhanced timing, precision, and ease of use, and provided full programming for all Actel FPGAs, including the members of Actel's SX family, the industry's fastest devices. By ensuring a greater level of timing analysis accuracy, Actel's R2-1998 Designer Series software helps designers work at the extremely high-frequency capabilities of Actel's new SX FPGA family. A new flip-flop report helps designers to determine the number of sequential and combinatorial macros used in a design for accurate prediction of device utilization. Refinements were made to ACTmap, including clock resource checking and speed/utilization performance improvements; and to ACTgen, including a new user interface, new macro types, behavioral VHDL and Verilog model generation capability, and improved reporting.
DeskTOP
In February 1999, Actel became the first programmable device supplier to offer a free integrated suite of design tools, the Actel DeskTOP. Introduction of the basic DeskTOP suite was the first phase of Actel's integrated design tool strategy. DeskTOP is a three-vendor suite of logic design tools from Synplicity, VeriBest and Actel, with technical support provided by Actel. The basic DeskTOP version will be offered at no charge to qualified designers through January 31, 2000. It offers synthesis for selected devices of up to 50,000 gates and can be used to design more than 20 Actel device types for commercial and HiRel applications. One year of DeskTOP maintenance, which includes full technical support and upgrades for future Actel device family additions, is $995. Actel's basic DeskTOP offering integrates the functionality of VeriBest's DesignView Design Manager, schematic entry, and VHDL simulator; Synplicity's Synplify synthesis software; and Actel's Designer place and route tool as well as programming, logic analyzer, and timing analysis software. Optional Verilog simulation is scheduled to be added to Actel DeskTOP during the second quarter of 1999.
The second phase of Actel's integrated design tool strategy is scheduled for the second quarter of 1999 with the introduction of DeskTOP Pro and DeskTOP Open. As a migration path option, DeskTOP Pro will take the entire DeskTOP development software offering from VeriBest, Synplicity, and Actel to the highest level of functional performance and productivity for the design of all Actel devices. DeskTOP Pro is targeted as a very reasonably priced, complete tool suite solution for "power users" designing high gate count, system-level devices. Actel DeskTOP Open will feature an open synthesis environment is being developed to appeal to customers who have already invested in their own synthesis tools. Both DeskTOP Open and DeskTOP Pro will offer feature-rich design solutions with no maximum size limitation for all supported Actel devices.
CoreHDL Intellectual Property
As integrated circuits move to ever higher levels of capacity and integration, the use of intellectual property ("IP"), in the form of cores, becomes more important. In offering CoreHDL IP, the Company is targeting high-density FPGA designers who are interested in combining customized logic with predefined functions optimized for high performance applications. By using predefined cores, designers save engineering resources for the value-added portions of their designs while shortening the design cycle. In addition, the portable nature of cores enables design reuse across multiple product versions.
Actel's CoreHDL IP portfolio consists of three cores, which are available in either Verilog-HDL or VHDL source code: CorePCI Target, CorePCI Target+DMA, and Serial Communication UART. There are two versions of each PCI core, one that has been ported to the Company's PCI-compliant ACT 3 devices (A1460BP and A14100BP) and one that has been ported to the PCI-compliant MX (A42MX24 and A42MX36) and SX (A54SX16P) devices. Actel also offers nine cores developed by Inicore AG, a Swiss IP provider, which are available only in VHDL source code: ADPLL, CANbus, CPU 6809, G704 (ISDN Framer), HDLC, I2C, UART, Utopia (ATM), and VME. In general, these cores are targeted to telecommunications and industrial control applications.
Silicon Explorer
Silicon Explorer is a powerful debugging and verification tool that enables the user to monitor the internal operation of a programmed FPGA as it performs its functions at speed within a real system. By permitting real-time probing, Silicon Explorer can significantly reduce the amount of time necessary to debug and verify an FPGA design. The Silicon Explorer tool suite includes ProbePilot, a high-speed signal acquisition hardware interface between the Actel FPGA, the board on which the FPGA resides, and the designer's desktop computer; Explore, an easy-to-use point-and-click software tool that is integrated with the Company's Designer Series development software is a PC-hosted logic analyzer that graphically displays the waveforms accessed through ProbePilot. The ProbePilot signal acquisition control takes advantage of the Company's ActionProbe circuitry, a patented architectural feature included in all Actel devices that provides 100% observability of internal nodes from selected external pins. ProbePilot supports an 18 channel logic analyzer and features high-speed 100 MHz asynchronous or 66 MHz synchronous sampling rates. ProbePilot connects directly to any desktop or laptop computer through the serial port and operates off the test board's 5.0 volt or 3.3 volt power supply. The Explore windows-based software drives the entire diagnostic and debug process and resides on the designer's PC as a companion to Actel's Designer Series FPGA development tools. Silicon Explorer's software graphically displays the waveforms accessed through ProbePilot - essentially turning your PC into a full-featured 18 channel logic analyzer, eliminating the need for a costly stand-alone logic analyzer.
Programmers
Actel's FPGAs can be programmed by Activator or Silicon Sculptor device programmers. The programmers obtain the fuse file, which includes instructions on programming an FPGA, from the Company's Designer Series software and use the file to program the device. Once a device is programmed, Actel's optional Silicon Explorer diagnostic debugging tool kit supports functional and timing verification of every internal signal. The Company also supports programmers that are offered by third parties, including BP Microsystems Inc., Data I/O, SMS Sprint, and System General.
Activator
There are two Activator device programmers, Activator 2 and Activator 2S, both of which execute all programming, verification, and debugging functions. Customized programming adapters for each device type permit different packages to be programmed by switching adapters. Activator 2 programs up to four FPGAs at a time; Activator 2S programs one FPGA at a time.
Silicon Sculptor
In February 1998, announced the availability of Silicon Sculptor, a new FPGA programmer for the PC. Silicon Sculptor is a cost-effective, highly reliable programmer for Actel devices that is convenient and easy-to-use. The compact size of the Silicon Sculptor makes it easy for designers to program Actel FPGAs from their desktop PC rather than in a lab. A single adapter module can be used to program all Actel devices within a package type, regardless of pin count. In addition, up to four Silicon Sculptors can concurrently program up to four devices from the same PC by simply connecting an expansion cable.
Sockets
Sockets for Actel FPGAs are available in prototype quantities from Actel and in production quantities from Actel-qualified socket manufacturers. Sockets permit designers to replace a chip without damaging the board, which reduces some of the risk commonly associated with using an antifuse FPGA in prototype board design. The complete line of sockets accommodates all Actel FPGAs in TQFP, PQFP, RQFP, and VQFP packages.
In March 1999, the Company announced a range of ball grid array (BGA) sockets for use with its FPGAs. The BGA sockets are well suited to the prototyping environment and are compatible with Actel's MX and SX devices as well as upcoming reprogrammable Actel FPGA families. The use of BGA sockets facilitates migration to full production, decreasing both time-to-market and production costs. The sockets are designed to be reliable and have zero insertion force, meaning that the device is not stressed before, during, or after testing. The main benefit of these sockets is that they are accommodated onto the same pad layout on the printed circuit board (PCB) as the device itself will eventually occupy. This avoids changes to the PCB during the crossover between prototyping and production. BGA packaging is becoming more popular, due mainly to their ease of use and ability to be re-worked.
Design Services Group
FPGAs are becoming more dense and their design more complex as designers integrate system-level logic functionality and IP onto a single piece of silicon. FPGA suppliers who possess system-level design expertise to offer to their customers will have a distinct advantage in the market. With its acquisition of the GateField Design Services Business Unit in August 1998, Actel became the first FPGA provider to offer such expertise. The Actel Design Services Group has expanded the Company's ability to support a greater portion of customers' overall design and risk management. The Design Services Group is located in a secure facility in Mt. Arlington, New Jersey, and is certified to handle government, military, and proprietary designs. The Actel Design Services Group provides varying levels of design services, including design methodology and tool consulting; turnkey FPGA and ASIC design, IP development and integration, and board and system design; software design and implementation; and development of prototypes, first articles and production units.
In January 1999, Actel announced that its Design Services Group was actively involved with a major customer to supply an FPGA and a new register transfer level (RTL) core for a 66MHz PCI design application. This design is being implemented with the beta version of an Actel 66MHz CorePCI macro in the Actel 16,000-gate PCI FPGA, the A54SX16P. This PCI solution is being developed by the Design Services Group for a PC-based accelerator board that will also use a number of Actel's new flash-based ProASIC reprogrammable FPGAs. The Company believes this PCI implementation, when complete, will be the first programmable application operating within the PCI 66MHz specification.
Market and Applications
FPGAs can be used in a broad range of applications across nearly all electronic system market segments. Most customers use the Company's antifuse FPGAs in low to medium volumes in the final production form of their products. Some high-volume electronic system manufacturers use Actel's antifuse FPGAs as a prototyping vehicle and convert production to lower-cost conventional gate arrays or standard cells, while others with time-to-market constraints use the Company's FPGAs in the initial production and then convert to conventional gate arrays or standard cells. As product life cycles continue to shorten and manufacturing efficiencies increase in antifuse FPGAs, some high-volume electronic system manufacturers are electing to retain antifuse FPGAs in volume production because conversion to conventional gate arrays or standard cells may not yield sufficiently attractive savings before the electronic system reaches the end of its life. With the introduction of the MX and SX families, Actel believes that its antifuse FPGAs will increasingly be used in high volume production.
Communications
The high capacity, high performance, and low power consumption of antifuse FPGAs make them well suited for use in communications equipment. Increasingly complex equipment must frequently be designed to fit in the space occupied by previous product generations. The rapidly changing communications environment rewards short development times and early market entry.
Representative Actel customers in the communications market include: 3Com, ADC Kentrox, Advanced Fibre Communications, Alcatel, Ascend Communications, Bay Networks, Cabletron, Cascade, Cisco Systems, Chipcom, DSC Communications, Hughes Network Systems, Lucent Technologies, Motorola, and Nortel.
Computer Systems and Peripherals
The computer systems markets are intensely competitive, placing a premium on early market entry for new products. FPGAs decrease the time to market and facilitate early completion of production models so that development of hardware and software can occur in parallel.
Representative Actel customers in the computer market include: AST Computer, Hewlett-Packard, IBM, Olivetti, Sky Computer, and Tandem Computer.
Industrial Control Equipment
Industrial control and instrumentation applications often require complex electronic functions tailored to specific needs. FPGAs offer programmability and high capacity, making them attractive to this segment of the electronic equipment market.
Representative Actel customers in the industrial market include: Allen Bradley/Rockwell, Eastman Kodak, General Electric, Hewlett-Packard, Marquette, and Siemens.
Military and Aerospace
Rigorous quality and reliability standards, stringent volume requirements, and the need for design security are characteristics of the military and aerospace market. The Company's antifuse FPGAs have high quality, reliability, and capacity, and are virtually impossible to reverse engineer, making them suitable for many military and aerospace applications. Actel's antifuse FPGAs are especially well suited for space applications, due to the high radiation tolerance of the antifuse, and for many aircraft and missile flight applications, due to the high density and performance of antifuse FPGAs. For these reasons, the Company is the world's leading supplier of military, radiation tolerant, and radiation hardened FPGAs
Representative Actel customers in the military market include: Alliant Technology, Boeing, E-Systems, Harris, Honeywell, Hughes Aircraft, Jet Propulsion Labs (JPL), Lockheed-Martin, Loral, National Aeronautics Space Administration (NASA), Northrup, Olin Corporation, Raytheon, SCI Systems, Texas Instruments Incorporated ("TI"), and TRW.
Sales and Distribution
The Company maintains a worldwide, multi-tiered selling organization that includes a direct sales force, independent manufacturers' representatives, and electronics distributors. In March 1999, Actel announced the appointment of Paul Indaco as Vice President of Worldwide Sales
Actel's domestic sales force consists of 70 sales and administrative personnel and field application engineers ("FAEs") operating from 21 sales offices located in major metropolitan areas. Direct sales personnel call on target accounts and support direct original equipment manufacturers ("OEMs"). Besides overseeing the activities of direct sales personnel, the Company's sales managers also oversee the activities of 19 manufacturers' representative firms that operate from approximately 48 office locations. The manufacturers' representatives concentrate on selling to major industrial companies in North America. To service smaller, geographically dispersed accounts in North America, Actel has distributor agreements with Arrow Electronics, Inc. and Zeus Electronics (collectively, "Arrow"), Pioneer-Standard Electronics, Inc. ("Pioneer"), and Unique Technologies ("Unique"). Arrow, Pioneer, and Unique have 75, 50, and 30 branch offices in North America, respectively.
In March 1998, Actel announced that its RadHard FPGAs were being made available through the Company's North American distribution network, making it easier for small subcontractors on communications satellite and military/aerospace projects to incorporate such devices into their designs. Prior to the announcement, all sales were made direct from the factory.
In August 1998, Actel announced that it had switched its Veba Electronics Group distribution partner in North America from Wyle Electronics ("Wyle") to Unique. Veba Electronics Group is one of the world's largest distributors of electronic components. Veba's Northern American distribution group includes Unique, Insight, and Wyle. A majority of the transition from Wyle to Unique was completed within 45 days. Actel is now strategically positioned as Unique's only FPGA supplier. This means that Unique's FPGA focus will be exclusively on Actel's channel distribution, service, and support requirements. Under its agreement with the Company, Unique will furnish distribution services and customer design support for Actel's existing and future FPGA product lines, including the ProASIC family of flash-based reprogrammable products. The agreement also provides for Unique to add FAEs dedicated to the Company.
Actel generates a significant portion of its revenues from international sales. Sales to customers outside the United States for 1998, 1997, and 1996 accounted for 33%, 31%, and 33% of net revenues, respectively. Of these export sales, the largest portion was derived from European customers. The Company's European sales organization consists of 26 distributors (including Arrow and Memec, which have 16 subsidiary companies in Europe) having approximately 45 branch offices. The activities of these distributors are supervised from sales management offices in Basingstoke (England), Paris (France), Milano (Italy), and Munich (Germany), where a total of 17 people are employed.
Actel's Pan-Asia sales organization consists of 12 distributors having approximately 25 branch offices. The activities of these distributors are supervised from sales management offices in Hong Kong (China), Seoul (Korea), Taipei (Taiwan), and Tokyo (Japan), where a total of nine people are employed. In June 1998, the Company announced the appointment of a regional sales manager and a synthesis expert for the Pan-Asian region and a Korean account sales manager. Two additional distributors serve the remaining international markets in which Actel offers its products.
In January 1998, Actel announced an agreement with High Reliability Components Corporation ("HIREC") to bring high reliability FPGAs to the Japanese satellite and space exploration industry. This includes the latest Japanese National Space Development Agency ("NASDA") launch vehicle, the H-IIA Rocket. The Company's radiation tolerant and radiation hardened FPGAs have been a part of many historic U.S. space missions, including such high profile projects as the Hubble Telescope and Mars Explorer. HIREC is a leading distributor of electronic devices and engineering services to the Japanese space industry. The agreement brings together Actel's significant experience in providing mission critical logic devices used in space exploration and communications satellites with HIREC's value added testing and quality assurance services. The result should be more reliable designs and faster time-to-launch for Japan's growing telecommunications and space infrastructure. HIREC has already delivered the Company's FPGAs combined with HIREC's extended tests and quality assurance services to NASDA satellite programs.
In September 1998, Actel announced that it had signed an agreement with Unique of Hong Kong under which Unique will distribute all of the Company's existing and future FPGAs in the People's Republic of China (PRC) and ASEAN regions. Unique, a division of Memec (Asia Pacific) Ltd. and part of the worldwide Memec Group within Veba Electronics Inc., is a leading distributor in marketing specialist semiconductors. In October 1998, the Company announced that it had signed an agreement with Maojet Technology Corp. of Taipei, an independent EDA software distributor, to distribute Actel's new ProASIC products in Taiwan; and an agreement with Tomen Electronics Corp. of Tokyo to distribute ProASIC products in Japan. Tomen Electronics is one of Japan's leading distributors of semiconductors, computer peripherals and software. Under the agreements, Maojet and Tomen will distribute all ProASIC products in process of geometries of 0.25-micron and smaller, as well as GateField's ASICmaster design tools software. Actel decided to work with Maojet and Tomen because of their experience distributing ProASIC products for GateField.
The Company's sales cycle for the initial sale of a design system is generally lengthy and often requires the ongoing participation of salespersons, engineers, and management. After a sales representative or distributor evaluates a customer's logic design requirements and determines if there is an application suitable for Actel's FPGAs, the next step typically is a visit to the qualified customer by a regional sales manager or the FAE from the Company or its distributor. The sales manager or FAE may then determine that additional analysis is required by engineers based at Actel's headquarters.
In 1998, more than half of Actel's sales in the United States and virtually all of the Company's sales outside the United States were made through distributors. As is common in the semiconductor industry, Actel generally grants price protection to distributors. Under this policy, distributors are granted a credit upon a price reduction for the difference between their original purchase price for products in inventory and the reduced price. From time to time, distributors are also granted credit on an individual basis for Company-approved price reductions on specific transactions to meet competition. The Company also generally grants distributors limited rights to return products. To date, product returns under this policy have not been material. Actel maintains reserves against which these credits and returns are charged. Because of its price protection and return policies, the Company does not recognize revenue on products sold to distributors until the products are resold to end customers.
Backlog
At December 31, 1998, Actel's backlog was approximately $25.5 million, compared with approximately $28.0 million at December 31, 1997. The Company includes in its backlog all OEM orders scheduled for delivery over the next nine months and all distributor orders scheduled for delivery over the next six months. Actel produces standard products that may be shipped from inventory within a short time after receipt of an order. The Company's business, and to a large extent that of the entire semiconductor industry, is characterized by short-term order and shipment schedules, rather than volume purchase contracts. In accordance with industry practice, Actel's backlog may be cancelled or rescheduled by the customer on short notice without significant penalty. As a result, the Company's backlog may not be indicative of actual sales and therefore should not be used as a measure of future revenue.
Customer Service and Support
Actel believes that superior customer service and technical support are essential for success in the FPGA market. The Company facilitates service and support through service team meetings that address particular aspects of the overall service strategy and support. The most significant areas of customer service and technical support are regularly measured. Actel's customer service organization emphasizes prompt, accurate responses to questions about product delivery and order status.
The Company's FAEs provide technical support to customers in Europe, Japan, Korea, Taiwan, and the Untied States. This network of experts is augmented by FAEs working for Actel's sales representatives and distributors throughout the world. Customers in any stage of design can also obtain assistance from the Company's technical support hotline or web-based technical support database called "Guru." In addition, Actel offers technical seminars on its products and comprehensive training classes on its software.
The Company generally warrants its products against defects in material and workmanship for one year. Actel also warrants that its automatic place and route software will achieve gate utilization at not less than the rates advertised. The Company has not experienced significant warranty returns to date.
Manufacturing and Assembly
Actel's strategy is to utilize third-party manufacturers for its wafer requirements, which permits the Company to allocate its resources to product design, development, and marketing. Wafers used in Actel's FPGAs are manufactured by Chartered Semiconductor in Singapore; by Lockheed-Martin FSC in Manassas, Virginia; by Matsushita in Japan; by UMC in Taiwan; and by Winbond in Taiwan. The Company's FPGAs in production are manufactured by Chartered Semiconductor using 0.6, 0.45, and 0.35 micron design rules; by Lockheed-Martin FSC using 0.8 micron design rules; by Matsushita using 1.0, 0.8, and 0.6 micron design rules; and by Winbond using 0.8 and 0.6 micron design rules.
In March 1999, Actel announced that it had, in partnership with Matsushita, successfully developed a 0.25-micron antifuse process that is being qualified for production. The new process technology was developed in record time, and is expected to sample in the second quarter of 1999 with volume production expected by the third quarter.
Wafers purchased by the Company from its suppliers are assembled, tested, marked, and inspected by Actel and/or a subcontractor of the Company before shipment to customers. Actel assembles most of its plastic commercial products in Hong Kong, Korea, and Singapore. Ceramic package assembly, which is generally required for military applications, is performed at one or more subcontractor manufacturing facilities, some of which are in the United States.
In September 1998, the Company also announced it had received ISO 9002 certification for the manufacturing and testing of its FPGAs. The certification was granted by DSCC. The ISO standards, developed by the International Organization for Standardization, provide an international benchmark for quality systems. Specifically, ISO 9002 requires compliance in the following areas: management responsibility, customer service, supplier management, internal quality audits, training process control, and inspection. As Actel continues to establish itself as a leading supplier of high-quality FPGAs, ISO certification provides a globally recognized benchmark that Actel's devices have been certified for integrity in the manufacturing and test process.
Strategic Relationships
In addition to strategic relationships that Actel enjoys with its customers, foundries, assembly houses, distributors, and sales representatives, the Company also has the following strategic partners:
AGL
In May 1998, the Company announced that it had signed a letter of intent to acquire AutoGate Logic, Inc. ("AGL") of Fremont, California. AGL is a software service company that offers a range of development tools, including place and route and timing analysis software. The financial terms of the proposed acquisition were not disclosed. The proposed acquisition was the result of increasing collaboration between the two companies. Consummation of the proposed acquisition was subject to the execution and delivery of definitive agreements and certain other closing conditions. Discussions ceased in the middle of December 1998, after it became evident that the financial terms contained in the letter of intent were no longer viable and that certain closing conditions would not occur.
On March 17, 1999, AGL informed the Company of a change in its situation and requested that Actel renew acquisition negotiations. The Company and AGL have restarted negotiations.
Boulder Creek
Actel has worked exclusively with Boulder Creek Corporation to jointly develop and manufacturer the Silicon Explorer. Boulder Creek designs and manufactures hardware and software tools used by electronic design engineers to debug systems on a chip. Founded in 1994, Boulder Creek is a privately held company located in Santa Cruz, California.
BP Microsystems
Actel has worked with BP Microsystems of Houston, Texas, to jointly develop Silicon Sculptor based on BP's world class technology. BP Microsystems offers a wide variety of programmers, including EPROM programmers, universal programmers, concurrent programming systems, and Fine Pitch Automated programming systems. The modules of the Silicon Sculptor are designed to be fully upward compatible with all BP Microsystems antifuse FPGA programmers, which permits design engineers to move from prototype programming to high volume production programming.
GateField
In a strategic move to position Actel as a complete solution provider for reprogrammable ASIC systems, the Company and GateField entered into a multi-year strategic alliance in August 1998. In establishing the alliance, Actel purchased marketing and license rights, the assets of GateField's Design Services Business Unit, and preferred stock. Consideration paid in these transactions totaled $10,447,000, consisting entirely of cash. For the financial details of these transactions, see Note 5 of Notes to Consolidated Financial Statements.
Marketing Rights
Under the terms of a Product Marketing Agreement, Actel received exclusive, worldwide distribution rights to the GateField's standard ProASIC FPGA products utilizing less than .35 micron geometries, including FPGA products that are integrated with SRAM or flash memory and all resulting next generation reduced process geometry ProASIC FPGA products. For these rights, the Company paid GateField an initial fee and agreed to pay a fee of $1,000,000 upon qualification of the initial .25 micron product. In addition, Actel and GateField will equally share gross profits from ProASIC product sales.
License Rights
Pursuant to the terms of a License Agreement, GateField granted to the Company a fully paid, non-exclusive, non-transferable license to sell and upon certain events, make, have made, import and use GateField's standard ProASIC FPGA products below .35 micron and all resulting next generation reduced process geometry ProASIC FPGA products.
Design Services Business Assets
Pursuant to the terms of an Asset Purchase Agreement, the Company purchased the assets of GateField's Design Service Business Unit, which is located in Mt. Arlington, New Jersey, and engaged in the business of providing prototyping design services and verification services for electronic systems, integrated circuits, and other electronic components. The purchase price for such assets may include contingent payments, not to exceed $1.0 million in the aggregate, based on the Actel Design Services Group achieving certain profitability levels.
Preferred Stock
Pursuant to terms of a Series C Preferred Stock Purchase Agreement, Actel purchased, and GateField issued to the Company, 300,000 shares of GateField's Series C Convertible Preferred Stock, par value $0.10 (the "Shares"). The Shares are initially convertible into 2,000,000 shares of GateField common stock and are entitled to certain liquidation and redemption rights. In the event that all of GateField's outstanding shares of Series B Preferred Stock are redeemed, Actel shall be entitled to redeem its Series C Shares, subject to applicable law. The Company is entitled to certain registration rights and has a right of first refusal to purchase its pro rata share of certain new securities GateField may issue.
Synplicity and VeriBest
In November 1998, the Company announced that it had, together with Synplicity and VeriBest, begun developing an integrated tool environment for Actel FPGA designs. The suite of tools, based exclusively on VHDL and Verilog standards and targeted for the PC environment, was released in the first quarter of 1999 (see "Products -- Software -- DeskTOP").
In March 1998, the Company announced that it and Synplicity have jointly developed a seamless synthesis methodology in Synplify 3.0c that allows designers of radiation hardened and radiation tolerant FPGAs to quickly and easily meet the tight single event upset (SEU) requirements specified in the next generation of communication, military, deep space and planetary mission satellites. The new version of Synplify, which is designed to work with Actel's RH1280, RP1280A, RP14100, RT1280, and RT14100 devices, permits designers to automatically infer sequential elements, such as C-C flip-flop macros and triple modular redundancy (TMR) macros, that dramatically improve SEU occurrence.
Research and Development
In 1998, 1997, and 1996, the Company spent $31.2 million, $26.5 million, and $23.9 million, respectively, on research and development, which represented approximately 20%, 17%, and 16% of net revenues, respectively, for such periods. Actel's research and development expenditures are divided among circuit design, software development, and process technology activities, all of which are dedicated to developing new families of FPGA products based on existing or emerging technologies. In the areas of circuit design and process technology, the Company's research and development activities include continuing efforts to reduce the cost and improve the performance of current products, principally by reducing the design rules under which such products are manufactured. Actel's software research and development activities include providing customers with access to a wide variety of CAE tools and HDL cores in a complete and automated desktop design environment on popular personal computer and workstation platforms.
The research and development projects that the Company publicly discussed in 1998 included the following:
ProASIC and ASICmaster
As part of its strategic alliance with GateField, Actel acquired the exclusive right to market and sell GateField's Standard ProASIC products in process geometries of 0.35-micron and smaller, as well as GateField's ASICmaster design tool software, as part of Actel's PLD and design suite product families. Under the terms of the Product Marketing Agreement, GateField is to provide Actel with a 0.25-micron ProASIC product family that is expected to support densities of up to half a million programmable logic gates. The Agreement further provides for migration to smaller process technologies, with the potential to produce multi-million gate devices. The non-volatile, single-device, reprogrammable Standard ProASIC products are being developed from GateField's patented, flash-based reprogrammable ASIC technology and architecture. ProASIC devices exhibit a high level of portability between PLD and ASIC design flows. The Company believes that 0.25-micron ProASIC products will be available in 1999.
Flash-based ProASIC products offer some benefits over other programmable devices available on the market today. Unlike SRAM and FPGA programmable products, which are either volatile or non-reprogrammable, ProASIC devices are non-volatile and reprogrammable. ProASIC devices permit designers to use their standard ASIC design flow, with no new design methodologies to learn, saving both time and money. ProASIC products also permit a seamless migration to standard ASIC designs, again saving time and money. In addition, ProASIC's high gate density translates into high performance capabilities.
The 0.25-micron ProASIC products are closely coupled with ASICmaster automated place-and-route EDA design tool software, which is optimized for HDL design and methodology. ASICmaster software, running on UNIX and Windows NT platforms, accepts netlists from standard mask programmable ASIC tools provided by companies such as Exemplar, Mentor Graphics, ViewLogic, Cadence, and Synopsys. ASICmaster performs place and route of the design into the selected device and provides back-annotated delay information for simulation. Once the design is verified, ASICmaster downloads the layout into a device programmer for chip programming. Design services are provided as needed to help the customer accelerate verification, prototyping, and time-to-market.
Because of its agreement with GateField, Actel also expects to benefit from GateField's strategic alliance with Siemens Semiconductor Group of Munich, Germany. This GateField relationship provides access to Siemens' 0.25-micron flash process technology at its new, state-of-the-art wafer fabrication facility in Dresden, Germany, plus assembly and test support.
ES Architecture and RS Reprogrammable Products
In 1996, Actel announced its intention to enter the reprogrammable FPGA market. The Company's first reprogrammable FPGA offering will be an SRAM-based "RS" product family utilizing Actel's new ES reprogrammable architecture.
The ES architecture combines a new, fine-grained cell structure with a routing-centric architecture. The expected result is logic cells that are more readily synthesized and more efficient than current programmable architectures. The key to the architectural efficiencies is a technology in which separate transistors are used to implement logic and to drive the interconnects. By separating these functions, Actel believes that more efficient die utilization is achievable, resulting in lower-cost designs. In addition, the interconnect drivers are tailored to routing length, which should provide high performance even for cross-chip routing. The ES architecture also makes greater use of hierarchy than current programmable architectures. A constant, maximum routing delay is associated with each level of hierarchy, which should provide the device with fanout independent delays. This means that, regardless of the number of logic elements being driven, the delay should always be constant, making the chip's performance predictable. Many aspects of the ES architecture are switch-technology independent, making possible future variants of the ES architecture employing antifuse, flash, or other basic programming elements.
The Company has experienced significant delays in matching the capabilities of its software and the resources of its silicon. Actel is completing a set of changes to both the silicon and the software, and believes that the product will be available in the second half of 1999.
Competition
The FPGA market is highly competitive, and the Company expects that competition will continue to increase as the market grows. Actel's competitors include suppliers of TTLs and ASICs, including conventional gate arrays, standard cells, PLDs, and FPGAs. Of these, the Company competes principally with suppliers of conventional gate arrays, standard cells, CPLDs, and FPGAs.
The primary advantages of conventional gate arrays and standard cells are high capacity, high speed, and low production cost in high volume. Actel competes with conventional gate array and standard cell suppliers by offering lower design costs, shorter design cycles, and reduced inventory risks. However, some customers elect to design and prototype with the Company's products and then convert to conventional gate arrays or standard cells to achieve lower costs for volume production. For this reason, Actel faces competition from companies that specialize in converting CPLDs and FPGAs, including the Company's products, into conventional gate arrays or standard cells.
The Company also competes with suppliers of CPLDs. Suppliers of these devices include Altera Corporation ("Altera"), Advanced Micro Devices' Vantis subsidiary, and Lattice Semiconductor. The circuit architecture of CPLDs gives them a performance advantage in certain lower capacity applications, but Actel believes that its products are better suited for higher capacity designs. Altera, however, has a larger installed base of development systems than the Company. In addition, many newer CPLDs are reprogrammable, which permits customers to reuse a circuit multiple times during the design process (unlike antifuse-based FPGAs, which permanently retain the programmed configuration). No assurance can be given that Actel will be able to overcome these competitive disadvantages.
The Company competes most directly with established FPGA suppliers, such as Xilinx, Inc. ("Xilinx") and Lucent Technologies (which is a licensed second source of some Xilinx products). While Actel believes its products and technology are superior to those of Xilinx in many applications requiring greater speed, lower cost, or nonvolatility, Xilinx came to market with its FPGAs approximately three years before the Company, has a larger installed base of development systems, and its SRAM-based products are reprogrammable. No assurance can be given that Actel will be able to overcome these competitive disadvantages.
Several companies have either already marketed antifuse-based FPGAs, including QuickLogic Corporation ("QuickLogic"), or announced their intention to do so. See "Legal." On March 31, 1995, the Company completed its acquisition of the antifuse FPGA business of TI, which was the only second-source supplier of the Company's products. Xilinx, which is a licensee of certain of the Company's patents, introduced antifuse-based FPGAs in 1995 and terminated its antifuse FPGA business in 1996. Cypress Semiconductor Corporation, which was a licensed second source of QuickLogic, sold its antifuse FPGA business to QuickLogic in the first quarter of 1997.
The Company believes that important competitive factors in its market are price, performance, number of usable gates, ease of use and functionality of development system software, installed base of development systems, adaptability of products to specific applications, length of development cycle (including reductions to finer micron design rules), number of I/Os, reliability, adequate wafer fabrication capacity and sources of raw materials, protection of products by effective utilization of intellectual property laws, and technical service and support. Failure of Actel to compete successfully in any of these or other areas could have a materially adverse effect on its business, financial condition, or results of operations.
Patents and Licenses
As of March 31, 1999, the Company had 167 United States patents and applications pending for an additional 40 United States patents. Actel also had 36 foreign patents and applications pending for 41 patents outside the United States. The Company's patents cover, among other things, Actel's basic circuit architecture, antifuse structure, and programming method. The Company expects to continue filing patent applications when appropriate to protect its proprietary technologies. Actel believes that patents, along with such factors as innovation, technological expertise, and experienced personnel, will become increasingly important.
The Company attempts to protect its circuit designs, software, trade secrets, and other proprietary information through patent and copyright protection, agreements with customers and suppliers, proprietary information agreements with employees, and other security measures. No assurance can be given that the steps taken by Actel will be adequate to protect its proprietary rights.
In connection with the settlement of patent litigation in 1993, Actel granted Xilinx a license under certain of Actel's patents that permits Xilinx to manufacture and market antifuse-based products. Xilinx announced in 1996 that it had discontinued its antifuse-based FPGA product line.
In 1995, Actel and BTR, Inc. entered into a License Agreement pursuant to which BTR licensed its proprietary technology to the Company for development and use in FPGAs and certain multichip modules. As partial consideration for the grant of the license, the Company is paying to BTR non-refundable advance royalties. Actel has also employed the principals of BTR to assist the Company in its development and implementation of the licensed technology.
During the third quarter of 1998, the Company and QuickLogic agreed to settle two patent infringement actions between the parties. See "Legal." As part of the settlement, the Company and QuickLogic entered into a Patent Cross License Agreement that protects all existing FPGA products of both companies for the lives of those products.
As is typical in the semiconductor industry, the Company has been notified of claims that it may be infringing patents owned by others. As it has in the past, the Company may obtain licenses under patents that it is alleged to infringe. The Company is in license negotiations with several companies, including two semiconductor manufacturers with significantly greater financial and intellectual property resources than the Company. No assurance can be given that licenses will be available or that the terms of any offered license will be acceptable to the Company. Failure to obtain a license for technology used by Actel could result in litigation. In the event of an adverse result in any litigation, the Company may be required to pay substantial damages; discontinue the use of infringing processes; cease the manufacture, use, and sale of infringing products; and/or expend significant resources to develop non-infringing technology. All litigation, whether or not determined in favor of Actel, can result in significant expense and divert the efforts of technical and management personnel from the Company's operations. In addition, the Company has agreed to defend its customers from and against any claims that Actel products infringe the patent or other intellectual rights of any third party, and to indemnify its customers up to the dollar amount of their purchases of any Actel products found to infringe. Any successful third party claim against the Company or its customers for patent or other intellectual property infringement may have a materially adverse effect on Actel's business, financial condition, or results of operations.
Employees
At the end of 1998, the Company had 457 full-time employees, including 137 in marketing, sales, and customer support; 157 in research and development; 115 in operations; and 33 in administration and finance. None of the Company's employees is represented by a labor union nor does Actel have employment agreements with any of its employees. The Company has not experienced any work stoppages, and believes that its employee relations are satisfactory. In March 1999, Actel announced the appointment of Suzanne Kinner as Vice President of Human Resources.
Risk Factors
Shareholders of Actel and prospective investors should carefully consider, along with the other information in this Annual Report on Form 10-K, the following risk factors:
Acts of God
The performance of Actel and each of its suppliers, distributors, subcontractors, and agents is subject to events or conditions beyond such party's control, including labor disputes, acts of public enemies or terrorists, war or other military conflicts, blockades, insurrections, riots, epidemics, quarantine restrictions, landslides, lightning, earthquake, fires, storms, floods, washouts, arrests, civil disturbances, restraints by or actions of governmental bodies acting in a sovereign capacity (including export or security restrictions on information, material, personnel, equipment, or otherwise), breakdowns of plant or machinery, inability to obtain transport or supplies, and the like. The occurrence of any of these circumstances could disrupt the Company's operations and may have a materially adverse effect on the Company's business, financial condition, or results of operations.
"Blank Check" Preferred Stock; Change in Control Arrangements
Actel's Articles of Incorporation authorize the issuance of up to 5,000,000 shares of "blank check" Preferred Stock (of which 4,000,000 shares remain available for issuance), with such designations, rights, and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board is empowered, without approval by holders of the Company's Common Stock, to issue Preferred Stock with dividend, liquidation, redemption, conversion, voting, or other rights that could adversely affect the voting power or other rights of the holders of the Common Stock. Issuance of the Preferred Stock could be used as a method of discouraging, delaying, or preventing a change in control of Actel. In addition, such issuance could adversely affect the market price of the Common Stock. Although the Company does not currently intend to issue any additional shares of its Preferred Stock, there can be no assurance that Actel will not do so in the future.
The Company has adopted an Employee Retention Plan that provides for payment of stock to Actel's employees who hold unvested stock options in the event of a change of control of the Company. Payment is contingent upon the employee remaining with Actel for six months after the change of control. The Company has also entered into Management Continuity Agreements with each of its executive officers, which provide for the acceleration of unvested stock options in the event an executive officer's employment is actually or constructively terminated other than for cause following a change of control.
Competition
The semiconductor industry is intensely competitive and is characterized by rapid rates of technological change, product obsolescence, and price erosion. Actel's existing competitors include suppliers of conventional gate arrays, standard cells, CPLDs, and FPGAs. The Company's two principal competitors are Xilinx, a supplier of FPGAs based on SRAM technology, and Altera, a supplier of CPLDs and FPGAs. The Company also faces competition from companies that specialize in converting FPGAs, including Actel's products, into conventional gate arrays or standard cells.
In addition, all existing FPGAs not based on antifuse technology and certain CPLDs are reprogrammable, a feature that makes them more attractive to designers. The Company also believes that, if there were a downturn in the market for CPLDs and FPGAs, companies with broader product lines and longer-standing customer relationships may be in a stronger competitive position than Actel. Many of the Company's current competitors offer broader product lines and have significantly greater financial, technical, manufacturing, and marketing resources than Actel.
Significant additional competition is possible from major domestic and international semiconductor suppliers. All such companies are larger, offer broader product lines, and have substantially greater financial and other resources than the Company, including the capability to manufacture their own wafers. Additional competition could adversely affect Actel's business, financial condition, or results of operations.
The Company may also face competition from suppliers of logic products based on new or emerging technologies. The Company seeks to monitor developments in existing and emerging technologies. No assurance can be given that Actel will be able to compete successfully with suppliers offering products based on new or emerging technologies. In any event, given the intensity of the competition and the research and development being done, no assurance can be given that Actel's technologies will remain competitive.
Dependence on Customized Manufacturing Processes
Actel's antifuse-based FPGAs and, to a lesser extent, flash-based ProASIC FPGAs are manufactured using customized steps that are added to otherwise standard manufacturing processes of independent wafer suppliers. There is considerably less operating history for the customized processes steps than for the foundries' standard manufacturing processes. The dependence of Actel on customized processing steps means that, in contrast with competitors using standard manufacturing processes, the Company has more difficulty establishing relationships with independent wafer manufacturers, takes longer to qualify a new wafer manufacturer, takes longer to achieve satisfactory, sustainable wafer yields on new processes, may experience a higher incidence of production yield problems, must pay more for wafers, and generally will not obtain early access to the most advanced processes. These risks are particularly pronounced with respect to wafers intended for use in military and aerospace applications. Any of the above factors could be a material disadvantage against the competing products of Actel's competitors that use standard manufacturing processes. As a result of these factors, the Company's products typically have been fabricated using processes one or two generations behind the processes used on competing products. As a consequence, Actel to date has not fully realized the price and performance benefits of its antifuse technology. The Company is attempting to accelerate the rate at which its products are reduced to finer geometries and is working with its wafer suppliers to obtain earlier access to advanced processes, but no assurance can be given that such efforts will be successful.
Dependence on Design Wins
In order for the Company to sell an FPGA to a customer, the customer must incorporate the FPGA into the customer's product in the design phase. Actel therefore devotes substantial resources, which it may not recover through product sales, in support of potential customer design efforts (including, among other things, providing development system software) and to persuade potential customers to incorporate the Company's FPGAs into new or updated products. These efforts usually precede by many months (and often a year or more) the generation of volume FPGA sales, if any, by Actel. The value of any design win, moreover, will depend in large part upon the ultimate success of the customer's product. No assurance can be given that the Company will win sufficient designs or that any design win will result in significant revenues.
Dependence on Independent Assembly Subcontractors
Actel relies primarily on foreign subcontractors for the assembly and packaging of its products and, to a lesser extent, for the testing of its finished products. The Company generally relies on one or two subcontractors to provide particular services and has from time to time experienced difficulties with the timeliness and quality of product deliveries. Actel has no long-term contracts with its subcontractors and certain of those subcontractors are currently operating at or near full capacity. There can be no assurance that these subcontractors will continue to be able and willing to meet the Company's requirements for such components or services. Any significant disruption in supplies from, or degradation in the quality of components or services supplied by, these subcontractors could delay shipments and result in the loss of customers or revenues or otherwise have a materially adverse effect on Actel's business, financial condition, or results of operations.
Dependence on Independent Software and Hardware Developers
Actel is dependent upon independent software and hardware developers for the development, maintenance, and support of certain elements of its Designer Series Development Systems software and of its Silicon Explorer debugging and verification tool, Activator and Silicon Sculptor device programmers, and sockets. The Company's reliance on independent software and hardware developers involves certain risks, including lack of control over development and delivery schedules and the availability of customer support. No assurance can be given that the Company's independent developers will be able to complete software and/or hardware under development, or provide updates or customer support in a timely manner, which could delay future software or FPGA releases and disrupt Actel's ability to provide customer support services. Any significant delays in the availability of the Company's software and/or hardware could be detrimental to the capability of the Company's new families of products to win designs, delay shipments and result in the loss of customers or revenues, or otherwise have a materially adverse effect on Actel's business, financial condition, or results of operations.
Dependence on Independent Wafer Manufacturers
Actel does not manufacture any of the wafers used in the production of its FPGAs. Such wafers are manufactured by Chartered Semiconductor in Singapore, Lockheed-Martin FSC in the United States, Matsushita in Japan, by UMC in Taiwan, and Winbond in Taiwan. The Company's reliance on independent wafer manufacturers to fabricate its wafers involves significant risks, including the risk of events limiting production and reducing yields, such as technical difficulties or damage to production facilities, lack of control over capacity allocation and delivery schedules, and potential lack of adequate capacity. These risks are particularly pronounced with respect to wafers intended for use in military and aerospace applications.
Actel has from time to time experienced delays in obtaining wafers from its foundries, and there can be no assurance that the Company will not experience similar or more severe delays in the future. In addition, although Actel has supply agreements with most of its wafer manufacturers, a shortage of raw materials or production capacity could lead any of the Company's wafer suppliers to allocate available capacity to customers other than Actel, or to internal uses, which could interrupt the Company's capability to meet its product delivery obligations. These risks are particularly pronounced with respect to wafers intended for use in military and aerospace applications. Any inability or unwillingness of Actel's wafer suppliers to provide adequate quantities of finished wafers to satisfy the Company's needs in a timely manner would delay production and product shipments and could have a materially adverse effect on Actel's business, financial condition, or results of operations.
If the Company's current independent wafer manufacturers were unable or unwilling to manufacture Actel's products as required, the Company would have to identify and qualify additional foundries. The qualification process typically takes one year or longer. No assurance can be given that any additional wafer foundries would become available or be able to satisfy Actel's requirements on a timely basis or that qualification would be successful. In addition, the semiconductor industry has from time to time experienced shortages of manufacturing capacity. To secure an adequate supply of wafers, the Company has considered, and continues to consider, various possible transactions, including the use of substantial nonrefundable deposits to secure commitments from foundries for specified levels of manufacturing capacity over extended periods, equity investments (such as Actel's investment in Chartered Semiconductor) in exchange for guaranteed production, and the formation of joint ventures to own foundries. No assurance can be given as to the effect of any such transaction on the Company's business, financial condition, or results of operations.
Dependence on International Operations
Actel buys a majority of its wafers from foreign foundries and has most of its commercial products assembled, packaged, and tested by subcontractors located outside the United States. These activities are subject to the uncertainties associated with international business operations, including trade barriers and other restrictions, changes in trade policies, foreign governmental regulations, currency exchange fluctuations, reduced protection for intellectual property, war and other military activities, terrorism, changes in political or economic conditions, and other disruptions or delays in production or shipments, any of which could have a materially adverse effect on the Company's business, financial condition, or results of operations.
In order to expand international sales and service, the Company will need to maintain and expand existing foreign operations or establish new foreign operations. This entails hiring additional personnel and maintaining or expanding existing relationships with international distributors and sales representatives. This will require significant management attention and financial resources and could adversely affect Actel's financial condition and operating results. No assurance can be given that the Company will be successful in its maintenance or expansion of existing foreign operations, in its establishment of new foreign operations, or in its efforts to maintain or expand its relationships with international distributors or sales representatives.
Dependence on Key Personnel
The success of the Company is dependent in large part on the continued service of its key management, engineering, marketing, sales, and support employees. Competition for qualified personnel is intense in the semiconductor industry, and the loss of Actel's key employees, or the inability of the Company to attract other qualified personnel, could have a materially adverse effect on Actel. The Company does not have employment agreements with any of its key employees.
Dependence on Military and Aerospace Customers
Although Actel is unable to determine with certainty the ultimate uses of its products, the Company estimates that sales of its products to customers in the military and aerospace industries, which sometimes carry higher profit margins than sales of products to commercial customers, accounted for approximately one-quarter of revenues in 1998. In general, Actel believes that the military and aerospace industries have accounted for a significantly greater percentage of the Company's net revenues following the introduction of RH1280 in 1996. No assurance can be given that future sales to customers in the military and aerospace industries will continue at current volume or margin levels. In June 1994, Secretary of Defense William Perry directed that the Department of Defense adopt a new way of doing business as it relates to acquisition by avoiding government-unique requirements and relying more on the commercial marketplace. Under the Perry initiative, the Department of Defense must increase access to commercial state-of-the-art technology and must facilitate the adoption by its suppliers of business processes characteristic of world class suppliers. Integration of commercial and military development and manufacturing facilitates the development of dual-use processes and products and contributes to an expanded industrial base that is capable of meeting defense needs at lower costs. To that end, many of the cost-driving specifications that have been part of military procurements for many years have been cancelled in the interest of buying commercial products. The Company anticipates that this trend toward the use of commercial off-the-shelf (COTS) products will continue, and it may erode the revenues and/or margins that Actel derives from sales to customers in the military and aerospace industries, which could have a materially adverse effect on Actel's business, financial condition, or results of operations.
Orders from the military and aerospace customers tend to be large and irregular, which creates operational challenges and contributes to fluctuations in Actel's net revenues and gross margins. These sales are also subject to more extensive governmental regulations, including greater import and export restrictions. In addition, products for military and aerospace applications require processing and testing that is more lengthy and stringent than for commercial applications, increasing the risk of failure. It is often not possible to determine before the end of processing and testing whether products intended for military or aerospace applications will fail and, if they do fail, a significant period of time is often required to process and test replacements, each of which makes it difficult to accurately estimate quarterly revenues and could have a materially adverse effect on Actel's business, financial condition, or results of operations.
Dividend Policy
Actel has never declared or paid any cash dividends on its capital stock. The Company intends to retain any earnings for use in its business and does not anticipate paying any cash dividends in the future. Fluctuations in Operating Results
The Company's quarterly and annual operating results are subject to fluctuations resulting from general economic conditions and a variety of risks specific to Actel or characteristic of the semiconductor industry, including booking and shipment uncertainties, supply problems, and price erosion.
Booking and Shipment Uncertainties
Actel typically generates a large percentage of its quarterly revenues from orders received during the quarter and shipped in the final weeks of the quarter, making it difficult to accurately estimate quarterly revenues. The Company's backlog (which may be cancelled or deferred by customers on short notice without significant penalty) at the beginning of a quarter accounts for only a fraction of Actel's revenues during the quarter. This means that the Company generates the rest of its quarterly revenues from orders received during the quarter and "turned" for shipment within the quarter, and that any shortfall in "turns" orders will have an immediate and adverse impact on quarterly revenues. There are many factors that could cause a shortfall in "turns" orders, including but not limited to a decline in general economic conditions or the businesses of end users, excess inventory in the channel, conversion to conventional (or non-programmable) gate arrays, or the loss of business to other competitors for price or other reasons.
Historically, Actel has shipped a disproportionately large percentage of its quarterly revenues in the final weeks of the quarter. Any failure by the Company to effect scheduled shipments by the end of the quarter, therefore, could have a materially adverse effect on revenues for such quarter. Since Actel generally does not recognize revenue on the sale of a product to a distributor until the distributor resells the product, the Company's quarterly revenues are also dependent on, and subject to fluctuations in, shipments by Actel's distributors. When there is a shortfall in revenues, operating results are likely to be adversely affected because most of the Company's expenses do not vary with revenues.
Supply Problems
In a typical semiconductor manufacturing process, silicon wafers produced by a foundry are sorted and cut into individual die, which are then assembled into individual packages and tested for performance. The manufacture, assembly, and testing of semiconductor products is highly complex and subject to a wide variety of risks, including defects in masks, impurities in the materials used, contaminants in the environment, and performance failures by personnel and equipment. Semiconductor products intended for military and aerospace applications are particularly susceptible to these conditions, any of which could have a materially adverse effect on Actel's business, financial condition, or results of operations.
As is common in the semiconductor industry, Actel's independent wafer suppliers from time to time experience lower than anticipated yields of usable die. For example, the Company experienced a yield problem at one of its foundries in the fourth quarter of 1993 that was severe enough to have a materially adverse effect on Actel's operating results. To the extent yields of usable die decrease, the average cost to the Company of each usable die increases, which reduces gross margin. Wafer yields can decline without warning and may take substantial time to analyze and correct, particularly for a company such as Actel that does not operate its own manufacturing facility, but instead utilizes independent facilities, most of which are offshore. Yield problems may also increase the time to market for the Company's products and create inventory shortages and dissatisfied customers. In addition, Actel typically experiences difficulties and delays in achieving satisfactory, sustainable yields on new processes or at new foundries. Although the Company eventually has been able to overcome these difficulties in the past, no assurance can be given that it will be able to do so with respect to its current or future new processes and/or new foundries. Nor can any assurance be given that the Company will not experience wafer supply problems in the future, or that any such problem would not have a materially adverse effect on Actel's business, financial condition, or results of operations.
Price Erosion
The semiconductor industry is characterized by intense competition. Historically, average selling prices in the semiconductor industry generally, and for the Company's products in particular, have declined significantly over the life of each product. While Actel expects to reduce the average selling prices of its products over time as the Company achieves manufacturing cost reductions, Actel is sometimes required by competitive pressures to reduce the prices of its products more quickly than such cost reductions can be achieved. In addition, the Company sometimes approves price reductions on specific sales to meet competition. If not offset by reductions in manufacturing costs or by a shift in the mix of products sold toward higher-margin products, declines in the average selling prices of Actel's products will reduce gross margins and could have a materially adverse effect on the Company's business, financial condition, or results of operations.
Forward-Looking Statements
All forward-looking statements contained in this Annual Report on Form 10-K, including all forward-looking statements contained in any document incorporated herein by reference, are made pursuant to the safe harbor provisions of the Public Securities Litigation Reform Act of 1995. Words such as "anticipates," "believes," "estimates," "expects," intends," "plans," "seeks," and variations of such words and similar expressions are intended to identify the forward-looking statements. The forward-looking statements include projections relating to trends in markets, revenues, average selling prices, gross margin, wafer yields, research and development expenditures, selling, general, and administrative expenditures, and the Year 2000 compliance issue. All forward-looking statements are based on current expectations and projections about the semiconductor industry and programmable logic market, and assumptions made by the Company's management that reflect its best judgment based on other factors currently known by management, but they are not guarantees of future performance. Accordingly, actual events and results may differ materially from those expressed or forecast in the forward-looking statements due to the risk factors identified herein or for other reasons. Actel undertakes no obligation to update any forward-looking statement contained or incorporated by reference in this Annual Report on Form 10-K.
Future Capital Needs
The Company must continue to make significant investments in research and development as well as capital equipment and expansion of facilities. Actel's future capital requirements will depend on many factors, including, among others, product development, investments in working capital, and acquisitions of complementary businesses, products, or technologies. To the extent that existing resources and future earnings are insufficient to fund the Company's operations, Actel may need to raise additional funds through public or private debt or equity financings. If additional funds are raised through the issuance of equity securities, the percentage ownership of current shareholders will be reduced and such equity securities may have rights, preferences, or privileges senior to those of the holders of the Company's Common Stock. No assurance can be given that additional financing will be available or that, if available, it can be obtained on terms favorable to Actel and its shareholders. If adequate funds are not available, the Company may be required to delay, limit, or eliminate some or all of its proposed operations.
Gross Margin
The Company's gross margin is the difference between the revenues it receives from the sale of its products and the cost of those products. The price Actel can charge for a product is constrained principally by its competitors. While competition has always been intense, the Company believes price competition is becoming more acute. This may be due in part to the transition toward high-level design methodologies, which permit designers to wait until later in the design process before selecting a programmable logic device and make it easier to convert from one programmable logic device to another. These competitive pressures may cause Actel to reduce the prices of its products more quickly than it can achieve cost reductions, which would reduce the Company's gross margin and may have a materially adverse effect on its operating results.
One of the most important variables affecting the cost of the Company's products is manufacturing yields. With its customized antifuse and, to a lesser extent, flash manufacturing process requirements, Actel almost invariably experiences difficulties and delays in achieving satisfactory, sustainable yields on new processes or at new foundries. The Company introduced most members of the MX family and all members of the SX family in 1998. Until satisfactory yields are achieved on these new product families, they generally will be sold at lower gross margins than Actel's mature product families. Depending upon the rate at which sales of these new products ramp (and the MX and SX families are directed at high-volume users) and the extent to which they displace mature products, the lower gross margins could have a materially adverse effect on the Company's operating results. Similarly, Actel anticipates introducing the first members of its new ProASIC and RS families in 1999. Until satisfactory yields are achieved on these new product families, they generally will be sold at lower gross margins than Actel's mature product families and could have a materially adverse effect on the Company's operating results.
Management of Growth
Actel has recently experienced and expects to continue to experience growth in the number of its employees and the scope of its operations, resulting in increased responsibilities for management personnel. To manage recent and potential future growth effectively, the Company will need to continue to hire, train, motivate, and manage a growing number of employees. The future success of Actel will also depend on its ability to attract and retain qualified technical, marketing, and management personnel. In particular, the current availability of qualified silicon design, software design, process, and test engineers is limited, and competition among companies for skilled and experienced engineering personnel is very strong. The Company has been attempting to hire a number of engineering personnel and has experienced delays in filling such positions. During strong business cycles, Actel expects to experience continued difficulty in filling its needs for qualified engineers and other personnel. No assurance can be given that the Company will be able to achieve or manage effectively any such growth, and failure to do so could delay product development and introductions or otherwise have a materially adverse effect on Actel's business, financial condition, or results of operations.
Manufacturing Yields
Actel depends upon its independent wafer suppliers to produce wafers with acceptable yields and to deliver them to the Company in a timely manner. Currently, substantially all of the Company's revenues are derived from products based on Actel's proprietary antifuse process technologies. Successful implementation of antifuse process technology requires a high degree of coordination between the Company and its foundry. Therefore, significant lead time is required to reach volume production on new processes and at a new wafer supply locations. Accordingly, no assurance can be given that volume production on Actel's new MX and SX families will be achieved in the near term or at all.
Similarly, the Company anticipates introducing the first members of its new ProASIC and RS families in 1999. While these products are based on flash and SRAM process technologies, respectively, and are therefore less customized than an antifuse process, they are leading edge technologies and less familiar to Actel. The Company has always experienced difficulty achieving satisfactory, sustainable yields on new process technologies at new foundries, and does not believe that ProASIC or RS will be much different. Although Actel eventually has been able to overcome these difficulties in the past, no assurance can be given that it will be able to do so with respect to its ProASIC or RS products. In any event, until satisfactory yields are achieved on these new product families, they generally will be sold at lower gross margins than Actel's mature product families and could have a materially adverse effect on the Company's operating results.
The fabrication of high-performance antifuse wafers or state-of-the-art flash or SRAM wafers is a complex process that requires a high degree of technical skill, state-of-the-art equipment, and effective cooperation between the wafer supplier and the circuit designer to produce acceptable yields. Minute impurities, errors in any step of the fabrication process, defects in the masks used to print circuits on a wafer, and other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be non-functional. As is common in the semiconductor industry, the Company has from time to time experienced in the past, and expects that it will experience in the future, production yield problems and delivery delays. Any prolonged inability to obtain adequate yields or deliveries could adversely affect the Actel's business and operating results.
One-Time Programmability
While the nonvolatility of Actel's antifuse FPGAs is necessary or desirable in some applications, logic designers generally would prefer to prototype with a reprogrammable logic device, all other things being equal. This is because the designer can reuse the device if he or she makes an error. The visibility associated with discarding a one-time programmable device often causes designers to select a reprogrammable device even when the alternative one-time programmable device offers significant advantages. This bias in favor of designing with reprogrammable logic devices appears to increase as the size of the design increases, and is a major reason the Company has decided to enter the reprogrammable FPGA market.
Patent Infringement
As is typical in the semiconductor industry, the Company has been and expects to be from time to time notified of claims that it may be infringing patents owned by others. No assurance can be given that such claims against Actel will not result in litigation. All litigation, whether or not determined in favor of Actel, can result in significant expense to the Company and can divert the efforts of Actel's technical and management personnel from productive tasks.
Although the Company has obtained patents covering aspects of its FPGA architecture, logic modules, and certain techniques for manufacturing its antifuse, no assurance can be given that Actel's patents will be determined to be valid or that any assertions of infringement or invalidity by other parties (or claims for indemnity from customers resulting from any infringement claims) will not be successful. In the event of an adverse ruling in any litigation involving intellectual property, the Company could suffer significant (and possibly treble) monetary damages, which might have a materially adverse effect on Actel's business, financial condition, or results of operations. The Company may also be required to discontinue the use of infringing processes; cease the manufacture, use, and sale of infringing products; expend significant resources to develop non-infringing technology; or obtain licenses under patents that it is infringing. Although patent holders commonly offer licenses to alleged infringers, no assurance can be given that licenses will be offered or that the terms of any offered licenses will be acceptable to Actel. In the event of a successful claim against the Company, Actel's failure to develop or license a substitute technology on commercially reasonable terms would have a materially adverse effect on the Company's business, financial condition, and results of operations.
Potential Acquisitions
In pursuing its business strategy, Actel may acquire products, technologies, or businesses from third parties. Identifying and negotiating these acquisitions may divert substantial management time away from the Company's operations. An acquisition could absorb substantial cash resources, require Actel to incur or assume debt obligations, and/or involve the issuance of additional equity securities of the Company. The issuance of additional equity securities may dilute, and could represent an interest senior to the rights of, the holders of Actel's Common Stock. An acquisition accounted for as a purchase, such as the Company's acquisition of TI's antifuse FPGA business in 1995, could involve significant one-time write-offs, possibility resulting in a loss for the fiscal year in which it is taken, and would require the amortization of any goodwill over a number of years, which would adversely affect earnings in those years. Any acquisition would require attention from the Company's management to integrate the acquired entity into Actel's operations, may require the Company to develop expertise outside its existing business, and could result in departures of management from either Actel or the acquired entity. An acquired entity may have unknown liabilities, and its business may not achieve the results anticipated at the time it is acquired by the Company.
Protection of Intellectual Property
Actel has historically devoted significant resources to research and development and believes that the intellectual property derived from such research and development is a valuable asset that has been and will continue to be important to the success of the Company's business. Actel relies primarily on a combination of nondisclosure agreements, other contractual provisions, and patent and copyright laws to protect its proprietary rights. No assurance can be given that the steps taken by the Company will be adequate to protect its proprietary rights. In addition, the laws of certain territories in which Actel's products are or may be developed, manufactured, or sold, including Asia and Europe, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. Failure of Actel to enforce its patents or copyrights or to protect its trade secrets could have a materially adverse effect on the Company's business, financial condition, or results of operations.
Reliance on Distributors
In 1998, more than half of Actel's sales in the United States and virtually all of the Company's sales outside the United States were made through distributors. Three of Actel's distributors, Wyle/Unique, Arrow, and Pioneer, accounted for approximately 14%, 14%, and 9%, respectively, of the Company's net revenues in 1998. No assurance can be given that future sales by these or other distributors will continue at current levels or that the Company will be able to retain its current distributors on terms that are acceptable to Actel.
The Company's distributors generally offer products of several different companies, including products that are competitive with Actel's products. Accordingly, there is a risk that these distributors may give higher priority to products of other suppliers, thus reducing their efforts to sell the Company's products. In addition, Actel's agreements with its distributors are generally terminable at the distributor's option. A reduction in sales efforts by one or more of the Company's current distributors or a termination of any distributor's relationship with Actel could have a materially adverse effect on the Company's business, financial condition, or results of operations.
Actel defers recognition of revenue on shipments to distributors until the product is resold by the distributor to the end user. The Company's distributors have on occasion built inventories in anticipation of substantial growth in sales and, when such growth did not occur as rapidly as anticipated, substantially decreased the amount of product ordered from Actel in subsequent quarters. Such a slowdown in orders would generally reduce the Company's profit margins on future sales of higher cost products because Actel would be unable to take advantage of any manufacturing cost reductions while the distributor depleted its inventory at lower average selling prices. In addition, while the Company believes that its major distributors are currently adequately capitalized, no assurance can be given that one or more of Actel's distributors will not experience financial difficulties. The failure of one or more of the Company's distributors to pay for products ordered from Actel or to continue operations because of financial difficulties or for other reasons could have a materially adverse effect on the Company's business, financial condition, or results of operations.
Reliance on International Sales
Sales to customers located outside the United States accounted for approximately 33%, 31%, and 33% of net revenues for 1998, 1997, and 1996, respectively. Actel expects that revenues derived from international sales will continue to represent a significant portion of its total revenues. International sales are subject to a variety of risks, including longer payment cycles, greater difficulty in accounts receivable collection, currency restrictions, tariffs, trade barriers, taxes, export license requirements, and the impact of recessionary environments in economies outside the United States. All of the Company's foreign sales are denominated in U.S. dollars, so Actel's products become less price competitive in countries with currencies that are declining in value against the dollar. In addition, since virtually all of the Company's foreign sales are made through distributors, such sales are subject to the risks described above in "Reliance on Distributors."
Semiconductor Industry Risks
The semiconductor industry has historically been cyclical and periodically subject to significant economic downturns, which are characterized by diminished product demand, accelerated price erosion, and overcapacity. The Company may in the future experience substantial period-to-period fluctuations in business and results of operations due to general semiconductor industry conditions, overall economic conditions, or other factors, including legislation and regulations governing the import or export of semiconductor products.
Software Development Challenges
The computational complexities are not yet well understood for the software tools required to support the largest members of the RS family of products. It is anticipated that both the computational memory capacities and tool runtimes will be several times greater than those required for Actel's current antifuse products, which are significantly smaller. It is expected that the Company will need to develop and deploy tools incorporating significantly more compact, memory-resident data structures, which must be combined with algorithms capable of dealing very efficiently with the large circuit sizes.
Technological Change and Dependence on New Product Development
The market for Actel's products is characterized by rapidly changing technology, frequent new product introductions, and declining average selling prices over product life cycles, each of which makes the timely introduction of new products a critical objective of the Company. Actel's future success is highly dependent upon the timely completion and introduction of new products at competitive price and performance levels. In evaluating new product decisions, Actel must anticipate well in advance both the future demand and the technology that will be available to supply such demand. Failure to anticipate customer demand, delays in developing new products with anticipated technological advances, and failure to coordinate the design and development of silicon and associated software products each could have a materially adverse effect on Actel's business, financial condition, or results of operation.
In addition, there are greater technological and operational risks associated with new products. The inability of the Company's wafer suppliers to produce advanced products; delays in commencing or maintaining volume shipments of new products; the discovery of product, process, software, or programming failures; and any related product returns could each have a materially adverse effect on Actel's business, financial condition, or results of operation.
Actel is scheduled to introduce members of the ProASIC and RS families in 1999. No assurance can be given that the Company's design and introduction schedules for such products or the supporting software will be met or that such products will be well-received by customers. No assurance can be given that any other new products will gain market acceptance or that the Company will respond effectively to new technological changes or new product announcements by others. Any failure of Actel to successfully define, develop, market, manufacture, assemble, or test competitive new products could have a materially adverse effect on its business, financial condition, or results of operations.
The Company must also continue to make significant investments in research and development to develop new products and achieve market acceptance for such products. Actel conducts most of its research and development activities at facilities operated by its foundries. Although the Company has not to date experienced any significant difficulty in obtaining access to its current facilities, no assurance can be given that access will not be limited or that such facilities will be adequate to meet Actel's needs in the future.
Volatility of Stock
The price of the Company's Common Stock can fluctuate substantially on the basis of factors such as announcements of new products by Actel or its competitors, quarterly fluctuations in the Company's financial results or the financial results of other semiconductor companies, or general conditions in the semiconductor industry or in the financial markets. In addition, stock markets have recently experienced extreme price and volume volatility. This volatility has had a substantial effect on the market prices of the securities issued by high technology companies, at times for reasons unrelated to the operating performance of the specific companies.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000.
Based on recent assessments, the Company determined that it would be required to upgrade, modify, and/or replace portions of its internal software and certain internal hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that, with modifications or replacements of existing software and certain hardware, the impact of the Year 2000 issue can be mitigated. However, if the modifications and replacements are not made on a timely basis, no assurance can be given that the Company's internal networks, desktops, and test equipment will be operational, or that third party vendors will be able to meet the Company's production needs.
The Company's plan to resolve the Year 2000 issue involves the following four phases: inventory, assessment, remediation, and testing/implementation. The Company has completed its inventory and assessment of information technology ("IT") and non-information technology ("Non-IT") systems that could be significantly affected by the Year 2000. The assessment indicated that most of the Company's significant IT systems could be affected, particularly the order entry, general ledger, billing, and inventory systems. Non-IT systems that could be affected include testers and bar-code devices used in various aspects of the manufacturing and shipping process.
Based on a review of its product lines (FPGA devices and programming software and hardware), the Company has determined that the majority of its products it has sold and will continue to sell do not require remediation to be Year 2000 compliant. Accordingly, the Company does not believe that the Year 2000 presents a material exposure as it relates to the Company's products.
With respect to its IT exposure, to date the Company has completed the remediation of its ERP systems (systems for order entry, general ledger, billing, production tracking, inventory and shipping) by upgrading to year 2000 compliant versions. Once software is reprogrammed or replaced for a system, testing and implementation are carried out. These phases run concurrently for different systems. The Company plans to have most IT systems fully tested and implemented by June 30, 1999, with 100% completion targeted for September 30, 1999.
The remediation of Non-IT systems is significantly more difficult than remediation of IT systems due to the dependency on manufacturers for information on the Year 2000 compliance status of the various components and products. The Company is 30% complete with the remediation phase of its Non-IT systems. The Company expects to complete its remediation of Non-IT systems by June 30, 1999. Testing and implementation of affected equipment is expected to be fully completed by September 30, 1999.
The Company has queried all of its significant suppliers and subcontractors ("Suppliers"). To date, the Company is not aware of any Supplier with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that its Suppliers will be Year 2000 ready. The inability of Suppliers to complete their Year 2000 compliance process in a timely fashion could materially and adversely impact the Company.
The Company will utilize both internal and external resources to reprogram or replace, test, and implement the software and embedded systems for Year 2000 modifications. To date, the Company has incurred approximately $0.5 million of expenses on efforts directed solely at Year 2000 compliance. The total cost of the Year 2000 project is not expected to exceed $2.0 million and is being funded through operating cash flows.
Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. The Company believes that it is more likely to experience Year 2000 problems with the systems of Suppliers rather than with the Company's internal systems or products. The Company's Year 2000 program includes efforts to assess the Year 2000 compliance of its Suppliers.
The Company currently has no contingency plans in place in the event it does not complete all phases of the Year 2000 program. The Company intends to develop a contingency plan to deal with Year 2000 issues that may materially adversely affect its business processes. The Company intends to have a contingency plan in place no later than June 30, 1999.
Based on its current understanding, the Company believes that the likelihood of a material adverse impact due to problems with internal systems or products sold to customers is remote and expects that the cost of its Year 2000 compliance program over the next two years will not have a material effect on the Company's financial position or overall trends in results of operations. The cost of the program and the date on which the Company believes it will become Year 2000 compliant are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, cooperation of vendors, and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. If Year 2000 modifications and conversions are not properly made, or are not completed in timely manner, the Year 2000 issue could have a materially adverse impact on the Company's future business operations and, in turn, on its financial position and results of operations. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in the area, the ability to locate and correct all relevant computer codes, and similar uncertainties.
Executive Officers of the Registrant
The following table identifies each executive officer of Actel as of March 31, 1999:
Mr. East has served as President and Chief Executive Officer of the Company since December 1988. From April 1979 until joining Actel, Mr. East served in various positions with Advanced Micro Devices, a semiconductor manufacturer, including Senior Vice President of Logic Products from November 1986 to November 1988. From December 1976 to March 1979, he served as Operations Manager for Raytheon Semiconductor. From September 1968 to December 1976, he served in various marketing, manufacturing, and engineering positions for Fairchild Camera and Instrument Corporation, a semiconductor manufacturer.
Mr. Perret joined Actel in January 1996 as Controller and has been Vice President of Finance and Chief Financial Officer since June 1997. From April 1992 until joining the Company, he was the Site Controller for the manufacturing division of Applied Materials, a maker of semiconductor manufacturing equipment, in Austin, Texas. From 1978 to 1991, Mr. Perret held various financial positions, including divisional controllerships with National Semiconductor, a semiconductor manufacturer.
Dr. Hamdy is a founder of the Company, was Vice President of Technology from August 1991 to March 1996 and Senior Vice President of Technology from March 1996 to September 1996, and has been Senior Vice President of Technology and Operations since September 1996. From November 1985 to July 1991, he held a number of management positions with the Company's technology and development group. From January 1981 to November 1985, Dr. Hamdy held various positions at Intel Corporation, a semiconductor manufacturer, lastly as project manager.
Mr. Burrow joined the Company in January 1992 as Southwest Regional Sales Manager, was Director of Western Area Sales from February 1996 to October 1997, and has been Vice President of Marketing since October 1997. From June 1983 until January 1992, he held various sales and marketing positions at Texas Instruments, a semiconductor manufacturer.
Mr. Farinaro joined Actel in August 1998 as Vice President & General Manager of Design Services. From February 1990 until joining Actel, he held various engineering and management positions with GateField (formally Zycad Corporation until 1997), a semiconductor company, with the most recent position of Vice President of Application & Design Services. From 1985 to 1990, Mr. Farinaro held various engineering and management positions at Singer Kearfott, an aerospace electronics company, and it's spin-off, Plessey Electronic Systems Corporation.
Mr. Indaco joined Actel in March 1999 as Vice President of Worldwide Sales. From March 1999 until joining the Company, he served as Vice President of Sales for Chip Express, a semiconductor manufacturer. From January 1996 to February 1999, Mr. Indaco held senior sales management positions with Redwood Microsystems, a semiconductor manufacturer. From October 1994 to January 1996, he held senior sales management positions with LSI Logic, a semiconductor manufacturer. From March 1984 to October 1994, Mr. Indaco held various field engineering sales and marketing for Intel Corporation, a semiconductor manufacturer. From July 1978 to February 1984, he held various field engineering sales and marketing for Texas Instruments, a semiconductor manufacturer.
Ms. Kinner joined Actel in March 1999 as Vice President of Human Resources. From November 1994 until joining the Company, she held human resource management positions at S3 Inc., a semiconductor manufacturer. From August 1985 to November 1994, Ms. Kinner held various human resources position for Mentor Graphics, an ECD supplier.
Mr. Mubarak joined the Company in November 1992, was Director of Product and Test Engineering until October 1997, and has been Vice President of Engineering since October 1997. From 1989 until joining Actel, he held various engineering and engineering management positions with Samsung Semiconductor Inc., a semiconductor manufacturer, and its spin-off, IC Works, Inc. From 1984 to 1989, Mr. Mubarak held various engineering, product planning, and engineering management positions with Advanced Micro Devices, a semiconductor manufacturer.
Dr. Smith joined Actel in March 1997 as Vice President of Software. Prior to joining the Company, he was an independent consultant specializing in product development and positioning, software team building, pragmatic software engineering practices, and small company trouble shooting. From September 1985 to March 1995, Dr Smith held various positions with Microelectronics and Computer Technology Corporation (MCC), a consortial systems and software R&D company, where he last served as Vice President of Advanced Systems and Networks.
Mr. Van De Hey joined Actel in July 1993 as Corporate Counsel, became Secretary in May 1994, and has been Vice President & General Counsel since August 1995. From November 1988 to September 1993, he was an associate with Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, a law firm in Palo Alto, California, and the Company's outside legal counsel. From August 1985 until October 1988, he was an associate with the Cleveland office of Jones, Day, Reavis & Pogue, a law firm.
Executive officers serve at the discretion of the Board of Directors.
ITEM 2.
ITEM 2. PROPERTIES
Actel's principal administrative, marketing, sales, customer support, design, research and development, and testing facilities are located in Sunnyvale, California, in three buildings that comprise approximately 138,000 square feet. These buildings are leased through June 2003, and the Company has a renewal option for an additional five-year term. Actel also leases sales offices in the metropolitan areas of Atlanta, Baltimore, Basingstoke (England), Boston, Chicago, Dallas, Denver, Hong Kong (China), Kanata (Ontario) Los Angeles, Milano (Italy), Minneapolis, Munich (Germany), Orlando, Paris (France), Philadelphia, Raleigh, Seoul (Korea), Taipei (Taiwan), and Tokyo (Japan), as well as the facilities of the Design Services Group in Mt. Arlington, New Jersey. The Company believes its facilities will be adequate for its needs in 1999, but is investigating options for continued expansion beyond that time.
ITEM 3.
ITEM 3. LEGAL
There are no pending legal proceedings of a material nature to which Actel is a party or of which any of its property is the subject. There are no such legal proceedings known by the Company to be contemplated by any governmental authority.
QuickLogic
During the third quarter of 1998, the Company and QuickLogic agreed to settle and dismiss the two patent infringement actions between the parties pending before the United States Court for the Northern District of California, San Jose Division. The actions were dismissed on September 4, 1998. As part of the settlement, the Company and QuickLogic entered into a Patent Cross License Agreement. Management is satisfied with the terms of the settlement, which is immaterial to the Company's business, financial condition, or operating results.
Lemelson
During the third quarter of 1998, the Lemelson Medical, Education & Research Foundation (the "Foundation"), filed a lawsuit in the United States District Court for the District of Arizona, against the Company and 25 other United States semiconductor companies seeking monetary damages and injunctive relief based on such companies' alleged infringement of certain patents held by the Foundation. The action was dismissed as to the Company on December 8, 1998, pursuant to the terms of a settlement agreement between the Foundation and the Company. The settlement is immaterial to the Company's business, financial condition, or operating results.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The information appearing under the caption "Stock Listing" in the Registrant's annual report to security holders for the fiscal year ended January 2, 1999 (the "1998 Annual Report"), is incorporated herein by this reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information appearing under the caption "Selected Consolidated Financial Data" in the 1998 Annual Report is incorporated herein by this reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information appearing under the caption "Management's Discussion and Analysis of Financial Conditions and Results of Operations" of the 1998 Annual Report is incorporated herein by this reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information appearing under the captions "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Shareholders' Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements," and "Report of Ernst & Young LLP, Independent Auditors" in the 1998 Annual Report is incorporated herein by this reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Except for the information specifically incorporated by reference from Actel's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 29, 1999, as filed on or about April 9, 1999, with the Securities and Exchange Commission (the "1999 Proxy Statement") in Part III of this Annual Report on Form 10-K, the 1999 Proxy Statement shall not be deemed to be filed as part of this Report. Without limiting the foregoing, the information under the captions "Compensation Committee Report" and "Company Stock Performance" under the main caption "OTHER INFORMATION" in the 1999 Proxy Statement are not incorporated by reference in this Annual Report on Form 10-K.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the identification and business experience of Actel's directors under the caption "Nominees" under the main caption "PROPOSAL NO. 1 -- ELECTION OF DIRECTORS" in the 1999 Proxy Statement and the information under the main caption "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934" in the 1999 Proxy Statement are incorporated herein by this reference. For information regarding the identification and business experience of Actel's executive officers, see "Executive Officers of the Registrant" at the end of Item 1 in Part I of this Annual Report on Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Director Compensation" under the main caption "PROPOSAL NO. 1 -- ELECTION OF DIRECTORS" in the 1999 Proxy Statement and the information under the caption "Executive Compensation" under the main caption "OTHER INFORMATION" in the 1999 Proxy Statement are incorporated herein by this reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Share Ownership" under the main caption "INFORMATION CONCERNING SOLICITATION AND VOTING" in the 1999 Proxy Statement and the information under the caption "Security Ownership of Management" under the main caption "OTHER INFORMATION" in the 1999 Proxy Statement are incorporated herein by this reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions" under the main caption "OTHER INFORMATION" in the 1999 Proxy Statement is incorporated herein by this reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form 10-K:
(1) Financial Statements. The following consolidated financial statements of Actel Corporation included in the 1998 Annual Report are incorporated by reference in Item 8 of this Annual Report on Form 10-K:
Consolidated balance sheets at December 31, 1998 and 1997
Consolidated statements of income for each of the three years in the period ended December 31, 1998
Consolidated statements of shareholders' equity for each of the three years in the period ended December 31, 1998
Consolidated statements of cash flows for each of the three years in the period ended December 31, 1998
Notes to consolidated financial statements
(2) Financial Statement Schedule. The financial statement schedule listed under 14(d) hereof is filed with this Annual Report on Form 10-K.
(3) Exhibits. The exhibits listed under Item 14(c) hereof are filed with, or incorporated by reference into, this Annual Report on Form 10-K.
(b) Reports on Form 8-K. Actel filed no reports on Form 8-K during the quarter ended January 3, 1999.
(c) Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this Report on Form 10-K:
Exhibit Number Description - ------------------ -------------------------------------------------------------
3.1 Restated Articles of Incorporation (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993).
3.2 Restated Bylaws of the Registrant (filed as Exhibit 3.3 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993).
10.1 (2) Form of Indemnification Agreement for directors and officers (filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993).
10.2 (2) 1986 Incentive Stock Option Plan, as amended and restated (filed as Exhibit 10.2 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 29, 1996).
10.3 (2) 1993 Directors' Stock Option Plan, as amended and restated (filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 28, 1997).
10.4 (2) 1993 Employee Stock Purchase Plan, as amended and restated (filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 28, 1997).
10.5 (2) 1995 Employee and Consultant Stock Plan, as amended and restated (filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 29, 1996).
10.6 Form of Distribution Agreement (filed as Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993).
10.7 (1) Patent Cross License Agreement dated April 22, 1993 between the Registrant and Xilinx, Inc. (filed as Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (File No. 33-64704), declared effective on August 2, 1993).
10.8 Subscription and Participation Agreement dated February 3, 1994 between the Registrant, Singapore Technologies Ventures Pte Ltd and Chartered Semiconductor Manufacturing Pte Ltd (filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 2, 1994).
10.9 Manufacturing Agreement dated February 3, 1994 between the Registrant and Chartered Semiconductor Manufacturing Pte Ltd (filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended January 2, 1994).
10.10 Distribution Agreement dated June 1, 1994, between the Registrant and Arrow Electronics, Inc. (filed as Exhibit 10.18 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21970) for the quarterly period ended July 3, 1994).
10.11 (1) Product Development and Marketing Agreement dated August 1, 1994, between the Registrant and Loral Federal Systems Company (filed as Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21970) for the quarterly period ended October 2, 1994).
10.12 (1) Foundry Agreement dated as of June 29, 1995, between the Registrant and Matsushita Electric Industrial Co., Ltd and Matsushita Electronics Corporation (filed as Exhibit 10.25 to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21970) for the quarterly period ended July 2, 1995).
10.13 Lease Agreement for the Registrant's offices in Sunnyvale, California, dated May 10, 1995 (filed as Exhibit 10.19 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 31, 1995).
10.14 (1) License Agreement dated as of March 6, 1995, between the Registrant and BTR, Inc. (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K (File No. 0-21970) for the fiscal year ended December 29, 1996).
10.15 Asset Purchase Agreement dated August 14, 1998, between GateField Corporation and Actel Corporation (filed as Exhibit 2.1 to GateField Corporation's Current Report on Form 8-K (File No. 0-13244) on August 14, 1998, and incorporated herein by this reference).
10.16 Series C Preferred Stock Purchase Agreement dated August 14, 1998 between GateField Corporation and Actel Corporation (filed as Exhibit 4.1 to GateField Corporation's Current Report on Form 8-K/A (File No. 0-13244) on August 31, 1998, and incorporated herein by this reference).
10.17 Product Marketing Agreement dated August 14, 1998, between the GateField Corporation and Actel Corporation (filed as Exhibit 10.24 to GateField Corporation's Quarterly Report on Form 10-Q (File No. 0-13244) on November 19, 1998, and incorporated herein by this reference.)
10.18 License Agreement dated August 14, 1998, between GateField Corporation and Actel Corporation (filed as Exhibit 10.25 to GateField Corporation's Quarterly Report on Form 10-Q (File No. 0-13244) on November 19, 1998, and incorporated herein by this reference.)
10.19 (1) Patent Cross License Agreement dated August 25, 1998, between Actel Corporation and QuickLogic Corporation.
13 Portions of Registrant's Annual Report to Shareholders for the fiscal year ended January 2, 1999, incorporated by reference into this Report on Form 10-K.
21 Subsidiaries of Registrant
23 Consent of Ernst & Young LLP, Independent Auditors
24 Power of Attorney - ------------------
(1) Confidential treatment requested as to a portion of this Exhibit.
(2) This Exhibit is a management contract or compensatory plan or arrangement.
(d) Financial Statement Schedule. The following financial statement schedule of Actel Corporation is filed as part of this Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements of Actel Corporation, including the notes thereto, and the Report of Independent Auditors with respect thereto:
Schedule Description Page - --------------- ----------------------------------------------------- --------- II Valuation and qualifying accounts --
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ACTEL CORPORATION
April 2, 1999 By: /s/ John C. East ----------------------------------------- John C. East President and Chief Executive Officer
SCHEDULE II
ACTEL CORPORATION
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Valuation and Qualifying Accounts (in thousands)