UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-21970
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ACTEL CORPORATION
(Exact name of Registrant as specified in its charter)
California 77-0097724
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
955 East Arques Avenue
Sunnyvale, California 94086-4533
(Address of principal executive offices) (Zip Code)
(408) 739-1010
(Registrant's telephone number, including area code)
--------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
Number of shares of Common Stock outstanding as of November 3, 2000:
24,121,223.
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
ACTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- ----------------------
Oct. 1, Oct. 3, Jul. 2, Oct. 1, Oct. 3,
2000 1999 2000 2000 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues ................................. $ 60,080 $ 43,162 $ 55,544 $ 166,290 $ 125,619
Costs and expenses:
Cost of revenues .......................... 22,454 16,659 20,949 62,611 48,891
Research and development .................. 9,325 7,740 8,888 26,564 24,251
Selling, general, and administrative ...... 12,329 10,921 11,827 35,685 34,266
Amortization of goodwill and other
acquisition-related intangibles ......... 2,324 350 1,544 4,891 1,179
Restructure and other charges ............. -- -- -- -- 1,963
Purchased in-process research and
development ............................. -- -- 5,558 5,558 --
--------- --------- --------- --------- ---------
Total costs and expenses ............ 46,432 35,670 48,766 135,309 110,550
--------- --------- --------- --------- ---------
Income from operations ....................... 13,648 7,492 6,778 30,981 15,069
Interest income and other, net ............... 2,691 941 1,859 5,855 2,403
Gain on sale of Chartered Common stock ....... -- -- 28,329 28,329 --
--------- --------- --------- --------- ---------
Income before tax provision and equity in net
loss of equity method investee ............. 16,339 8,433 36,966 65,165 17,472
Equity in net (loss) of equity method investee (922) (217) (356) (1,401) (217)
Tax provision ................................ 5,638 2,548 16,498 25,774 5,440
--------- --------- --------- --------- ---------
Net income ................................... $ 9,779 $ 5,668 $ 20,112 $ 37,990 $ 11,815
========= ========= ========= ========= =========
Net income per share:
Basic ..................................... $ 0.41 $ 0.26 $ 0.86 $ 1.63 $ 0.55
========= ========= ========= ========= =========
Diluted ................................... $ 0.36 $ 0.25 $ 0.77 $ 1.45 $ 0.52
========= ========= ========= ========= =========
Shares used in computing net income per share:
Basic ..................................... 23,869 21,748 23,263 23,300 21,535
========= ========= ========= ========= =========
Diluted ................................... 26,999 23,003 26,186 26,207 22,711
========= ========= ========= ========= =========
</TABLE>
<PAGE>
ACTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
Oct. 1, Jan. 2,
2000 2000
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 14,062 $ 4,939
Short-term investments ............................ 161,624 102,201
Accounts receivable, net .......................... 25,799 22,753
Inventories, net .................................. 26,486 25,324
Deferred income taxes ............................. 21,378 20,622
Prepaid expenses and other current assets ......... 2,054 2,045
--------- ---------
Total current assets ........................ 251,403 177,884
Property and equipment, net .......................... 11,014 12,564
Investment in Chartered Semiconductor ................ -- 37,619
Other assets, net .................................... 48,062 31,144
--------- ---------
$ 310,479 $ 259,211
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 11,616 $ 15,374
Accrued salaries and employee benefits ............ 13,844 6,884
Other accrued liabilities ......................... 3,501 2,887
Income taxes payable .............................. 6,457 4,025
Deferred income ................................... 42,365 39,896
--------- ---------
Total current liabilities ................... 77,783 69,066
Deferred tax liability ............................ 949 11,515
--------- ---------
Total liabilities ........................... 78,732 80,581
Commitments and contingencies
Shareholders' equity:
Common stock ...................................... 24 22
Additional paid-in capital ........................ 141,535 110,146
Accumulated earnings .............................. 90,390 52,401
Note receivable from officer ...................... (368) --
Accumulated other comprehensive income ............ 166 16,061
--------- ---------
Total shareholders' equity .................. 231,747 178,630
--------- ---------
$ 310,479 $ 259,211
========= =========
<PAGE>
ACTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Nine Months Ended
----------------------
Oct. 1, Oct. 3,
2000 1999
--------- ---------
Operating activities:
Net income ........................................ $ 37,990 $ 11,815
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................... 10,598 7,165
Non-cash portion of restructure and other charges -- 3,057
Equity in net loss of equity method investee .... 1,401 217
Gain on sale of Chartered Semiconductor stock ... (28,329) --
Purchased in-process research and development ... 5,558 --
Changes in operating assets and liabilities:
Accounts receivable ........................... (3,046) (4,534)
Inventories ................................... (1,162) 2,816
Other current assets .......................... 4 305
Accounts payable, accrued salaries and employee
benefits, and other accrued liabilities ..... 6,016 (843)
Deferred income ............................... 2,469 2,713
Deferred income taxes ......................... (976) 347
--------- ---------
Net cash provided by operating activities ......... 30,523 23,058
--------- ---------
Investing activities:
Purchases of property and equipment ............... (4,157) (4,539)
Purchases of available-for-sale securities ........ (288,476) (131,708)
Sales of available-for-sale securities ............ 229,502 113,449
Other assets ...................................... (304) (2,197)
Proceeds from sale of Chartered Semiconductor
common stock .................................... 39,009 --
Cash paid for purchase of Prosys .................. (6,857) --
Note receivable from GateField .................... (3,750) (8,000)
--------- ---------
Net cash used in investing activities ............. (35,033) (32,995)
--------- ---------
Financing activities:
Issuance of note receivable from officer .......... (368) --
Sale of common stock .............................. 14,001 5,864
--------- ---------
Net cash provided by financing activities ......... 13,633 5,864
--------- ---------
Net decrease in cash and cash equivalents ............ 9,123 (4,073)
Cash and cash equivalents, beginning of period ....... 4,939 13,947
--------- ---------
Cash and cash equivalents, end of period ............. $ 14,062 $ 9,874
========= =========
<PAGE>
Supplemental disclosures of cash flow information:
Cash paid for taxes ............................... $ 24,314 $ 8,193
Supplemental disclosures of non-cash transactions:
Issuance of common stock in conjunction with Prosys
acqusition .......................................... $ 7,526 --
Conversion of $8.0 million GateField Promissory Note
into 1,230,769 shares of GateField common stock.
Conversion of 300,000 shares of GateField Series C
Preferred Stock with an adjusted cost basis of $1.3
million into 200,000 shares of GateField common
stock.
1. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements of Actel
Corporation ("Actel" or "the Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. The interim financial
statements should be read in conjunction with the audited financial statements
included in the Company's Annual Report on Form 10-K for the year ended January
2, 2000. The results of operations for the three and nine months ended October
1, 2000, are not necessarily indicative of results that may be expected for the
entire year ending December 31, 2000.
2. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended by SFAS 137 and 138, is
required to be adopted in years beginning after June 15, 2000. Actel will adopt
SFAS 133 for the first quarter of fiscal 2001. SFAS 133 requires all derivatives
to be carried on the balance sheet at fair value. Under SFAS 133, changes in the
derivatives' fair value must be recognized currently in earnings unless specific
hedge accounting criteria are met and a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting. The Company has evaluated the impact of adopting SFAS 133 and does
not expect adoption to have a material effect on the Company's financial
position or results of operations.
In March 2000, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation." FIN 44 clarifies the application of Accounting Principles
Board Opinion No. 25 for certain issues relating to stock compensation. FIN 44
is effective July 1, 2000, but certain conclusions in it cover specific events
that occur after either December 15, 1998, or January 12, 2000. To the extent
that FIN 44 covers events occurring during the period after December 15, 1998,
or January 12, 2000, but before the effective date of July 1, 2000, the effects
of applying FIN 44 are recognized on a prospective basis from July 1, 2000. The
Company has adopted FIN 44 and there has been no material effect on its
financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued
SEC Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company believes that its current revenue recognition policy is consistent
with the guidance of SAB 101.
3. Equity Accounting
In light of Actel's investments in and agreements with GateField
Corporation ("GateField"), including common stock, convertible promissory notes,
and marketing and licensing agreements, Actel accounts for its investments in
GateField under the equity method of accounting. Actel began accounting for its
equity interest in GateField under the equity method of accounting during 1999.
For the third quarter of fiscal 2000, equity accounting resulted in a charge of
$1,709,000 to the Company's net income, consisting of $787,000 in amortization
of goodwill and $922,000 in equity in net losses of equity method investee.
During the quarter ended October 1, 2000, the Company loaned GateField
$2.75 million in exchange for a promissory note that bears interest at the rate
of 6.25% per year and is convertible into 523,810 shares of GateField common
stock. At October 1, 2000, the Company owned 1,622,298 shares of GateField
common stock. Assuming conversion of all promissory notes due from GateField,
the aggregate total of GateField common stock owned by Actel would be 2,336,584
shares, or 33.9% of the total common stock of GateField. GateField common stock,
which is listed on the National Association of Security Dealers ("NASD")
Over-The-Counter Bulletin Board, closed at $4.8125 on September 29, 2000.
On May 31, 2000, GateField and Actel announced the signing of a
definitive agreement to merge. In the merger, Actel would pay cash consideration
of $5.25 for each share of GateField common stock not already owned by Actel
(approximately 4.5 million shares). Actel would also assume all outstanding
GateField stock options. The merger is subject to several conditions, including
approval by GateField stockholders at a special meeting currently scheduled for
November 10, 2000.
<PAGE>
4. Inventories
Inventories consist of the following:
Oct. 1, Jan. 2,
2000 2000
----------- -----------
(in thousands)
Inventories:
Purchased parts and raw materials.............. $ 4,820 $ 3,363
Work-in-process................................ 11,830 8,366
Finished goods................................. 9,836 13,595
----------- -----------
$ 26,486 $ 25,324
=========== ===========
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value). Given the volatility of the market for the
Company's products, the Company makes inventory provisions for potentially
excess and obsolete inventory based on backlog and forecast demand. However,
such backlog demand is subject to revisions, cancellations, and rescheduling.
Actual demand will inevitably differ from such backlog and forecast demand, and
such differences may be material to the financial statements. Excess inventory
increases handling costs and the risk of obsolescence, is a non-productive use
of capital resources, and delays realization of the price and performance
benefits associated with more advanced manufacturing processes.
5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share":
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- -----------------
Oct. 1, Oct. 3, Jul. 2, Oct. 1, Oct. 3,
2000 1999 2000 2000 1999
------- ------- ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Basic:
Average common shares outstanding ........... 23,869 21,748 23,263 23,300 21,535
Shares used in computing net income per share 23,869 21,748 23,263 23,300 21,535
======= ======= ======= ======= =======
Net income .................................. $ 9,779 $ 5,668 $20,112 $37,990 $11,815
======= ======= ======= ======= =======
Net income per share ........................ $ 0.41 $ 0.26 $ 0.86 $ 1.63 $ 0.55
======= ======= ======= ======= =======
Diluted:
Average common shares outstanding ........... 23,869 21,748 23,263 23,300 21,535
Net effect of dilutive stock options - based
on the treasury stock method ............. 3,130 1,255 2,923 2,907 1,176
------- ------- ------- ------- -------
Shares used in computing net income per share 26,999 23,003 26,186 26,207 22,711
======= ======= ======= ======= =======
Net income .................................. $ 9,779 $ 5,668 $20,112 $37,990 $11,815
======= ======= ======= ======= =======
Net income per share ........................ $ 0.36 $ 0.25 $ 0.77 $ 1.45 $ 0.52
======= ======= ======= ======= =======
</TABLE>
6. Comprehensive Income
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- --------------------
Oct. 1, Oct. 3, Jul. 2, Oct. 1, Oct. 3,
2000 1999 2000 2000 1999
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net Income .................................... $ 9,779 $ 5,668 $ 20,112 $ 37,990 $ 11,815
Change in gain on available-for-sale securities 506 (23) (5,738) 1,283 (175)
Less reclassification adjustment for (gains)
losses included in net income .............. -- -- (17,189) (17,178) --
-------- -------- -------- -------- --------
Other Comprehensive Income (Loss) ............. 506 (23) (22,927) (15,895) (175)
-------- -------- -------- -------- --------
Total Comprehensive Income (Loss) ............. $ 10,285 $ 5,645 $ (2,815) $ 22,095 $ 11,640
======== ======== ======== ======== ========
</TABLE>
Accumulated other comprehensive income presented in the accompanying
consolidated condensed balance sheets consists of the accumulated net unrealized
gain (loss) on available-for-sale securities.
7. Infringement Claims
Periodically, the Company is made aware that technology used by the
Company may infringe intellectual property rights held by others. During the
third quarter of fiscal 2000, the Company continued in negotiations with several
third parties regarding potential patent infringement issues. The Company has
made adequate provision for the estimated settlement costs of claims for alleged
infringement prior to the balance sheet date. While management believes that
reasonable resolution will occur, there can be no assurance that these claims
will be resolved or that the resolution of these claims will not have a
materially adverse effect on future results of operations or require changes in
the Company's products or processes. In addition, management's evaluation of the
likely impact of these pending disputes could change based upon new information
learned by management. Subject to the foregoing, management does not believe any
pending dispute, including the legal proceeding described below, are likely to
have a materially adverse effect on the Company's financial condition, results
of operations, or liquidity. The foregoing is a forward-looking statement
subject to all of the risks and uncertainties of intellectual property disputes
and legal proceedings, including the discovery of new information and
unpredictability as to the ultimate outcome.
On March 29, 2000, Unisys Corporation brought suit in the United States
District Court for the Northern District of California, San Jose Division,
against the Company seeking monetary damages and injunctive relief based on
Actel's alleged infringement of four patents held by Unisys. In the lawsuit,
Unisys alleges that the Company has infringed and continues to infringe four
Unisys patents and seeks damages, costs and attorneys' fees, as well as an
injunction prohibiting further infringement. On May 11, 2000, the Company filed
its answer and counterclaim in which it denies that it has infringed or is
infringing any of the asserted patents, and seeks a judicial declaration that
the asserted patents are invalid and unenforceable. Trial has been set to
commence on March 25, 2002. The Company believes that it has meritorious
defenses to the claims asserted by Unisys and intends to defend itself
vigorously in this matter.
8. Prosys Technology Acquisition
In June 2000, the Company completed the acquisition of Prosys
Technology, Inc. ("Prosys"), a developer of embedded field programmable gate
array ("FPGA") intellectual property ("IP") cores, in a transaction accounted
for as a purchase. In connection with the acquisition, the Company accrued for a
cash payment of $6,900,000 to be made to Prosys shareholders and issued 220,518
shares of Actel common stock, which were valued at $34.13 per share. The
valuation of the common stock was based on an average of the closing market
prices for Actel common stock on the two days before, the day of, and the two
days after the agreement to acquire Prosys was announced. The Company also
assumed $144,000 of liabilities, incurred $88,000 of acquisition costs, and
assumed existing Prosys options, which were converted into options to acquire
Actel common stock. These options were fully vested and valued at $9,864,000
using the Black-Scholes Option Pricing Model. Thus, total consideration for the
Prosys acquisition was valued at $24,522,000.
In accordance with the provisions of Accounting Principles Board
Opinion No. 16, "Business Combinations", all identifiable assets were assigned a
portion of the total consideration on the basis of their respective fair values.
The consideration was allocated as follows based on the valuation report of an
independent valuation specialist:
In-process research and development $ 5,558,000
Acquired work-force 273,000
Patent applications 349,000
Cash & other current assets 57,000
Deferred tax liability (249,000)
Goodwill and other intangibles 18,534,000
A portion of the purchase price has been allocated to acquired
in-process research and development ("IPRD"). IPRD was identified and valued
through extensive interviews, analysis of data provided by Prosys concerning
developmental products, their stage of development, the time and resources
needed to complete them, and associated risks. The income approach, which bases
the value of an asset on future earnings capacity of the asset, was utilized in
valuing the IPRD. This approach values an asset based on the future cash flows
that could be potentially generated by the asset over its estimated useful life.
The future cash flows are discounted to their present value utilizing a discount
rate (25%) that would provide sufficient return to a potential investor to
estimate the value of the subject asset. The estimated completion date of the
technology is late 2000. The present value of the cash flows over the life of
the asset is summed to equal the estimated value of the asset. The IPRD, valued
at $5,558,000 using the income approach, was charged to expense upon the closing
of the acquisition.
The value of the assembled workforce was estimated using a cost
approach. This approach identifies the employees that would require significant
cost to replace and train. This analysis then estimates the fully burdened costs
(locating, interviewing, and hiring) attributed to each employee. These costs
are summed up and tax-effected to estimate the value of the estimated workforce.
The Company expects to amortize the value assigned to the acquired workforce of
$273,000 on a straight-line basis over an estimated remaining useful life of six
months.
As of the valuation date, it was assumed that there was some value
attributable to the Prosys patent applications. To value the patent
applications, the relief from royalty methodology was utilized. This methodology
assumes that the value of the asset equals the amount a third party would pay to
use the asset and capitalize on the related benefits of the asset. Therefore, a
revenue stream for the asset is estimated, and then an appropriate royalty rate
is applied to the forecasted revenue to estimate the pre-tax income associated
with the asset. The pre-tax income is then tax-effected to estimate the
after-tax net income associated with the asset. Finally, the after-tax net
income is discounted to the present value using an appropriate rate of return
(25%) that considers both the risk of the asset and the associated cash flow
estimates. The Company expects to amortize the value assigned to the patent
applications of $349,000 on a straight-line basis over an estimated useful life
of five years.
Goodwill, which represents the excess of the purchase price of an
investment in an acquired business over the fair value of the underlying net
identifiable assets, is amortized on a straight-line basis over its estimated
useful life of five years.
The following unaudited pro forma results of operations for the third
quarter and nine months ending October 1, 2000, are presented are as if the
acquisition of Prosys had occurred as of the beginning of 1999, and includes
certain estimated adjustments (including amortization of intangibles). The pro
forma results exclude the one-time write-off of $5,558,000 of in-process
research and development and the tax effect of the charge. The pro-forma
information has been prepared for comparative purposes only and does not purport
to be indicative of what operating results would have been if the acquisition
had actually taken place at the beginning of 1999 or of future operating
results.
Three Months Ended Nine Months Ended
------------------- -------------------
Oct. 1, Oct. 3, Oct. 1, Oct. 3,
-------- -------- -------- --------
(in thousands, except per share amounts)
Net revenues .................. $ 60,080 $ 43,162 $166,290 $125,619
Net income .................... 9,916 4,273 41,554 7,355
Diluted earnings per share .... 0.37 0.18 1.57 0.32
9. Subsequent Events
On October 2, 2000, the Company made a $2.2 million equity investment
in Elixent Limited, a developer of IP. The Actel investment represents 13.5% of
the equity share capital of Elixent on a fully diluted basis.
On October 6, 2000, Actel loaned GateField $3.25 million in exchange
for a promissory note that is convertible into GateField common stock at an
effective rate of $5.25 per share.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
All forward-looking statements contained in this Quarterly Report on
Form 10-Q, 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. In addition, 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. The Company undertakes no obligation to update any statement,
including any forward-looking statement, contained or incorporated by reference
in this Quarterly Report on Form 10-Q.
Results of Operations
Net Revenues
Net revenues for the third quarter of fiscal 2000 were a record $60.1
million, which represents an increase of 8% compared with the Company's net
revenues for the second quarter of fiscal 2000 of $55.5 million and an increase
of 39% compared with the Company's net revenues for the third quarter of fiscal
1999 of $43.2 million. Quarterly net revenues increased sequentially due to a
17% increase in the overall average selling price ("ASP") of FPGAs that resulted
primarily from increased sales of the Company's newer product families, which
was partially offset by a 7% decrease in unit shipments.
Net revenues for the first nine months of fiscal 2000 were $166.3
million, which represents an increase of 32% compared with the Company's net
revenues for the first nine months of fiscal 1999. Net revenues increased as the
result of a 27% increase in unit shipments and a 5% increase in ASPs.
Gross Margin
Gross margin for the third quarter of fiscal 2000 was a record 62.6% of
net revenues, compared with 62.3% for the second quarter of fiscal 2000 and
61.4% for the third quarter of fiscal 1999. Gross margin for the first nine
months of fiscal 2000 was 62.3% of net revenues, compared with 61.1% of net
revenues for the first nine months of fiscal 1999. Gross margin improved
primarily as a result of improved yields, especially on newer products.
The Company seeks to improve gross margin by reducing costs. These cost
reduction activities include improving wafer yields, negotiating price
reductions with suppliers, increasing the level and efficiency of its testing
and packaging operations, achieving economies of scale by means of higher
production levels, and increasing the number of die produced per wafer by
shrinking the die size of its products. There can be no assurance that these
efforts will be successful. The ability of the Company to shrink the die size of
its FPGAs is dependent on the availability of more advanced manufacturing
processes. Because of the custom steps involved in manufacturing antifuse-based
FPGAs, the Company typically obtains access to new manufacturing processes later
than its competitors using standard manufacturing processes.
Research and Development
Research and development expenditures for the third quarter of fiscal
2000 were $9.3 million, or 16% of net revenues, compared with $8.9 million, or
16% of net revenues, for the second quarter of fiscal 2000 and $7.7 million, or
18% of revenues, for the third quarter of fiscal 1999. Spending on research and
development increased in the third quarter of fiscal 2000 primarily as a result
of the Company's acquisition in June 2000 of Prosys, an embedded FPGA IP
developer. The third quarter of fiscal 2000 was the first full quarter to
include the Prosys incremental spending.
Research and development expenditures for the first nine months of
fiscal 2000 were $26.6 million, or 16% of net revenues, compared with $24.3
million, or 19% of net revenues, for the first nine months of fiscal 1999. This
represents an increase of 10% in research and development expenditures, compared
with an increase of 32% in net revenues during the same time period. Spending
increased because of the Prosys acquisition and increased new product
development actvities.
Selling, General, and Administrative
Selling, general, and administrative expenses for the third quarter of
fiscal 2000 were $12.3 million, or 21% of net revenues, compared with $11.8
million, or 21% of net revenues, for the second quarter of fiscal 2000 and $10.9
million, or 25% of net revenues, for the third quarter of fiscal 1999. Selling,
general, and administrative expenses for the third quarter of fiscal 2000
increased from the second quarter of fiscal 2000 due principally to increased
sales cost associated with the higher revenue. Spending in the third quarter of
fiscal 2000 increased over the same quarter one year ago because of increased
marketing activities in support of new products and increased selling expenses
associated with higher revenue generation.
Selling, general, and administrative expenses for the first nine months
of fiscal 2000 were $35.7 million, or 21% of net revenues, compared with $34.3
million, or 27% of net revenues, for the first nine months of fiscal 1999.
Acquired In-Process Research and Development Expenses
In June 2000, the Company completed its acquisition of Prosys in a
transaction accounted for as a purchase. The in-process research and development
expense associated with this purchase resulted in a one-time charge of $5.6
million during the second quarter of fiscal 2000.
Amortization of Goodwill, Other Acquisition-Related Intangibles, and
Other Acquisition-Related Expenses
Amortization of goodwill and other acquisition-related expenses for the
third quarter of fiscal 2000 was $2.3 million, compared with $1.5 million for
the second quarter of fiscal 2000 and $0.4 million for the third quarter of
fiscal 1999. The increase in the third quarter over the prior quarter was due to
a full quarter of amortization for the Prosys acquisition, which occurred late
in the second quarter of fiscal 2000. The increase in the third quarter of
fiscal 2000 over the third quarter in fiscal 1999 was due primarily to goodwill
amortization charges of $1.1 million arising from the Prosys acquisition and
equity method of accounting charges of $0.8 million arising from the Company's
investments in GateField.
Amortization of goodwill and other acquisition-related intangibles for
the first nine months of fiscal 2000 was $4.9 million, compared with $1.2
million for the first nine months of fiscal 1999. This increase was due
primarily to goodwill amortization charges of $1.4 and $1.1 million arising from
the Company's acquisitions of Prosys in the second quarter of fiscal 2000 and of
AutoGate Logic, Inc. in the fourth quarter of fiscal 1999, respectively, and
equity method of accounting charges of $1.9 million arising from the Company's
investments in GateField. The first nine months of fiscal 1999 included goodwill
amortization charges of $0.7 million arising from the Company's acquisition of
Texas Instrument's FPGA business in 1995, which was fully amortized during
fiscal 1999.
Gain on Sale of Chartered Common Stock
During the second quarter of fiscal 2000, the Company sold all of its
shares of Chartered Semiconductor common stock for a one-time gain of $28.3
million.
Interest Income and Other Income and Expenses
Interest income and other income and expenses was $2.7 million for the
third quarter of fiscal 2000, compared with $1.9 million in the previous quarter
and $0.9 million in the third quarter one year ago. For the first nine months of
fiscal 2000, interest and other income and expenses was $5.9 million, compared
with $2.4 million during the first nine months of fiscal 1999. The increase in
both instances was driven by increased cash, cash equivalents, and short-term
investments available for investing by the Company.
Equity in Net Loss of Equity Method Investee
In light of Actel's investments in and agreements with GateField, Actel
accounts for its investments in GateField under the equity method of accounting.
Actel began accounting for its equity interest in GateField under the equity
method of accounting during 1999. During the quarter ended October 1, 2000, the
Company loaned GateField $2.75 million in exchange for a promissory note that
bears interest at the rate of 6.25% per year and is convertible into 523,810
shares of GateField common stock. At October 1, 2000, the Company owned
1,622,298 shares of GateField common stock.
In light of this investment, the Company incurred a charge of $0.9
million in the third quarter of fiscal 2000 compared with $0.4 million in the
prior quarter and $0.2 million in the third quarter one year ago. The increase
in the charge to the Company's net income for third quarter of fiscal 2000
compared with the prior quarter was the result of an increase in the quarterly
loss of GateField. Compared with the same quarter one year ago, the charge was
higher due to an increase in the Company's ownership of GateField common stock
from 4.1% to 26.3%.
Tax Provision
The Company's effective rate for the three and nine months ended
October 1, 2000 was 32%, excluding the effect of certain non-recurring
acquisition-related charges and investment gains. The effective tax rates
including such charges and gains for the three and nine months ended October 1,
2000, were 37% and 40%, respectively. The effective tax rates are based on the
estimated annual tax rate in compliance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." This rate differs from the
federal statutory rate due primarily to state income taxes (net of federal
benefit), the benefits of research and development credits, tax exempt income,
and recognition of certain deferred tax assets subject to valuation allowances
as of January 2, 2000.
Liquidity and Capital Resources
At the end of the third quarter of fiscal 2000, the Company's cash,
cash equivalents, and short-term investments were $175.7 million, compared with
$107.1 million at the beginning of fiscal 2000. The amount of cash and cash
equivalents increased principally because of the sale of Chartered Semiconductor
common stock ($39.0 million cash proceeds), cash provided by operations, and
cash received from employee stock option transactions.
During the first nine months of 2000, the Company generated $30.5
million of cash from operating activities. The Company used $35.0 million of
cash in investing activities during the first nine months of 2000. Investing
activities included $59.0 million net purchases of available-for-sale
securities, the purchase of Prosys for $6.9 million, the purchase of two
promissory notes from GateField totaling $3.8 million, and purchases of property
and equipment of $4.2 million. These investing purchases were partially offset
by $39.0 million of proceeds from the sale of Chartered Semiconductor common
stock. Financing activities during the first nine months of 2000 provided cash
of $13.6 million, which was generated primarily from proceeds from sales of
common stock under employee option and stock purchase plans.
The Company has a line of credit with a bank that provides for
borrowings not to exceed $5,000,000. The agreement contains covenants that
require the Company to maintain certain financial ratios and levels of net
worth. As of October 1, 2000, the Company was in compliance with the covenants
for the line of credit. Borrowings against the line of credit bear interest at
the bank's prime rate. There were no borrowings against the line of credit at
October 1, 2000. The line of credit, which expires in May 2001, may be
terminated by either party upon not less than thirty days' prior written notice.
The Company believes that existing cash, cash equivalents, and
short-term investments, together with cash from operations, will be sufficient
to meet its cash requirements for the next four quarters. A portion of available
cash may be used for investment in or acquisition of complementary businesses,
products, or technologies. Wafer manufacturers are increasingly demanding
financial support from customers in the form of equity investments and advance
purchase price deposits, which in some cases are substantial. If the Company
requires additional capacity, it may be required to incur significant
expenditures to secure such capacity.
The Company believes that the availability of adequate financial
resources is a substantial competitive factor. To take advantage of
opportunities as they arise, or to withstand adverse business conditions should
they occur, it may become prudent or necessary for the Company to raise
additional capital. The Company intends to continue monitoring the availability
and cost of potential capital resources, including equity, debt, and off-balance
sheet financing arrangements, and may consider raising additional capital on
terms that are acceptable to the Company. There can be no assurance that
additional capital will become available on acceptable terms, if at all.
Other Factors Affecting Future Operating Results
The Company's operating results are subject to general economic
conditions and a variety of risks characteristic of the semiconductor industry
(including booking and shipment uncertainties, wafer supply fluctuations, and
price erosion) or specific to the Company, any of which could cause the
Company's operating results to differ materially from past results. For a
discussion of such risks, see "Risk Factors" in Part I of the Company's Annual
Report on Form 10-K for 1999, which is incorporated herein by this reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of October 1, 2000, the Company's investment portfolio consisted
primarily of corporate bonds, floating rate notes, and federal and municipal
obligations. The primary objectives of the Company's investment activities are
to preserve principal, meet liquidity needs, and maximize yields. To meet these
objectives, the Company invests only in high credit quality debt securities with
average maturities of less than two years. The Company also limits the
percentage of total investments that may be invested in any one issuer.
Corporate investments as a group are also limited to a maximum percentage of the
Company's investment portfolio.
The Company's investments are subject to interest rate risk. An
increase in interest rates could subject the Company to a decline in the market
value of its investments. These risks are mitigated by the ability of the
Company to hold these investments to maturity. A hypothetical 100 basis point
increase in interest rates would result in a decrease of approximately
$1,371,000 in the fair value of the Company's available-for-sale securities.
The Company purchases a portion of the wafers it uses in production
from Japanese suppliers, which are denominated in Japanese yen. An adverse
change in the foreign exchange rate would affect the price the Company pays for
a portion of the wafers used in production over the long term. The Company
attempts to mitigate its exposure to risks from foreign currency fluctuations by
purchasing forward foreign exchange contracts to hedge firm purchase commitments
denominated in foreign currencies. Forward exchange contracts are short term and
do not hedge purchases that will be made for anticipated longer-term wafer
needs. A hypothetical adverse change of 10% in exchange rates would result in a
decline in income before taxes of approximately $1,153,000 based on projected
yen denominated wafer purchases for the next four quarters.
Both of the hypothetical changes noted above are based upon sensitivity
analysis performed on the Company's financial position at October 1, 2000.
Actual results may differ materially.
<PAGE>
Additional Quarterly Information
The following table presents certain unaudited quarterly results for
each of the eight quarters in the period ended October 1, 2000. In the opinion
of management, all necessary adjustments (consisting only of normal recurring
accruals) have been included in the amounts stated below to present fairly the
unaudited quarterly results when read in conjunction with the audited
consolidated financial statements of the Company and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended January 2, 2000.
These quarterly operating results are not necessarily indicative of the results
for any future period.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
Oct. 1, Jul. 2, Apr. 2, Jan. 2, Oct. 3, Jul. 4, Apr. 4, Jan. 3,
2000 2000 2000 2000 1999 1999 1999 1999
------- ------- ------- ------- ------- ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Income Data:
Net revenues ................................. $60,080 $55,544 $50,666 $46,042 $43,162 $41,619 $40,838 $40,174
Gross profit ................................. 37,626 34,595 31,458 28,546 26,503 25,381 24,844 24,377
Income from operations ....................... 13,648 6,778 10,555 7,175 7,492 2,111 5,466 5,535
Net income ................................... $ 9,779 $20,112 $ 8,099 $ 5,823 $ 5,668 $ 1,926 $ 4,221 $ 4,118
Net income per share:
Basic ..................................... $ 0.41 $ 0.86 $ 0.36 $ 0.26 $ 0.26 $ 0.09 $ 0.20 $ 0.20
======= ======= ======= ======= ======= ======= ======= =======
Diluted ................................... $ 0.36 $ 0.77 $ 0.32 $ 0.24 $ 0.25 $ 0.09 $ 0.19 $ 0.19
======= ======= ======= ======= ======= ======= ======= =======
Shares used in computing net income per share:
Basic ..................................... 23,869 23,263 22,767 22,048 21,748 21,511 21,347 21,091
======= ======= ======= ======= ======= ======= ======= =======
Diluted ................................... 26,999 26,186 25,467 24,015 23,003 22,454 22,673 22,201
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
Oct. 1, Jul. 2, Apr. 2, Jan. 2, Oct. 3, Jul. 4, Apr. 4, Jan. 3,
2000 2000 2000 2000 1999 1999 1999 1999
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of Net Revenues:
Net revenues ................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit ................................. 62.6 62.3 62.1 62.0 61.4 61.0 60.8 60.7
Income from operations ....................... 22.7 12.2 20.8 15.6 17.4 5.1 13.4 13.8
Net income ................................... 16.3 36.2 16.0 12.6 13.1 4.6 10.3 10.3
</TABLE>
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Periodically, the Company is made aware that technology used by the
Company may infringe intellectual property rights held by others. During the
third quarter of fiscal 2000, the Company continued in negotiations with several
third parties regarding potential patent infringement issues. The Company has
made adequate provision for the estimated settlement costs of claims for alleged
infringement prior to the balance sheet date. While management believes that
reasonable resolution will occur, there can be no assurance that these claims
will be resolved or that the resolution of these claims will not have a
materially adverse effect on future results of operations or require changes in
the Company's products or processes. In addition, management's evaluation of the
likely impact of these pending disputes could change based upon new information
learned by management. Subject to the foregoing, management does not believe any
pending dispute, including the legal proceeding described below, are likely to
have a materially adverse effect on the Company's financial condition, results
of operations, or liquidity. The foregoing is a forward-looking statement
subject to all of the risks and uncertainties of intellectual property disputes
and legal proceedings, including the discovery of new information and
unpredictability as to the ultimate outcome.
Except as described below, there are no pending legal proceedings of a
material nature to which the Company 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.
Unisys v. Actel and QuickLogic (CV C-00 01114 WDB)
On March 29, 2000, Unisys brought suit in the United States District
Court for the Northern District of California, San Jose Division, against the
Company seeking monetary damages and injunctive relief based on Actel's alleged
infringement of four patents held by Unisys. In the lawsuit, Unisys alleges that
the Company has infringed and continues to infringe four Unisys patents and
seeks damages, costs and attorneys' fees, as well as an injunction prohibiting
further infringement. On May 11, 2000, the Company filed its answer and
counterclaim in which it denies that it has infringed or is infringing any of
the asserted patents, and seeks a judicial declaration that the asserted patents
are invalid and unenforceable. Trial has been set to commence on March 25, 2002.
The Company believes that it has meritorious defenses to the claims asserted by
Unisys and intends to defend itself vigorously in this matter.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACTEL CORPORATION
Date: November 8, 2000 /s/ Henry L. Perret
--------------------------------
Henry L. Perret
Vice President of Finance
and Chief Financial Officer
(as principal financial officer
and on behalf of Registrant)
