UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

Commission file number 0-21970

 

 

 

 

ACTEL CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

(650) 318-4200

 

(Registrant’s telephone number, including area code)

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $.001 par value
Preferred Stock Purchase Rights
(Title of class)

 

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The aggregate market value of voting and non voting common equity held by non affiliates of the Registrant was approximately $288 million as of July 2, 2009, based upon the closing price on the NASDAQ Global Market reported for such date. Shares held by each officer and director and each person owning more than 10% of the outstanding voting and non-voting stock have been excluded from this calculation because such persons may be deemed to be affiliates of the Registrant. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purpose. The number of shares outstanding of the Registrant’s Common Stock on March 10, 2010, was 26,429,647 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The information required by Part III of this Annual Report on Form 10-K is incorporated by reference to the registrant’s proxy statement for its 2010 annual meeting of shareholders, which proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

 

 

TABLE OF CONTENTS

 

 

 

In this Annual Report on Form 10-K, Actel Corporation and its consolidated subsidiaries are referred to as “we,” “us,” “our,” “The Company” or “Actel.” You should read the information in this Annual Report with the Risk Factors in Item 1A. Unless otherwise indicated, the information in this Annual Report is given as of March 15, 2010, and we undertake no obligation to update any of the information, including forward-looking statements. All forward-looking statements are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements containing words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “seeks,” and variations of such words and similar expressions are intended to identify the forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements due to the risks identified in the Risk Factors or for other reasons.

 

Actel Corporation is the leading supplier of low-power field-programmable gate arrays (“FPGAs”), mixed-signal FPGAs, and system-critical FPGAs. Delivering the lowest power consumption of any comparably sized FPGAs at both the chip and the system level, the Company’s flash- and antifuse-based FPGA solutions enable power-efficient design. In support of our FPGAs, we offer design and development software and tools to optimize power consumption; power-smart intellectual property (“IP”) cores, including industry-standard processor technologies; the industry’s smallest footprint packaging; programming hardware and starter kits; and a variety of design services. We target a wide range of applications in the aerospace, avionics, communications, consumer, industrial and military markets that require low power consumption, high reliability, or other attributes of our nonvolatile flash-and antifuse-based technologies that have an inherent competitive advantage over traditional SRAM-based FPGAs.

 

In April 2008, Actel and Pigeon Point Systems, the leading provider of Telecommunications Computer Architecture (“TCA”) management components, announced a partnership to develop and market solutions based on the Actel Fusion mixed-signal FPGAs to speed the design of AdvancedTCA blade and AdvancedMC carrier blade management controllers. In a strategic move to strengthen its market position, Actel acquired Pigeon Point Systems in July 2008. The two companies’ combined portfolio of reference designs, development kits, easy-to-use development environments, and expert design services gives designers the capability to address system and power management issues throughout the design process.

 

The Company was founded and incorporated in California in 1985. Actel’s Common Stock trades on the NASDAQ Global Market under the symbol ACTL. Our corporate headquarters are located at 2061 Stierlin Court, Mountain View, Calif., 94043, and our Website address is www.actel.com. We provide access free of charge, through a link on our Website, to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as amendments to those reports, as soon as reasonably practicable after the reports are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). The Actel, Actel Fusion, IGLOO, Axcelerator, FlashLock, FuseLock, Libero, ProASIC, and ProASIC^PLUS names and logos are registered trademarks of Actel. This Annual Report also includes unregistered trademarks of Actel as well as registered and unregistered trademarks of other companies.

 

Industry Overview

 

Three principal types of integrated circuits (“ICs”) are used in nearly every electronic system: processors, which are used for control and computing tasks; memory devices, which are used to store program instructions and data; and logic devices, which are used to adapt these processing and storage capabilities to a specific application. The logic market is highly fragmented and includes application-specific integrated circuits (“ASICs”) and programmable logic devices (“PLDs”). FPGAs are one type of PLD. Price, performance, reliability, power consumption, security, density, features, ease-of-use, and time to market determine the degree to which logic devices compete for specific applications. Unlike ASICs, which are customized for use in a specific application at the time of manufacture, FPGAs and complex PLDs (“CPLDs”) are manufactured as standard components and customized “in the field,” allowing the same device type to be used for many different applications. Using software

tools, users program their design into a PLD, resulting in lower development costs and inventory risks, shorter design cycles, and faster time to market.

 

Traditionally, ASICs and CPLDs have addressed the low-power needs of portable consumer applications. However, with long design cycles and little flexibility to address changing standards and late-stage design modifications, ASICs are riskier and often impractical for portable applications with short product-life cycles. Moreover, CPLDs are becoming less attractive in some low-power applications due mainly to increasing demand for high-end features. As a result, FPGAs are becoming the preferred solution as competition intensifies and time to market has an increasing impact on the success of portable, battery-powered products. Of course, FPGAs must meet the potential customer’s other design requirements, including cost, performance, size and security.

 

FPGAs based on static random access memory (“SRAM”) technology have inherently high static power consumption compared with antifuse- or flash-based FPGAs. This is because the SRAM cells must always be minimally turned on in order to maintain their memory state, whereas antifuse- or flash-based FPGAs can maintain their programmed state with power completely off. Even “low-power” SRAM-based FPGAs draw on the order of ten times more power for typical battery-operated applications. SRAM-based FPGAs also experience power surges at start-up that drain batteries and can cause system-initialization failures. Compounding the problem, each process node “shrink” increases the static power consumption of transistor-heavy SRAM-based FPGAs. The power problem becomes further complicated with respect to SRAM-based solutions that utilize flash technology to program the device’s SRAM architecture. Though marketed as flash-based devices, these solutions add flash circuitry to the power-draining SRAM FPGA fabric, so they have inherently high static power consumption like a standard SRAM-based FPGA.

 

The Actel Advantage

 

To a great extent, the characteristics of an FPGA are dictated by the technology used to make the device programmable. Devices based on nonvolatile flash or antifuse programming elements offer significant power, security, and neutron-immunity advantages over volatile FPGAs based on SRAM technology. Our strategy is to offer our FPGAs to markets in which our nonvolatile flash- and antifuse-based technologies have an inherent competitive advantage.

 

• Low Power and Small Footprint

 

Because they don’t use power-draining SRAM configuration bit cells, nonvolatile flash-based FPGAs have significantly lower static power than SRAM-based solutions, making them optimal for low-power applications. In addition, some of our flash-based FPGAs have been designed specifically for low-power applications. When compared with high density SRAM FPGAs, Actel’s flash FPGAs use up to 1700 times less static power. When compared with low density CPLDs, flash FPGAs use up to 25 times less power. We also offer the industry’s smallest micro chip scale package and the largest selection of small footprint packages. The low power combined with small packages create new opportunities for designers of battery-powered handheld applications with strict board space requirements.

 

• Security

 

Once programmed, our nonvolatile single-chip devices retain configuration indefinitely without requiring an external configuration device. With no bitstream susceptible to interception, our nonvolatile solutions eliminate the potential for in-system errors or data erasures that might occur during download. For our flash-based devices, we offer the Actel FlashLock feature, which provides a unique combination of reprogrammability and design security without external overhead. Our flash-based devices with AES-based security permit secure, remote field updates of both system design and flash memory content. For our antifuse-based FPGAs, we offer the Actel FuseLock feature, which is designed to prevent unauthorized users from reading back the contents.

 

• Reliability (Radiation Tolerant)

 

Our flash- and antifuse-based devices are not subject to configuration upsets caused by high-energy neutrons naturally present in the earth’s atmosphere. SRAM-based FPGAs, on the other hand, are vulnerable to neutron-

induced configuration loss not only under high-altitude conditions, as traditionally believed, but also in ground-based applications. The energy of the collision can change the state of the SRAM FPGA’s configuration cell and thereby cause an unpredictable change in FPGA functionality. These errors, which are very difficult to prevent in SRAM FPGAs, can result in failure-in-time (“FIT”) rates in the thousands and complete system failures.

 

• Single Chip

 

Unlike volatile SRAM-based FPGAs, our nonvolatile FPGAs do not require additional system components, such as configuration serial nonvolatile memory or a flash-based microcontroller, to configure the device at every system power-up. By eliminating the support devices required by volatile SRAM-based FPGAs, our nonvolatile single-chip FPGAs reduce the direct costs of the bill of materials. In addition, our nonvolatile flash- and antifuse-based FPGAs lower associated total system costs by reducing design complexity, increasing reliability, and simplifying materials management.

 

• Live At Power-Up

 

Our nonvolatile devices are live at power-up (“LAPU”): as soon as system power is applied to the board and normal operating specifications are achieved, our devices are working. The LAPU feature greatly simplifies total system design and often permits the removal of expensive power-sequencing, voltage-monitor, and brownout-detection devices from the board. Simplifying the system design reduces total system cost and design risk while increasing system reliability and improving system initialization time.

 

Products

 

We offer customers a range of low-power flash-based solutions to address design challenges in the military and aerospace, communications, consumer and industrial markets. With densities ranging from 10,000 to 3,000,000 system gates, our reprogrammable product families exploit the inherent benefits of our nonvolatile flash technology: low power, security, neutron immunity, single chip, small footprint, and LAPU. Our flash-based solutions include the IGLOO, ProASIC3, Actel Fusion and recently introduced SmartFusion mixed-signal FPGA families as well as those families optimized for an ARM Cortex-M1 processor: the M1 IGLOO, M1 ProASIC3/E, and M1 Fusion families. In addition we have expanded our flash product lines into the military and aerospace markets with our RT ProASIC3 space flight FPGAs and our military-qualified ProASIC3L and ProASIC3EL FPGAs.

 

We also offer a broad portfolio of nonvolatile antifuse-based FPGAs. Ranging in density from 3,000 to 4,000,000 system gates, our single-chip solutions include FPGAs qualified to commercial, industrial, and military specifications as well as radiation-tolerant devices. Spanning six process geometries, our antifuse-based solutions include the RTAX-DSP, RTAX-S, RTAX-SL, Axcelerator, eX, SX-A, MX, and the legacy SX, ACT 3, ACT 2, and ACT 1 families. We still ship many legacy antifuse FPGAs to customers with products having long life-cycles.

 

To meet the diverse requirements of our customers, we offer almost all our products in a variety of speed grades, package types, and/or ambient (environmental) temperature tolerances. We also offer “green,” lead-free, and RoHS-compliant packages, which provide the necessary mechanical and environmental protection while ensuring consistent reliability and performance.

 

The families discussed below are currently being designed by customers into their next-generation applications. Although our more mature product families have been excluded from this discussion, they continue to generate significant revenues.

 

• IGLOO FPGAs

 

• The lowest-power FPGAs

 

Since its introduction in 2006, designers of portable and handheld applications have taken note of our 10,000 to 3,000,000 system gate IGLOO family due to its unprecedented low power. The family offers quick and easy power control with flexible implementation options, including the Flash*Freeze, low-power active, and sleep modes, and is the only truly low-power FPGA solution to support 1.2 V core operation. We provide designers with

comprehensive solutions for IGLOO, including storage, display, and control-related development boards, reference designs, and IP cores, to enable rapid design of their portable and power-sensitive applications.

 

 

 

 

 

 

• ProASIC3/E FPGAs

 

• Low power FPGAs

 

With densities ranging from 10,000 to 3,000,000 system gates, our ProASIC3/E FPGAs are commercially qualified and shipping to customers worldwide for high-volume applications in the communications, consumer and industrial markets. Optimized for cost, our reprogrammable ProASIC3 family also delivers high performance to power-conscious applications. ProASIC3/E devices support free implementation of the ARM Cortex-M1 soft processor IP core, offering the benefits of programmability and time to market at an ASIC-like unit cost.

 

 

 

 

 

 

• Actel Fusion and SmartFusion Intelligent Mixed-Signal FPGAs

 

Actel Fusion, the world’s first mixed-signal FPGA integrates configurable analog, flash memory and flash-based programmable logic in a monolithic device. With densities ranging from 90,000 to 1,500,000 system gates our Fusion FPGAs have been designed by a broad spectrum of customers for use in a wide range of applications. The Actel Fusion mixed-signal FPGA system management functionality, which includes power and thermal management, data logging, and system diagnostics, gives us the opportunity to win numerous designs in high-volume applications. Fusion FPGAs can integrate system and power management functions and provide programmable flexibility in a single chip, resulting in potential cost, power, and space savings of 50 percent or more, relative to current implementations. To provide templates for the customization of system management functions and to speed development time, we also offer the System Management Development Kit, a complete prototyping and development kit. In addition, we have introduced several Fusion-based reference designs addressing the xTCA standards based on the Pigeon Point portfolio of system management solutions.

 

The recent introduction of the SmartFusion intelligent mixed-signal FPGAs greatly expands our ability to compete in the embedded market space, allowing us to pursue designs not previously available to FPGAs. With

densities ranging from 60,000 to 500,000 system gates, SmartFusion devices integrate FPGA fabric, an ARM Cortex-M3 processor and programmable analog, providing full customization, IP protection and ease-of-use. The combination of a microcontroller, analog peripherals, embedded flash and programmable logic with single-chip operation offers levels of integration previously only available in custom solutions. In-application programming enables real-time updates and reprogramming of the complete chip, and without the restrictions of traditional fixed-function microcontrollers, SmartFusion devices offer the flexibility of a true system-on-a-chip solution. The synthesis of these three areas also increases security by keeping all data transfers within the chip and preventing interception. Additionally, the inherent security of our flash technology combined with encrypted in-system programming and the FlashLock key controlling access to the security settings of the device ensures IP protection.

 

• RTAX-S, RTAX-SL, RTAX-DSP, and RT-ProASIC3 FPGAs

 

Designers utilizing our RTAX-S FPGAs value their radiation tolerance, high reliability, firm-error immunity and programmability. RTAX-S FPGAs, with densities ranging from 250,000 to 4,000,000 system gates, are not subject to the high up-front tooling charges and long lead-times associated with radiation-hardened ASICs, giving us development-cost and time-to-market advantages. In addition, our RTAX-S devices have “built in” triple module redundancy (TMR), a single event upset (SEU) mitigation technique. Competing high-density FPGA solutions require TMR to be instantiated by the user, which can consume more than two-thirds of the FPGA’s available logic. We believe no other FPGA delivers the density, radiation tolerance and reliability of our 4,000,000 system-gate RTAX4000S device, which significantly expanded the number of space applications that can be supported by our RTAX-S family.

 

 

 

 

 

 

Supporting Products and Services

 

In support of our low-power FPGAs and power-efficient mixed-signal FPGAs, we offer power-optimized design and development software and tools, power-smart IP cores, programming hardware and starter kits, and a variety of services that enable our customers to implement their designs in our products.

 

• Design and Development Software and Tools

 

The Actel Libero integrated design environment (“IDE”) seamlessly integrates best-in-class design tools from Mentor Graphics and Synopsys with Actel-developed custom tools into a single FPGA development package. Emphasizing power-conscious design, the Actel Libero IDE includes power-driven layout and advanced power-analysis capabilities, allowing users to optimize their systems for low power consumption. We also offer a comprehensive development environment, boards, and reference designs to enable customers to get system-level products to market quickly and reduce cost and risk.

 

• IP Cores

 

With more than 180 IP products designed and optimized to work with Actel devices, our IP cores support the aerospace, avionics, communications, consumer and industrial markets. Our IP solutions streamline designs, enable

faster time-to-market, and minimize design costs and risks. We supply IP, components, tools, and complete reference designs. This allows the system designer to focus on adding value to the design. Our IP is optimized and verified for use with Actel FPGAs, so designers can spend time developing and verifying the system instead of the IP blocks. We also offer a range of processor technologies — from our small CoreABC to the high-performance, industry-standard ARM Cortex-M1 processor — allowing designers to select an appropriate processor for their application. In 2008, we broadened our support for industry-standard processors. Complementing the existing Libero IDE, we added new software drivers and real-time operating system support. In combination with development boards, these offerings further enhance a designers’ ability to use processor technology in our low-power and mixed-signal FPGAs. In 2009, The Athena Group, Inc. joined our CompanionCore program and announced the availability of its silicon-proven cryptography cores for our IGLOO and ProASIC3 FPGAs.

 

• Programming Hardware

 

We offer several programming options, including Silicon Sculptor 3 and the FlashPro series, for designers utilizing our nonvolatile FPGAs. Our Silicon Sculptor 3 is a compact, high-speed, single-device programmer for all Actel devices. Up to 12 Silicon Sculptor 3 programmers can be connected to a single PC using nested USB hubs. FlashPro4 is a compact and cost-effective programmer for our flash-based devices. With its in-system programming capability, this programmer limits incompatibility problems and expensive redesign costs and offers faster time to market. FlashPro4 programmers support SmartFusion, Fusion, IGLOO, and ProASIC3/E devices and are powered from the USB port. We also offer programming adapter modules, surface-mount sockets, prototyping adapter boards and mechanical packages, and accessories.

 

• Starter Kits

 

In addition to demonstration and evaluation boards, we offer starter kits for all of our key FPGA families including IGLOO, M1 IGLOO, SmartFusion, Fusion, M1 Fusion, ProASIC3, M1 ProASIC3, ProASIC^PLUS, and Axcelerator. Low-cost starter kits, which include design and programming software and device programmers, are a quick and cost-effective way to assess an FPGA technology. We also offer a battery-powered IGLOO-based Icicle Kit to demonstrate extended battery life for portable designs.

 

The recently released SmartFusion Evaluation Kit, SmartFusion Development Kit, and the Fusion Advanced Development Kit include a Mixed-Signal Power Manager that enables designers to control and reduce power at the system level. Additionally, Pigeon Point Systems offers a range of SmartFusion and Fusion-based xTCA benchtop Board Management Reference (BMR) kits.

 

Vertical Markets and Applications

 

FPGAs are used in a broad range of applications across nearly all electronic system market segments. Our products serve a wide range of customers within the communications, consumer, industrial, and military and aerospace markets. We target applications that require low power or other attributes of our nonvolatile flash and antifuse-based technologies that have an inherent competitive advantage.

 

• Communications

 

Pigeon Point Systems, a wholly owned subsidiary of Actel Corporation, delivers world-class management components for modular platforms based on the AdvancedTCA, AdvancedMC, and MicroTCA architectures (collectively referred to as “xTCA”) to leading companies worldwide. Pigeon Point Systems is the leading provider of xTCA management components and offers a comprehensive solution for proprietary and standards-based system management implementations in the industrial, military and telecommunications markets.

 

Current system management implementations often require numerous discrete components (sometimes numbering in the hundreds) that occupy large amounts of board space and are difficult to change. In the communications market, increased costs and risks are driving the rapid adoption of standards for remotely managed systems, such as AdvancedTCA and MicroTCA. Management subsystems based on mixed-signal FPGAs can integrate the functionality of many of the discrete components, thereby reducing cost and board space, while simultaneously increasing flexibility and reducing risk.

We believe that widely used and proven reference designs for xTCA management controllers will be very attractive to product designers in the rapidly growing xTCA-focused portion of the communications infrastructure market. In addition, these reference designs can provide management controller foundation technology for developers who are building proprietary systems for the much larger non-xTCA communications infrastructure market. In 2009, Pigeon Point Systems introduced several management controller reference designs supporting Fusion. Currently, multiple companies are either shipping products or are in the process of developing products based on these designs.

 

With the introduction of the SmartFusion intelligent mixed-signal FPGA, Pigeon Point Systems is working to add SmartFusion variants of all its xTCA management controller solutions. SmartFusion is designed to support hardware management applications. Pigeon Point Systems’ management products can leverage the microcontroller, programmable analog, and flash FPGA fabric subsystems of a SmartFusion device. Based on the success that we have already demonstrated with Fusion, we believe that management controller solutions built with SmartFusion will be even more compelling.

 

To support these system management applications of our mixed-signal FPGAs, we also offer a portfolio of IP cores for processing, analog, memory interface and communications. Sample communications applications include:

 

Mid- and high-end routers and switches
Access systems (cable and DSL)
Metropolitan and optical networks
Multi-Service provisioning platforms
Wireless base stations and backhaul

 

• Consumer

 

For designers of battery-operated portable and consumer applications, the goal is to achieve the lowest power possible in order to extend the battery life by using low static and dynamic power and by allowing the system to enter and exit low-power modes quickly. Other considerations include design security, flexibility and modularity, small footprint, design reuse, and field upgradeability. We have a detailed strategy and multi-phased plan to increase market penetration for our industry leading lowest-power IGLOO FPGAs in the rapidly-growing portable market. More specifically, the increasing popularity of personal media players, portable navigation devices, displays, and wireless electronics and the convergence of multiple features has created a tremendous demand for processor interfaces such as storage, display control, motor control and human interface control. In 2008, we introduced nano versions of our IGLOO and ProASIC3 low power FPGAs, targeted at the high-volume, portable markets. IGLOO nano products offer groundbreaking possibilities in power, size, lead-times, operating temperature, and cost. Available in logic densities from 10,000 to 250,000 gates, the 1.2 V to 1.5 V IGLOO nano devices have been designed for high-volume applications where power and size are key decision criteria. IGLOO and ProASIC3 nano devices bring a new level of value and flexibility to the high-volume and portable markets. When measured against the typical project metrics of performance, cost, flexibility and time to market, the nano devices provide an attractive alternative to ASICs and application-specific standard products (“ASSPs”) in fast moving or highly competitive markets. Sample consumer applications include:

 

GPS devices
Home networking
Multimedia entertainment systems PDAs
Portable gaming
Set-top boxes
Smart phones
Digital TV accessories

 

• Industrial

 

Recent advances in electronic component performance and integration at lower price points have spurred the proliferation of electronic control units. Crossing many technologies and applications, from automated industrial

manufacturing lines to instrumentation systems to medical equipment, the focus is on increasing power efficiency while reducing total system cost. For many industrial applications, the Actel Fusion mixed-signal FPGA can offer unprecedented integration in a single-chip, replacing a host of discrete components at less than half the cost and board space while maintaining system reliability. Mixed-signal FPGAs with analog interface and flash memory enable designers to integrate a processor, run directly from on-chip memory, and tightly couple control logic, analog input/output and processing needs, while the range of peripherals SmartFusion offers for its hard Cortex-M3 processor and the flexibility of its FPGA fabric make the device a good fit for industrial automation. Our nanoPower IGLOO FPGA, with its ultra low power Flash*Freeze mode, can offer designers orders of magnitude lower power consumption than competing programmable solutions. In an insulin pump, for example, our ultra low power IGLOO FPGAs can integrate glue logic and multiple functions — from human machine interface (“HMI”), display, storage and communication control to microcontroller functions — into a single chip, thereby reducing the bill of materials, board area, power consumption and cost. Sample industrial applications include:

 

Instrumentation and test equipment
Point of sale
RFID readers
Surveillance and automation systems
Industrial motor control
Security camera
Portable medical instruments
Clinical equipment
Imaging and scanning equipment
Diagnostic lab equipment
Home infusion pumps
Patient monitor

 

• Military and Aerospace

 

With a focus on stringent quality and reliability requirements, military and aerospace designers have long recognized the inherent advantages of nonvolatile FPGA technologies for applications that require high reliability, firm-error immunity, low power consumption, small footprint (single chip), and design security. Thousands of our radiation-tolerant and radiation-hardened FPGAs have performed mission- or flight-critical functions aboard manned space vehicles, earth-orbiting satellites, and deep space probes. Over the last decade, Actel FPGAs have been onboard more than 100 launches and flown on over 300 satellites and spacecraft, including GPS-2RM, Mars Reconnaissance Orbiter, Mars Explorer Rovers 1 and 2 (Spirit and Opportunity), Echostar, and Globalstar. We are the leading supplier of aerospace PLDs. In 2009, we added sophisticated digital signal processing capabilities to our industry-leading radiation-tolerant RTAX-S space flight FPGAs. These RTAX-DSP FPGAs add embedded radiation-tolerant multiply-accumulate blocks to the industry-standard RTAX-S product family, resulting in a dramatic increase in device performance and utilization when implementing arithmetic functions, such as those encountered in DSP algorithms, without sacrificing reliability or radiation tolerance. We also introduced RT ProASIC3 devices for space flight applications. The reprogrammability of the new low-power RT ProASIC3 devices simplifies prototyping and eases hardware timing validation while offering critical immunity to radiation-induced configuration upsets. These new products broaden our industry-leading space-flight offering and give designers the reliable, flexible solutions they need to design next-generation space-flight systems.

 

ProASIC3 and ProASIC3EL FPGAs are also offered as military-qualified product offerings, extending our low-power leadership and the reliability benefits of our flash-based FPGA technologies. Verified to operate across the full military temperature range and ranging in density from 600,000 to 3,000,000 system gates, the new low-power devices are immune to neutron-induced configuration upsets, saving board space and minimizing complexity in the system. With lower power, increased gate density, and improved performance, we enable designers to eliminate the higher power consumption and failure risks often associated with SRAM-based FPGAs for a wide range of military, aerospace, and avionics applications.

Sample aerospace and military applications include:

 

Attitude and orbit control
Camera electronics
Command and data handling
Instrumentation
Management of spacecraft power and environmental controls
Navigation and guidance
Propulsion system electronics
Radio communication
Sensor control
Sensor data processing
Telemetry

 

ProASIC3 and ProASIC^PLUS FPGAs have been designed into flight-critical applications on the new Boeing 787 Dreamliner commercial airliner, which successfully completed its maiden test flight in December 2009.

 

Sales and Distribution

 

We maintain a worldwide, multi-tiered selling organization that includes a direct sales force, independent sales representatives (in North America), electronics distributors, and value-added resellers.

 

Our North American sales force consists of sales and administrative personnel and field application engineers (“FAEs”) operating from offices located in major metropolitan areas. Direct sales personnel call on assigned accounts, typically large, direct original equipment manufacturers (“OEMs”). Our sales managers oversee the activities of our direct sales personnel as well as those of our sales representatives and distributors. Our sales representatives are independent companies operating under contract with us to sell our products in assigned geographic regions. The sales representatives concentrate on selling to major industrial companies in North America. We take direct orders from a small number of large, strategic customers and fulfill those orders with direct shipments. To support order fulfillment for the vast majority of customers, we have distribution agreements with Avnet, Inc. (“Avnet”) Future Electronics, Inc. (“Future Electronics”) and Mouser Electronics, Inc. (“Mouser”). The sales forces of these distributors also call on the engineering departments of the many smaller, geographically dispersed accounts in North America that our sales representatives do not focus on.

 

We generate a significant portion of our revenues from international sales. Sales to European customers accounted for 25% of net revenues in 2009, while sales to Pan Asian and Rest of the World (“ROW”) customers accounted for 23%. Our European and Pan Asian/ROW sales organization consists of employees operating from various sales offices and distributors. Outside North America, we do not utilize independent sales representative companies. In those geographic areas, our distributors perform the role of both sales representative and distributor. Avnet and Future Electronics are also franchised distributors for Actel in most countries outside North America, and we also utilize local and regional distributors in many European and Asian markets.

 

Sales made through distributors accounted for 70% of our net revenues in 2009. As is common in the semiconductor industry, we generally grant price protection to distributors. Under this policy, distributors are granted a credit upon an approved price reduction for the difference between their original purchase price for products in inventory and the reduced price. From time to time, distributors are also granted credit on an individual basis for approved price reductions on specific transactions to meet competition. We also generally grant distributors limited rights to return products. Because of our price protection and return policies, we generally do not recognize revenue on products sold to distributors until the products are resold to end customers.

 

Backlog

 

Our backlog was $64.2 million at January 3, 2010 compared with $54.0 million at January 4, 2009. We include in our backlog all OEM orders scheduled for delivery over the next nine months and all distributor orders scheduled for delivery over the next six months. Our business, and to a great extent that of the entire semiconductor industry, is characterized by short-term order and shipment schedules rather than volume purchase contracts. In accordance

with industry practice, our backlog generally may be cancelled or rescheduled by the customer on short notice without significant penalty. In addition, a significant part of our business consists of orders that are received and shipped within a quarter. As a result, our backlog may not be indicative of actual sales and therefore should not be used as a measure of future revenues.

 

Customer Service and Support

 

We believe that premier customer service and technical support are essential for success in the FPGA market. Our customer service organization emphasizes dependable, prompt, accurate responses to questions about product delivery and order status. Our FAEs are strategically located around the world to provide technical support to our worldwide customer base. This network of experts is augmented by FAEs working for our sales representatives and distributors throughout the world. Customers in any stage of design may also obtain assistance from our technical support hotline or our online interactive automated technical support system. In addition, we offer technical seminars, training classes, and failure analysis services. Many of our customers regularly measure the most significant areas of customer service and technical support.

 

We generally warrant that our FPGAs will be free from defects in material and workmanship for one year, and that our software will conform to published specifications for 90 days. To date, we have not experienced significant warranty returns.

 

Manufacturing and Assembly

 

Our strategy is to utilize third-party manufacturers for our wafer requirements, which permits us to allocate our resources to product design, development, and marketing. Our FPGAs in production are manufactured by:

 

 

In March 2009, Panasonic informed us of its intention to cease production of Actel’s legacy ACT products. In order to support our customers’ future demands for the ACT products, we committed to purchase from Panasonic approximately $8 million of last-time-buy wafers relating to our ACT products. As of January 3, 2010, we had purchased approximately $3.8 million of last-time-buy wafers from Panasonic.

 

Wafers purchased from our suppliers are assembled, tested, marked, and inspected by Actel and/or our subcontractors before shipment to customers. We assemble most of our plastic commercial products in China, Hong Kong, the Philippines, Singapore, and South Korea. Hermetic package assembly, which is often required for military applications, is performed at one or more subcontractor manufacturing facilities, usually in the United States.

 

We invest resources in the continual improvement of our products, processes, and systems. We strive to ensure that our quality and reliability systems conform to standards that have worldwide recognition for improving an organization’s capabilities. We have has obtained the following quality certifications: ISO9001:2000 (Quality Management Systems), ISO/TS16949:2002 (Automotive standard), and AS9100:2004 (Aerospace standard). We are also QML (Qualified Manufacturers List) certified by the Defense Supply Center Columbus (“DSCC”). Our QML certification confirms that our quality management procedures, processes, and controls comply with MIL-PRF-38535, the performance specification used by the U.S. Department of Defense for monolithic ICs. QML certification demonstrates our capability to produce quality products for all types of high reliability, military, and space applications. The ISO9001, ISO/TS16949, AS9100, and QML certifications demonstrate that our quality

systems conform with internationally-valued standards and confirm our commitment to supply top-quality FPGAs to a diverse customer base.

 

Research and Development

 

Our research and development expenditures are divided among circuit design, software development, IP development, and process technology activities, all of which are involved in the development of new products based on existing or emerging technologies. In the areas of circuit design and process technology, our research and development activities also involve continuing efforts to reduce the power and cost and improve the performance of current products, including “shrinks” of the design rules under which such products are manufactured. Emphasizing power conscious design, our software research and development activities include enhancing the functionality, usability, and availability of high-level design and development tools and IP cores in a complete and automated desktop design environment.

 

In 2009, 2008, and 2007, our research and development expenses were $60.7 million, $65.7 million and $63.7 million, respectively. We believe technical leadership and innovation are essential to our future success and we are committed to continuing a significant level of research and development effort.

 

Competition

 

We believe that the increasing costs associated with the use of advanced chip manufacturing technology are driving the development and use of PLDs. Also driving the use of PLDs are the increasingly stringent criteria for power, cost, footprint, features, design reuse, reliability, and security.

 

Competition is intense and we expect that to increase as the market grows. We believe our products and technologies are superior to competitive products for many applications requiring low power, nonvolatility or high reliability and security. However, our primary competitors, Xilinx and Altera, are substantially larger than Actel, offer products to a more extensive customer base, and have substantially greater financial, technical, sales, and other resources. We also expect continued competition from ASIC suppliers and from new companies that may enter the PLD or mixed-signal markets.

 

We believe that the important competitive factors in our market are power consumption; price; performance; capacity (total number of usable gates); density (concentration of usable gates); ease-of-use and functionality of development tools; installed base of development tools; reprogrammability; strength of sales organization and channels; reliability; security; adaptability of products to specific applications and IP; ease, speed, cost, and consistency of programming; length of research and development cycle (including migration to finer process geometries); number of I/Os; reliability; wafer fabrication and assembly capacity; availability of packages, adapters, sockets, programmers, and IP; technical service and support; and utilization of intellectual property laws.

 

 

This Annual Report on Form 10-K, including any information incorporated by reference herein, contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify forward looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology. The forward looking statements contained in this Form 10-K involve known and unknown risks, uncertainties, and situations that may cause our or our industry’s actual results, level of activity, performance, or achievements to be materially different from any results, levels of activity, performance, or achievements expressed or implied by these statements. These factors include those listed below in this Item 1A and those discussed elsewhere in this Form 10-K. We encourage investors to review these factors carefully. We may from time to time make additional written and oral forward looking statements, including statements contained in our filings with the SEC. We do not undertake to update any forward looking statement that may be made from time to time by or on behalf of us, whether as a result of new information, future events, or otherwise, except as required by law.

Before deciding to purchase, hold, or sell our securities, you should be aware that our business faces numerous financial and market risks, including those described below, as well as general economic and business risks. The following discussion provides information concerning the material risks and uncertainties that we have identified and believe may adversely affect our business, our financial condition, and our results of operations. Before deciding to purchase, hold, or sell our securities, you should carefully consider these risks and uncertainties, together with all of the other information included in this Annual Report on Form 10-K.

 

Risks Related to Our Failure to Meet Expectations

 

Our quarterly revenues and operating results fluctuate due to general economic conditions and a variety of risks specific to Actel or characteristic of the semiconductor industry, including booking and shipment uncertainties, supply problems, and price erosion. These and other factors make it difficult for us to accurately predict quarterly revenues and operating results, which may fail to meet our expectations. When we fall short of our quarterly revenue expectations, our operating results will probably also be adversely affected because the majority of our expenses are fixed and therefore do not vary with revenues. Any failure to meet expectations could cause our stock price to decline, perhaps significantly.

 

The current economic environment makes quarterly revenues difficult to predict.

 

Our quarterly revenues and operating results are affected, both positively and negatively, by fluctuations in general economic conditions and in the semiconductor industry. Overall conditions in the worldwide economy and financial markets in general, and in the semiconductor industry in particular, have improved since the second half of 2008, but visibility continues to be limited and forecasting remains extremely difficult. Our failure, or the failure of our distributors, to accurately forecast customer demand for our products could adversely (and perhaps materially) affect our operating efficiencies and quarterly financial results.

 

We derive a significant percentage of our quarterly revenues from bookings received during the quarter, making quarterly revenues difficult to predict.

 

We generate a significant percentage of our quarterly revenues from orders received during the quarter and “turned” for shipment within the quarter. Any shortfall in expected “turns” orders will adversely affect quarterly revenues. There are many factors that can cause a shortfall in turns orders, including declines in general economic conditions or the businesses of our customers, excess inventory in the channel, and conversion of our products to ASICs or other competing products for price or other reasons. In addition, we sometimes book a disproportionately large percentage of turns orders during the final weeks of the quarter. Any failure to receive, or delay in receiving, expected turns orders would adversely (and perhaps materially) affect quarterly revenues.

 

We sometimes derive a significant percentage of our quarterly revenues from shipments made in the final weeks of the quarter, making quarterly revenues difficult to predict.

 

We sometimes ship a disproportionately large percentage of our quarterly revenues during the final weeks of the quarter, and any delays in making those shipments are more likely to cause them to slip into the following quarter. Any failure to effect scheduled shipments by the end of a quarter would adversely (and perhaps materially) affect quarterly revenues.

 

Our military and aerospace shipments tend to be large and are subject to complex scheduling uncertainties, making quarterly revenues and operating results difficult to predict.

 

Orders from our military and aerospace customers tend to be large monetarily and irregular, which contributes to fluctuations in our net revenues and gross margins. These sales are also subject to more extensive governmental regulations, including greater export restrictions. Historically, it has been difficult to predict if and when export licenses will be granted, if required. In addition, products for military and aerospace applications require processing and testing that is more lengthy and stringent than for commercial applications, which increases the complexity of scheduling and forecasting as well as the risk of failure. It is often impossible to determine before the end of processing and testing whether products intended for military or aerospace applications will pass and, if not, it is

generally not possible for replacements to be processed and tested in time for shipment during the same quarter. Any failure to effect scheduled shipments by the end of a quarter would adversely (and perhaps materially) affect quarterly revenues.

 

We derive a majority of our quarterly revenues from products resold by our distributors, making quarterly revenues difficult to predict.

 

We generate the majority of our quarterly revenues from sales made through distributors. Since we generally do not recognize revenue on the sale of a product to a distributor until the distributor resells the product, our quarterly revenues are dependent on, and subject to fluctuations in, shipments by our distributors. We are therefore highly dependent on the accuracy of shipment forecasts from our distributors in setting our quarterly revenue expectations. Any failure by our distributors to effect scheduled shipments by the end of a quarter would adversely (and perhaps materially) affect our quarterly revenues. We are also highly dependent on the timeliness and accuracy of resale reports from our distributors. Late or inaccurate resale reports, particularly in the last month of a quarter, contribute to our difficulty in predicting and reporting our quarterly revenues and/or operating results.

 

An unanticipated shortage of products available for sale may cause our quarterly revenues and/or operating results to fall short of expectations.

 

In a typical semiconductor manufacturing process, silicon wafers produced by a foundry are sorted and cut into individual die, which are then assembled into individual packages and tested. The manufacture, assembly, and testing of semiconductor products is highly complex and subject to a wide variety of risks, including defects in photomasks, impurities in the materials used, contaminants in the environment, and performance failures by personnel and equipment. In addition, we may not discover defects or other errors in new products until after we have commenced volume production. Semiconductor products intended for military and aerospace applications and new products, such as our Fusion, SmartFusion, ProASIC 3, and Igloo FPGAs, are often more complex and more difficult to produce, increasing the risk of manufacturing- and design-related defects. Our failure to effect scheduled shipments by the end of a quarter due to production difficulties or other unexpected supply constraints would adversely (and perhaps materially) affect our quarterly revenues.

 

Unanticipated increases, or the failure to achieve anticipated reductions, in the cost of our products may cause our quarterly operating results to fall short of expectations.

 

As is also common in the semiconductor industry, our independent wafer suppliers from time to time experience lower than anticipated yields of usable die. Wafer yields can decline without warning and may take substantial time to analyze and correct, particularly for a company like Actel that utilizes independent foundries, almost all of which are offshore. Yield problems are most common at new foundries (particularly when new technologies are involved) or on new processes or new products (particularly when new products and new processes are both involved). Our FPGAs are also manufactured using customized processing steps, which may increase the incidence of production yield problems as well as the amount of time needed to achieve satisfactory, sustainable wafer yields on new processes and new products. Lower than expected yields of usable die or other unanticipated increases in the cost of our products could reduce our gross margin, which would adversely affect (and perhaps materially) our quarterly operating results. In addition, in order to win designs, we generally must price new products on the assumption that manufacturing cost reductions will be achieved, which often do not occur as soon as expected. We also seek to reduce costs by negotiating price reductions with suppliers, increasing the level and efficiency of our testing and packaging operations, achieving economies of scale by means of higher production levels, and shrinking the die size of our products. The failure to achieve expected manufacturing or other cost reductions during a quarter could reduce our gross margin, which would adversely (and perhaps materially) affect our quarterly operating results. Also, if we discover defects or other errors in a new product that require us to “re-spin” some or all of the product’s photomask set, we must write-off the photomasks that are replaced. This type of expense is becoming more significant as the cost of photomasks continues to increase. The write-off of any photomasks will adversely, and perhaps materially, affect our operating results for the quarter in which the write-off is taken. The same is true of any other property and equipment write-offs. During the second quarter of 2009, for

example, we recorded non-cash asset impairment charges totaling $5.5 million for certain manufacturing fixed assets that were determined to be excess of current and expected future manufacturing requirements.

 

Unanticipated reductions in the average selling prices of our products may cause our quarterly revenues and operating results to fall short of expectations.

 

The semiconductor industry is characterized by intense price competition. The average selling price of a product typically declines significantly between introduction and maturity. We sometimes are required by competitive pressures to reduce the prices of our new products more quickly than cost reductions can be achieved. We also sometimes approve price reductions on specific direct sales for strategic or other reasons, and provide price concessions to our distributors for a portion of their original purchase price in order to permit them to address individual negotiations involving high-volume or competitive situations. Typically, a customer purchasing a small quantity of product for prototyping or development from a distributor will pay list price. However, a customer using our products in volume production will often negotiate a substantial price discount from the distributor. Under such circumstances, the distributor will in turn often negotiate and receive a price concession from Actel. This is a standard practice in the semiconductor industry and we provide some level of price concession to every distributor. We have also sometimes offered price reductions on certain products to reduce inventory levels. Unanticipated declines in the average selling prices of our products could cause our quarterly revenues and/or gross margin to fall short of expectations, which would adversely (and perhaps materially) affect our quarterly financial results.

 

In preparing our financial statements, we make good faith estimates and judgments that may change or turn out to be erroneous, making our financial results difficult to predict.

 

In preparing our financial statements in conformity with accounting principles generally accepted in the United States, we must make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. The most difficult estimates and subjective judgments that we make concern goodwill and long-lived asset impairment, income taxes, inventories, legal matters and loss contingencies, revenues, and stock-based compensation expense. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. If these estimates or their related assumptions change, our operating results for the periods in which we revise our estimates or assumptions could be adversely (and perhaps materially) affected. For example, during the second quarter of 2009, we determined (on the basis of our forecast of future taxable income and other relevant factors) that it was more likely than not that we would not be able to realize any of our net deferred tax assets. As a result, we recorded a tax provision for the second quarter of $23.8 million on a second quarter pre-tax loss of $21.4 million, the difference being due primarily to the valuation allowance recorded against 100% of our net deferred tax assets during the second quarter.

 

Our net inventories were $37.3 million at the end of 2009 compared with $60.6 million at end of 2008 and $35.6 million at the end of 2007. The $25.0 million (or 70%) increase in our net inventory during 2008 was due to a build-up of our new flash products, including Fusion, Igloo, and ProASIC3. We have historically built-up inventories of new products early in their life cycles, but the build-up in inventory for the new flash products during 2008 was particularly pronounced due to a conscious effort to support increased turns business and shorter lead times for the consumer products at which the new flash products are targeted. We experienced very strong booking for these products in the first half of 2008 and accordingly initiated a ramp-up in manufacturing. However, a significant amount of these orders were cancelled in the second half of 2008 as a result of the worldwide economic crisis. Beginning in August 2008, we reduced our wafer starts for flash products to the lowest levels practicable and have continued to restrict flash wafer starts based on inventory levels and forecast sales of flash products. However, in order to preserve our relationships with our foundries, we must continue to build certain minimum levels of flash products, so an extended period of time will probably be necessary in order to draw down inventory levels closer to historical norms. We believe our flash products are still attractive to our targeted customer base. We continue to focus our efforts on growing the flash business and are aggressively marketing our flash products in an effort to reduce our inventory. This may include promotional pricing for certain large volume orders, which may negatively

affect our gross margins. We are also monitoring market trends and significant events that may have an adverse effect on the carrying value of our inventory. Although we have been able to reduce some of our flash inventory in recent quarters, we determined (as part of our normal quarterly inventory review) that additional reserves for excess inventory of $13.3 million, $0.6 million, and $1.2 million were required as of the end of the second, third, and fourth quarters of 2009, respectively. If we conclude in the future that additional inventory write-downs are required, our operating results for the periods in which the write-downs occur would also be adversely (and perhaps materially) affected.

 

Risks Related to Our Business Strategies

 

Our short- and long-term revenues and operating results are dependent in large part upon the success of our business strategies, which include developing and offering FPGAs to markets in which we believe our technologies have a competitive advantage, such as the mixed-signal and value-based FPGA markets, and conducting more of our operations offshore (i.e., overseas) in order to reduce costs. Our failure to execute any of our business strategies, or the failure of any of our business strategies to achieve the desired results, could (and probably would) have an adverse (and perhaps material) effect on our business, financial condition, and/or operating results.

 

In order for us to sell an FPGA, our customer must incorporate our FPGA into the customer’s product in the design phase. We devote substantial resources, which we may not recover through product sales, to persuade potential customers to incorporate our FPGAs into new or updated products and to support their design efforts (including, among other things, providing design and development software). These efforts usually precede by many months (and often a year or more) the generation of FPGA sales, if any. In addition, the value of any design win depends in large part upon the ultimate success of our customer’s product in its market. Our failure to win sufficient designs, or the failure of the designs we win to generate sufficient revenues, could have a materially adverse effect on our business, financial condition, and/or operating results.

 

The products that we develop may fail to adequately address the markets at which they are targeted, or the markets that we target may fail to emerge or grow as much as we project, which might prevent us from winning sufficient customer designs to maintain or expand our business.

 

The market for our products is characterized by rapid technological change, product obsolescence, and price erosion, making the timely introduction of new or improved products critical to our success. Our product development and marketing strategy is to define, develop, and offer FPGAs to markets in which we believe that our nonvolatile flash- and antifuse-based technologies have a competitive advantage. Our strategy involves considerable risk because our unique technologies and products can take years to develop (if at all), and markets that we target may fail to develop as we predict. Our failure to design, develop, market, and sell new or improved products that satisfy customer needs, compete effectively, and generate acceptable margins may adversely (and perhaps materially) affect our business, financial condition, and/or operating results.

 

The Actel Fusion and SmartFusion mixed-signal FPGAs present numerous significant challenges.

 

Our experience generally suggests that the development and market risks related to new products are greatest when we attempt to develop products based in whole or in part on technologies with which we have limited experience. During 2005, we introduced our Actel Fusion mixed-signal technology, which integrates analog capabilities, flash memory, and FPGA fabric into a single mixed-signal FPGA that may be used with soft processor cores. Before the development of Actel Fusion mixed-signal FPGAs, we had limited experience with analog circuitry and soft processor cores and no experience with mixed-signal FPGAs. As our experience also suggests, the development and market risks related to the second-generation product, SmartFusion, ought to be significantly lower.

 

To realize the advantages of being the initial entrant in the mixed-signal FPGA market, we needed to understand the market, the competition, and the value proposition; identify the early adopters and understand their buying process, decision criteria, and support requirements; and select the appropriate sales channels and provide the appropriate customer service, logistical, and technical support, including training. Meeting these challenges has been a priority for Actel generally and for our sales and marketing organizations in particular. While Actel Fusion

has achieved limited success, a great deal of understanding and experience has been gained, which have been or are being applied to SmartFusion. Nonetheless, the risks associated with the market acceptance of SmartFusion are still substantial. When entering a new market, the first-mover typically faces the greatest technological and market challenges, and that remains true of the mixed-signal FPGA market. Our failure to meet these challenges could have a materially adverse effect on our business, financial condition, and/or operating results.

 

Our gross margin may decline as we increasingly compete with ASICs and serve the value-based market.

 

The price we can charge for our products is constrained principally by our competition. While it has always been intense, we believe that price competition for new designs is increasing. This may be due in part to the transition toward high-level design methodologies. Designers can now wait until later in the design process before selecting a PLD or ASIC and it is easier to convert between competing PLDs or between a PLD and an ASIC. The increased price competition may also be due in part to the increasing penetration of PLDs into price-sensitive markets previously dominated by ASICs. We have strategically targeted many of our products at the value-based market, which is defined primarily by low prices. If our strategy is successful, we will generate an increasingly greater percentage of our net revenues from low-price products, which may make it more difficult to maintain gross margin at our historic levels. In addition, gross margins on new products are generally lower than on mature products. Thus, if we generate a greater percentage of our net revenues from new products, our overall gross margin could be adversely affected. We have also sometimes offered price reductions on certain products to reduce inventory levels. Any long-term decline in our overall gross margin may have an adverse effect on our operating results.

 

Our restructuring plan may not properly realign our cost structure and our increased reliance on offshore and outsourced operations may adversely affect our business, financial condition, and/or operating results.

 

During the first quarter of 2009, we announced a Company-wide restructuring plan that, in conjunction with cost-reduction initiatives taken in the fourth quarter of 2008, is expected to result in a quarterly reduction in expenses of approximately $6.5 million in the third quarter of 2010 compared with the third quarter of 2008. We estimate that approximately $4.5 million of the quarterly reductions will be in operating spending and that the balance of savings will be in cost of goods sold. To date, we have recorded approximately $5.0 million for severance and other costs related to reductions in force and $5.5 million in other restructuring costs. We expect to record additional charges of approximately $0.5 million by the third quarter of 2010, when the restructuring will be substantially complete. If we experience expenses in excess of what we anticipate in connection with these restructuring activities (such as unanticipated costs associated with closing a facility), or if we experience unanticipated inefficiencies as a result of these restructuring activities (such as excessive delays in developing new products caused by reduced headcount), our business, financial condition, and/or operating results could be adversely (and perhaps materially) affected.

 

In addition, part of our restructuring plan involves increased offshoring and outsourcing, which involves numerous risks, including operational business issues such as productivity, efficiency, and quality; geographic, cultural, and communication issues; and information security, intellectual property protection, and other legal issues. The increased offshoring and outsourcing activities will also be subject to the general uncertainties associated with international business operations, including trade barriers and other restrictions; governmental regulations (including taxation) and changes in governmental regulations (including trade policies); currency exchange fluctuations; war and other military activities; terrorism; changes in social, political, or economic conditions; and other disruptions or delays in production or shipments. Any of these risks could render our offshoring and outsourcing plans ineffective, which could have an adverse (and perhaps material) effect on our business, financial condition, and/or operating results.

 

Risks Related to Defective Products

 

Our products are complex and may contain errors, manufacturing defects, design defects, or otherwise fail to comply with our specifications, particularly when first introduced or as new versions are released. Our new products are being designed to use ever more advanced manufacturing processes, adding cost, complexity, and elements of

experimentation to the development, particularly in the areas of mixed-voltage and mixed-signal design. We rely primarily on our in-house personnel to design test operations and procedures to detect any errors prior to delivery of our products to customers.

 

Any error or defect in our products could have a material adverse effect on our business, financial condition, and operating results.

 

If problems occur in the operation or performance of our products, we may experience delays in meeting key introduction dates or scheduled delivery dates to our customers, in part because our products are manufactured by third parties. These problems could also cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from our product development efforts, and cause significant customer-relations problems and impair our business reputation. Any error or defect might require product replacement or recall or obligate us to accept product returns. Any of the foregoing could have an adverse (and perhaps material) effect on our financial results and business in the short and/or long term.

 

Any product liability claim could pose a significant risk to our business, financial condition, and operating results.

 

Product liability claims may be asserted with respect to our products. Our products are typically sold at prices that are significantly lower than the cost of the end-products into which they are incorporated. A defect or failure in our product could cause failure in our customer’s end-product, so we could face claims for damages that are much higher than the revenues and profits we receive from the products involved. In addition, product liability risks are particularly significant with respect to aerospace, automotive, and medical applications because of the risk of serious harm to users of those products. Any product liability claim, whether or not determined in our favor, can result in significant expense, divert the efforts of our technical and management personnel, and harm our business. In the event of an adverse settlement of any product liability claim or an adverse ruling in any product liability litigation, we could incur significant monetary liabilities, which may not be covered by any insurance that we carry and might have a materially adverse effect on our financial condition and/or operating results.

 

Risks Related to New Products

 

The market for our products is characterized by rapid technological change, product obsolescence, and price erosion, making the timely introduction of new or improved products critical to our success. Our failure to design, develop, market, and sell new or improved products that satisfy customer needs, compete effectively, and generate acceptable margins may adversely affect our business, financial condition, and/or operating results.

 

Numerous factors can cause the development or introduction of new products to fail or be delayed.

 

To develop and introduce a product, we must successfully accomplish all of the following:

 

 

 

Each of these steps is difficult and subject to failure or delay, and the failure or delay of any step can cause the failure or delay of the entire development and introduction. In addition to failing to meet our development and introduction schedules for new products or the supporting software or hardware, our new products may not gain market acceptance, and we may not respond effectively to new technological changes or new product announcements by others. Any failure to successfully define, develop, market, manufacture, assemble, test, or program competitive new products could have a materially adverse effect on our business, financial condition, and/or operating results.

 

New products are subject to greater design and operational risks.

 

Our future success is highly dependent upon the timely development and introduction of competitive new products at acceptable margins. However, there are greater design and operational risks associated with new products. The inability of our wafer suppliers to produce advanced products; delays in commencing or maintaining volume shipments of new products; the discovery of product, process, software, or programming defects or failures; and any related product returns could each have a materially adverse effect on our business, financial condition, and/or results of operation.

 

New products are subject to greater technology risks.

 

As is common in the semiconductor industry, we have experienced, and expect to experience in the future, difficulties and delays in achieving satisfactory, sustainable yields on new products. The fabrication of antifuse and flash wafers is complex, requiring a high degree of technical skill, state-of-the-art equipment, and effective cooperation between Actel and the foundry to produce acceptable yields. Minute impurities, errors in any step of the fabrication process, defects in the photomasks used to print circuits on a wafer, and other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be non-functional. Yield problems increase the cost of our new products as well as time it takes us to bring them to market, which can create inventory shortages and dissatisfied customers. Any prolonged inability to obtain adequate yields or make deliveries of new products could have a materially adverse effect on our business, financial condition, and/or operating results.

 

New products generally have lower gross margins.

 

Our gross margin is the difference between the amount it costs us to make our products and the revenues we receive from the sale of those products. One of the most important variables affecting the cost of our products is manufacturing yields. With our customized antifuse and flash manufacturing process requirements, we almost invariably experience difficulties and delays in achieving satisfactory, sustainable yields on new products. Until satisfactory yields are achieved, gross margins on new products are generally lower than on mature products. We have also sometimes offered price reductions on certain products to reduce inventory levels. The lower gross margins typically associated with new products could have a materially adverse effect on our operating results.

 

Risks Related to Competitive Disadvantages

 

The semiconductor industry is intensely competitive. Our competitors include suppliers of ASICs, CPLDs, and FPGAs. Our biggest direct competitors are Xilinx, Altera, and Lattice, all of which are suppliers of CPLDs and SRAM-based FPGAs. Altera and Lattice have announced the development of FPGAs manufactured on embedded flash processes. We also directly compete with QuickLogic, a supplier of antifuse-based FPGAs. In addition, we face competition from suppliers of logic products based on new or emerging technologies. While we seek to monitor developments in existing and emerging technologies, our technologies may not remain competitive. We also face competition from companies that specialize in converting our products into ASICs.

Many of our current and potential competitors are larger and have more resources.

 

We are much smaller than Xilinx and Altera, which have broader product lines, more extensive customer bases, and substantially greater financial and other resources. Additional competition is also possible from major domestic and international semiconductor suppliers, all of which are larger and have broader product lines, more extensive customer bases, and substantially greater financial and other resources than Actel, including the capability to manufacture their own wafers. We may not be able to overcome these competitive disadvantages.

 

Our antifuse technology is not reprogrammable, which is a competitive disadvantage in most cases.

 

All existing FPGAs not based on antifuse technology and certain CPLDs are reprogrammable. The one-time programmability of our antifuse FPGAs is necessary or desirable in some applications, but logic designers generally prefer to prototype with a reprogrammable logic device. This is because the designer can reuse the device if an error is made. The visibility associated with discarding a one-time programmable device often causes designers to select a reprogrammable device even when an alternative one-time programmable device offers significant advantages. This bias in favor of designing with reprogrammable logic devices appears to increase as the size of logic devices increase. We have attempted to overcome this competitive disadvantage by offering reprogrammable flash devices, but antifuse FPGAs account for the bulk of our revenues and will continue to do so for some time.

 

Our flash and antifuse technologies are not manufactured on standard processes, which is a competitive disadvantage.

 

Our antifuse-based FPGAs and (to a lesser extent) flash-based FPGAs are manufactured using customized steps that are added to otherwise standard manufacturing processes of independent wafer suppliers. There is considerably less operating history for the customized process steps than for the foundries’ standard manufacturing processes. Our dependence on customized processing steps means that, in contrast with competitors using standard manufacturing processes, we generally have more difficulty establishing relationships with independent wafer manufacturers; take longer to qualify a new wafer manufacturer; take longer to achieve satisfactory, sustainable wafer yields on new processes; may experience a higher incidence of production yield problems; must pay more for wafers; and may not obtain early access to the most advanced processes. Any of these factors could be a material disadvantage against competitors using standard manufacturing processes. As a result of these factors, our products typically have been fabricated using processes at least one generation behind the processes used by competing products. As a consequence, we generally have not fully realized the benefits of our technologies. Although we generally attempt to obtain earlier access to advanced processes, we may not be able to overcome these competitive disadvantages.

 

Risks Related to Events Beyond Our Control

 

Our performance is subject to events or conditions beyond our control, and the performance of each of our foundries, suppliers, subcontractors, distributors, agents, and customers is subject to events or conditions beyond their control. These events or conditions include labor disputes, acts of terrorists, war or other military conflicts, blockades, insurrections, riots, epidemics, quarantine restrictions, landslides, lightning, earthquakes, fires, storms, floods, washouts, arrests, civil disturbances, restraints by or actions of governmental bodies (including export, import, and security restrictions on information, material, personnel, equipment, software, and the like), breakdowns of plant or machinery, and inability to obtain transport or supplies. These events or conditions could impair our operations, which may have a materially adverse effect on our business, financial condition, and/or operating results.

 

Our operations and those of our partners are located in areas subject to volatile natural, economic, social, and political conditions.

 

Our corporate offices are located in California, which has been subject to power outages and shortages. More extensive power shortages in the state could disrupt our operations and interrupt our research and development activities. Our foundry partners in Asia as well as our operations in California are located in areas that have been seismically active in the recent past. In addition, many of the countries outside of the United States in which our

foundry partners and assembly and other subcontractors are located have unpredictable and potentially volatile economic, social, and/or political conditions. The occurrence of these or similar events or circumstances could disrupt our operations and may have a materially adverse effect on our business, financial condition, and/or operating results.

 

We have only limited insurance coverage.

 

Our insurance policies provide coverage for only certain types of losses and may not be adequate to fully offset even covered losses. If we were to incur substantial liabilities not adequately covered by insurance, our business, financial condition, and/or operating results could be adversely (and perhaps materially) affected.

 

Risks Related to Dependence on Third Parties

 

We rely heavily on, but generally have little control over, our independent foundries, suppliers, subcontractors, and distributors, whose interests may diverge from our interests.

 

Our independent wafer manufacturers may be unable or unwilling to satisfy our needs in a timely manner, which could harm our business.

 

We do not manufacture any of the semiconductor wafers used in the production of our FPGAs. Our wafers are currently manufactured by GlobalFoundries Inc. (formerly Chartered Semiconductor Manufacturing Ltd) in Singapore, Infineon Technologies AG in Germany, Panasonic Corporation (formerly Matsushita Electric Industrial Co. Ltd.) in Japan, and United Microelectronics Corporation (UMC) in Taiwan. Our reliance on independent wafer manufacturers to fabricate our wafers involves significant risks, including lack of control over capacity allocation, delivery schedules, the resolution of technical difficulties limiting production or reducing yields, and the development of new processes. Although we have supply agreements with some of our wafer manufacturers, a shortage of raw materials or production capacity could lead any of our wafer suppliers to allocate available capacity to other customers, or to internal uses in the case of Infineon, which could impair our ability to meet our product delivery obligations and may have a materially adverse effect on our business, financial condition, and/or operating results.

 

Our limited volume and customized process requirements generally make us less attractive to independent wafer manufacturers.

 

The semiconductor industry has from time to time experienced shortages in manufacturing capacity. When production capacity is tight, the relatively small number of wafers that we purchase from any foundry and the customized process steps that are necessary for our technologies put us at a disadvantage to foundry customers who purchase more wafers manufactured on standard processes. Our capability to shrink the die size of our FPGAs is dependent on the availability of more advanced manufacturing processes. Due to the customized steps involved in manufacturing our FPGAs, we typically obtain access to new manufacturing processes later than our competitors using standard manufacturing processes. No assurance can be given that our efforts to reduce costs by improving wafer yields will be successful. To secure an adequate supply of wafers, we may consider various transactions, including the use of substantial nonrefundable deposits, contractual purchase commitments, equity investments, or the formation of joint ventures. Any of these transactions could have a materially adverse effect on our business, financial condition, and/or operating results.

 

Identifying and qualifying new independent wafer manufacturers is difficult and might be unsuccessful.

 

If our current independent wafer manufacturers were unable or unwilling to manufacture our products as required, we would need to identify and qualify additional foundries. No additional wafer foundries may be able or willing to satisfy our requirements on a timely basis. Even if we were able to identify a new third-party manufacturer, the costs associated with manufacturing our products may increase. In any event, the qualification process typically takes one year or longer, which could cause product shipment delays, and qualification may not be successful. Any of these developments could have a materially adverse effect on our business, financial condition, and/or operating results.

Our independent assembly subcontractors may be unable or unwilling to meet our requirements, which could delay product shipments and result in the loss of customers or revenues.

 

We rely primarily on foreign subcontractors for the assembly and packaging of our products and, to a lesser extent, for the testing of our finished products. Our reliance on independent subcontractors involves certain risks, including lack of control over capacity allocation and delivery schedules. We generally rely on one or two subcontractors to provide particular services for each product and from time to time have experienced difficulties with the timeliness and quality of product deliveries. We have no long-term contracts with our subcontractors and certain of those subcontractors sometimes operate at or near full capacity. Any significant disruption in supplies from, or degradation in the quality of components or services supplied by, our subcontractors could have a materially adverse effect on our business, financial condition, and/or operating results.

 

Our independent software and hardware developers and suppliers may be unable or unwilling to satisfy our needs in a timely manner, which could impair the introduction of new products or the support of existing products.

 

We are dependent on independent software and hardware developers for the design, development, supply, maintenance, and support of some of our analog capabilities, IP cores, design and development software, programming hardware, design diagnostics and debugging tool kits, and demonstration boards (or certain elements of those products). Our reliance on independent developers involves certain risks, including lack of control over delivery schedules and customer support. Any failure of or significant delay by our independent developers to complete software and/or hardware under development in a timely manner could disrupt the release of our software and/or the introduction of our new products, which might be detrimental to the capability of our new products to win designs. Any failure of or significant delay by our independent suppliers to provide updates or customer support could disrupt our ability to ship products or provide customer support services, which might result in the loss of revenues or customers. Any of these disruptions could have a materially adverse effect on our business, financial condition, and/or operating results.

 

Our future performance will depend in part on the effectiveness of our independent distributors in marketing, selling, and supporting our products.

 

In 2009, sales made through distributors accounted for 70% of our net revenues, compared with 74% for 2008 and 77% for 2007. Our distributors offer products of several different companies, so they may reduce their efforts to win new designs or sell our products or give higher priority to other products. This is particularly a concern with respect to any distributor that also sells products of our direct competitors. A reduction in design wins or sales effort, termination of relationship, failure to pay for products, or discontinuance of operations because of financial difficulties or for other reasons by one or more of our current distributors could have a materially adverse effect on our business, financial condition, and/or operating results.

 

Distributor contracts generally can be terminated on short notice.

 

Although we have contracts with our distributors, the agreements are terminable by either party on short notice. Avnet accounted for 35% of our net revenues in 2009 compared with 36% in 2008 and 40% in 2007. The loss of Avnet as a distributor, or a significant reduction in the level of design wins or sales generated by Avnet, could have a materially adverse effect on our business, financial condition, and/or operating results.

 

Fluctuations in inventory levels at our distributors can affect our operating results.

 

Our distributors occasionally build inventories in anticipation of significant growth in sales and, when such growth does not occur as rapidly as anticipated, substantially reduce the amount of product ordered from us in subsequent quarters. Such a slowdown in orders generally reduces our gross margin because we are unable to take advantage of any manufacturing cost reductions while the distributor depletes its inventory.

Risk Related to the Conduct of International Business

 

Substantially all of our operations, an increasing proportion of our internal functions, and a significant portion of our sales are subject to the uncertainties associated with international business operations.

 

We depend on international operations for almost all of our products and will become increasingly dependent on international employees and contractors for many of our functions.

 

We purchase all of our wafers from foreign foundries and have almost all of our commercial products assembled, packaged, and tested by subcontractors located outside of the United States. In addition, beginning in the fourth quarter of fiscal 2008, we initiated a restructuring program in order to reduce our operating costs and focus our resources on key strategic priorities. A part of our restructuring plan involves increased offshoring, as a result of which many of our internal engineering, marketing, sales, and support functions will be conducted by employees located outside of the United States, and increased outsourcing, as a result of which many of our operational functions will be conducted by contractors located outside of the United States. These activities are subject to the uncertainties associated with international business operations, including trade barriers and other restrictions, changes in trade policies, governmental regulations, currency exchange fluctuations, reduced protection for intellectual property, war and other military activities, terrorism, changes in social, political, or economic conditions, and other disruptions or delays in production or shipments, any of which could have a materially adverse effect on our business, financial condition, and/or operating results. Our employees and facilities located outside of the United States are also subject to local regulation.

 

We depend on international sales for a substantial portion of our revenues.

 

Sales to customers outside North America accounted for 48% of net revenues in 2009, compared with 51% in 2008 and 50% in 2007, and we expect that international sales will continue to represent a significant portion of our total revenues. International sales are subject to the risks described above as well as generally longer payment cycles, greater difficulty collecting accounts receivable, and currency restrictions. We also maintain foreign sales offices to support our international customers, distributors, and sales representatives, which are subject to local regulation.

 

In addition, international sales are subject to the export, import, and other security laws and regulations of the United States and other countries. Unlike our older RTSX-S space-grade FPGAs, our newer RTAX-S space-grade FPGAs are subject to the International Traffic in Arms Regulations (ITAR), which are administered by the U.S. Department of State. ITAR controls not only the export of products, but also the export of related technical data and defense services as well as foreign production. While we believe that we have obtained and will continue to obtain all required licenses for RTAX-S FPGA exports, we have undertaken corrective actions with respect to the other ITAR controls and are implementing improvements in our internal compliance program. If the corrective actions and improvements were to fail or be ineffective for a prolonged period of time, it could have a materially adverse effect on our business, financial condition, and/or operating results. Changes in United States export laws or regulations (or in the administration of such laws and regulations) that require us to obtain additional export licenses can cause significant shipment delays, as was the case in connection with a recent determination by the U.S. Department of State that our RTSX-SU space-grade FPGAs (a slightly modified version of our RTSX-S FPGAs manufactured for Actel by UMC in Taiwan) are subject to the ITAR. In addition, the fact that our RTAX-S and RTAX-SU space-grade FPGAs are ITAR-controlled make them less attractive to foreign customers, which could have a materially adverse effect on our business, financial condition, and/or operating results. Any future restrictions or assessments imposed by the United States or any other country on our international sales or sales offices could have a materially adverse effect on our business, financial condition, and/or operating results.

 

Risk Related to Economic and Market Fluctuations

 

We have experienced substantial period-to-period fluctuations in revenues and operating results due to conditions in the overall economy, in the general semiconductor industry, in our major markets, and at our major customers. We may again experience these fluctuations, which could be adverse and may be severe.

Our business has been, and may in the future be, adversely affected by economic downturns.

 

During the second half of 2008, the global economy experienced a downturn due to the subprime lending crisis, general credit market crisis, collateral effects on the finance and banking industries, concerns about liquidity, slower economic activity, increased unemployment rates, decreased consumer confidence, reduced corporate profits and capital spending, and generally adverse business conditions. The worldwide economic crisis caused many of our customers to curtail their spending, which in turn caused sharp declines in our revenues and operating results. Any future downturns in the global economy may have similar adverse effects on our business, financial condition, and/or operating results.

 

Our revenues and operating results may be adversely affected by future downturns in the semiconductor industry.

 

The semiconductor industry historically has been cyclical and periodically subject to significant economic downturns, which are characterized by diminished product demand, accelerated price erosion, and overcapacity. Beginning in the fourth quarter of 2000, we experienced (and the semiconductor industry in general experienced) reduced bookings and backlog cancellations due to excess inventories at communications, computer, and consumer equipment manufacturers and a general softening in the overall economy. During this downturn, which was severe and prolonged, we experienced lower revenues, which had a substantial negative effect on our operating results. Any future downturns in the semiconductor industry may have a similar adverse effect on our business, financial condition, and/or operating results.

 

Our revenues and operating results may be adversely affected by future downturns in the military and aerospace market.

 

We estimate that sales of our products to customers in the military and aerospace industries, which carry higher overall gross margins than sales of products to other customers, accounted for 41% of our net revenues in 2009 compared with 38% in 2008 and 32% in 2007. Any future downturn in the military and aerospace market could have a materially adverse effect on our revenues and/or operating results.

 

Our revenues and/or operating results may be adversely affected by future downturns at any of our major customers.

 

A relatively small number of customers are responsible for a significant portion our net revenues. We have experienced periods in which sales to one or more of our major customers declined significantly as a percentage of our net revenues. We believe that sales to a limited number of customers will continue to account for a substantial portion of net revenues in future periods. The loss of a major customer, or decreases or delays in shipments to major customers, could have a materially adverse effect on our business, financial condition, and/or operating results.

 

We are exposed to fluctuations in the market values of our investment portfolio.

 

Our investments are subject to interest rate and other risks. Our investment portfolio consists primarily of asset-backed obligations, corporate bonds, floating-rate notes, and federal and municipal obligations. An increase in interest rates could subject us to a decline in the market value of our investments. This risk is mitigated by our ability to hold these investments for a period of time sufficient to recover the carrying value of the investment, which may not be until maturity. In addition, if the issuers of our investment securities default on their obligations, or their credit ratings are negatively affected by liquidity, credit deterioration or losses, financial results, or other factors, the value of our investments could decline and result in a material impairment. To mitigate these risks, we invest only in high credit quality debt securities with average maturities (when purchased) of less than two years. We also limit, as a percentage of total investments, our investment in any one issuer and in corporate issuers as a group.

 

In the event that the carrying value of the investment exceeds its fair value and the decline in value is determined to be other than temporary, the carrying value is reduced to its current fair market value. Due to the sale of a bond in January 2010 at a loss of $0.3 million, we recognized an investment loss of $0.3 million as of January 3, 2010. We continue to monitor our investments closely to determine if additional information becomes available that may have an adverse impact on the fair value and ultimate realizability of our investments. If we concluded that any

of our remaining investments were other-than-temporarily impaired, our financial results for the periods in which the write-downs occurred would be adversely (and perhaps materially) affected.

 

Other Risks

 

We may be materially and adversely affected by changing rules and practices.

 

Pending or new accounting pronouncements, corporate governance or public disclosure requirements, or tax laws or regulatory rulings, environmental or safety regulations, or rulings, or other federal, state, local, or foreign laws, regulations, rulings, or practices could have an effect, possibly material and adverse, on our business, financial condition, and/or operating results. Any change in accounting pronouncements, corporate governance or public disclosure requirements, taxation or other rules or practices, as well as any change in the interpretation of existing pronouncements, requirements, or rules or practices, may call into question our SEC or tax filings or other compliance efforts and could affect our treatment and reporting of transactions completed before the change.

 

We may be unable to comply with the requirements of the Sarbanes-Oxley Act of 2002 and more recent related corporate governance and public disclosure requirements.

 

We are committed to maintaining high standards of corporate governance and public disclosure, and therefore have invested the resources necessary to comply with the evolving laws, regulations, and standards. This investment has resulted in increased general and administrative expenses as well as a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations, and standards differ from the activities intended by regulatory or governing bodies, we might be subject to lawsuits or sanctions or investigation by regulatory authorities, such as the SEC or The Nasdaq Global Market, and our reputation may be harmed.

 

We evaluated our internal controls systems in order to allow management to report on, and our independent public accountants to attest to, our internal controls as required by Section 404 of the Sarbanes-Oxley Act. In performing the system and process evaluation and testing required to comply with the management certification and auditor attestation requirements of Section 404, we incurred significant additional expenses, which adversely affected our operating results and financial condition and diverted a significant amount of management’s time. While we believe that our internal control procedures are adequate, we may not be able to continue complying with the requirements relating to internal controls or other aspects of Section 404 in a timely fashion. If we were not able to comply with the requirements of Section 404 in a timely manner in the future, we may be subject to lawsuits or sanctions or investigation by regulatory authorities. Any such action could adversely affect our financial results and the market price of our Common Stock. In any event, we expect that we will continue to incur significant expenses and diversion of management’s time to comply with the management certification and auditor attestation requirements of Section 404.

 

Any acquisition we make may harm our business, financial condition, and/or operating results.

 

In pursuing our business strategy, we may acquire other products, technologies, or businesses from third parties. Identifying and negotiating these acquisitions may divert substantial management time away from our operations. An acquisition could absorb substantial cash resources, require us to incur or assume debt obligations, and/or involve the issuance of Actel equity or debt securities. The issuance of additional equity securities may dilute, and could represent an interest senior to, the rights of the holders of our Common Stock. An acquisition would involve subsequent deal-related expenses and could involve significant write-offs (possibly resulting in a loss for the fiscal year(s) in which taken) and would require the amortization of any identifiable intangibles over a number of years, which would adversely affect earnings in those years. Any acquisition would require attention from our management to integrate the acquired entity into our operations, may require us to develop expertise outside our existing business, and could result in departures of management from either Actel or the acquired entity. An acquired entity could have unknown liabilities, and our business may not achieve the results anticipated at the time of the acquisition. The occurrence of any of these circumstances could disrupt our operations and may have a materially adverse effect on our business, financial condition, and/or operating results.

We may face significant business and financial risk from claims of intellectual property infringement asserted against us, and we may be unable to adequately obtain or enforce our own intellectual property rights.

 

As is typical in the semiconductor industry, we are notified from time to time of claims that we may be infringing patents or other intellectual property rights owned by others. As we sometimes have in the past, we may obtain licenses under patents or other intellectual property rights that we are alleged to infringe. Although holders of patents or other intellectual property rights commonly offer licenses to alleged infringers, we may not be offered a license for patents or other intellectual property rights that we are alleged to infringe or we may not find the terms of any offered licenses acceptable. We may not be able to resolve any claim of infringement, and the ultimate resolution of any claim may have a materially adverse effect on our business, financial condition, and/or operating results.

 

Our failure to resolve any claim of infringement could result in litigation or arbitration. In addition, we have agreed to defend our customers from and indemnify them against claims that our products infringe the patent or other intellectual rights of third parties. All litigation and arbitration proceedings, whether or not determined in our favor, can result in significant expense and divert the efforts of our technical and management personnel. In the event of an adverse ruling in any litigation or arbitration involving intellectual property, we could suffer significant (and possibly treble) monetary damages, which could have a materially adverse effect on our business, financial condition, and/or operating results. We may also be required to discontinue the use of infringing processes; cease the manufacture, use, and sale or licensing of infringing products; expend significant resources to develop non-infringing technology; or obtain licenses under patents or other intellectual property rights that we are infringing. In the event of a successful claim against us, our failure to develop or license a substitute technology on commercially reasonable terms could also have a materially adverse effect on our business, financial condition, and/or operating results.

 

We have devoted significant resources to research and development and believe that the intellectual property derived from such research and development is a valuable asset important to the success of our business. We rely primarily on patent and trade secret laws to protect the intellectual property developed as a result of our research and development efforts. As part of the Company’s cost-reduction efforts, we expect to reduce our rate of patent application filings in 2010. Every year we abandon some of our existing U.S. and foreign patents and pending applications that we perceive to have lesser value. As part of the Company’s cost-reduction efforts, we expect to increase the number of existing patents and pending patent applications that we abandon in 2010. These cost-reduction measures may reduce our ability to protect our products by enforcing, or defend the Company by asserting, our intellectual property rights against others.

 

In addition to patent and trade secret laws, we rely on trademark and copyright laws in combination with nondisclosure agreements and other contractual provisions to protect our proprietary rights. The steps we have taken may not be adequate to protect our proprietary rights. In addition, the laws of certain territories in which our products are developed, manufactured, or sold, including Asia and Europe, may not protect our products and intellectual property rights to the same extent as the laws of the United States. Our failure to enforce our patents, trademarks, or copyrights or to protect our trade secrets could have a materially adverse effect on our business, financial condition, and/or operating results.

 

We may be unable to attract or retain the personnel necessary to successfully develop our technologies, design our products, or operate, manage, or grow our business.

 

Our success is dependent in large part on our ability to attract and retain key managerial, engineering, marketing, sales, and support employees. Particularly important are highly skilled design, process, software, and test engineers involved in the manufacture of existing products and the development of new products and processes. Our failure to recruit employees with the necessary technical or other skills or the loss of key employees could have a materially adverse effect on our business, financial condition, and/or operating results.

 

From time to time we have experienced growth in the number of our employees and the scope of our operations, resulting in increased responsibilities for management personnel. To manage future growth effectively, we will need to attract, hire, train, motivate, manage, and retain a growing number of employees. During strong

business cycles, we expect to experience difficulty in filling our needs for qualified engineers and other personnel. In addition, part of our restructuring plan involves increased offshoring, which will require us to attract and retain key managerial, engineering, marketing, sales, and support employees outside of the United States. Any failure to attract and retain qualified employees, or to manage our growth effectively, could delay product development and introductions or otherwise have a materially adverse effect on our business, financial condition, and/or operating results.

 

In February 2010, we announced that John C. East will retire as President and Chief Executive Officer of the Company and as a member of the Board of Directors. He will remain in his current role until a new Chief Executive Officer is in place, and will then serve as a consultant until August 2, 2011. Our Board of Directors has formed a committee to conduct a search for a new President and Chief Executive Officer. Mr. East will participate in the search, which will include both internal and external candidates. Our Board may not be able to identify and hire a suitable successor in the anticipated time period and the succession process may cause disruptions to our business.

 

We have some arrangements that may not be neutral toward a potential change of control and our Board of Directors could adopt others.

 

We have adopted an Employee Retention Plan that provides for payment of a benefit to our employees who hold unvested stock options, stock appreciation rights (SARs) or restricted stock units (RSUs) in the event of a change of control. Payment is contingent upon the employee remaining employed for six months after the change of control (unless the employee is terminated without cause during the six months). Each of our executive officers has also entered into a Management Continuity Agreement, which provides for the acceleration of stock options, SARs, and RSUs unvested at the time of a change of control in the event the executive officer’s employment is actually or constructively terminated other than for cause following the change of control. While these arrangements are intended to make executive officers and other employees neutral towards a potential change of control, they could have the effect of biasing some or all executive officers or employees in favor of a change of control.

 

Our Articles of Incorporation authorize the issuance of up to 5,000,000 shares of “blank check” Preferred Stock with designations, rights, and preferences determined by our Board of Directors. Accordingly, our Board is empowered, without approval by holders of our Common Stock, to issue Preferred Stock with dividend, liquidation, redemption, conversion, voting, or other rights that could adversely affect the voting power or other rights of the holders of our Common Stock. Issuance of Preferred Stock could be used to discourage, delay, or prevent a change in control. In addition, issuance of Preferred Stock could adversely affect the market price of our Common Stock.

 

On October 17, 2003, our Board of Directors adopted a Shareholder Rights Plan. Under the Plan, we issued a dividend of one right for each share of Common Stock held by shareholders of record as of the close of business on November 10, 2003. The provisions of the Plan can be triggered only in certain limited circumstances following the tenth day after a person or group announces acquisitions of, or tender offers for, 15% or more of our Common Stock. The Shareholder Rights Plan is designed to guard against partial tender offers and other coercive tactics to gain control of Actel without offering a fair and adequate price and terms to all shareholders. Nevertheless, the Plan could make it more difficult for a third party to acquire Actel, even if our shareholders support the acquisition.

 

Our stock price may decline significantly, possibly for reasons unrelated to our operating performance.

 

The stock markets broadly, technology companies generally, and our Common Stock in particular have historically experienced price and volume volatility. Our Common Stock may continue to fluctuate substantially on the basis of many factors, including:

 

 

Like many other stocks, the price of our Common Stock was adversely affected by the global economic crisis, and our stock price may similarly be subject to future declines.

 

If our stock price declines sufficiently, we may write down our goodwill, which could have a materially adverse affect on our operating results.

 

We account for goodwill and other intangible assets under FASB ASC 350, “Goodwill and Other Intangible Assets.” Under this standard, goodwill is tested for impairment annually or more frequently if certain events or changes in circumstances indicate that the carrying amount of goodwill exceeds its implied fair value. The two-step impairment test identifies potential goodwill impairment and measures the amount of a goodwill impairment loss to be recognized (if any). The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. We are a single reporting unit under FASB ASC 350, so we use an enterprise approach to determine our total fair value. Since the best evidence of fair value is quoted market prices in active markets, we start with our market capitalization as the initial basis for the analysis. We also consider other factors including control premiums from observable transactions involving controlling interests in comparable companies as well as overall market conditions. As long as we determine our total enterprise fair value is greater than our book value and we remain a single reporting unit, our goodwill will be considered not impaired, and the second step of the impairment test under FASB ASC 350 will be unnecessary. If our total enterprise fair value were to fall below our book value, we would proceed to the second step of the goodwill impairment test, which measures the amount of impairment loss by comparing the implied fair value of our goodwill with the carrying amount of our goodwill. As a result of this analysis, we may be required to write down our goodwill, and recognize a goodwill impairment loss, equal to the difference between the book value of goodwill and its implied fair value.

 

If our long-lived assets become impaired, our operating results will be adversely affected.

 

FASB ASC 350 also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable in accordance with FASB ASC 360, Impairment or Disposal of Long Live Assets. During the second quarter of 2009, we recorded non-cash asset impairment charges totaling $5.5 million for certain manufacturing fixed assets that were determined to be in excess of current and expected future manufacturing requirements. Circumstances may arise in the future, such as a sustained decline in our forecasted cash flows, indicating that the carrying value of other long-lived assets may be impaired. If we are required to record a charge to earnings because an impairment of our long-lived assets is determined, our operating results will be adversely effected.

 

 

None.

 

 

Our principal facilities and executive offices are located in Mountain View, California, in two buildings that comprise approximately 158,000 square feet. These buildings are leased through January 2014. We have two renewal options to extend the lease term by five years. In addition to our facility in Mountain View, we also lease sales offices in various countries around the world to support our worldwide customer base. We believe our facilities are adequate for our current requirements and the foreseeable future.

 

 

None.

 

 

Executive Officers

 

The following table identifies each of our executive officers:

 

 

Mr. East has served as our President and Chief Executive Officer since December 1988. From April 1979 until joining us, 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, Mr. East served in various marketing, manufacturing, and engineering positions for Fairchild Camera and Instrument Corporation, a semiconductor manufacturer.

 

Mr. Carson joined Actel in August 2009. Mr. Carson comes to Actel following a six-year tenure as senior vice president and CFO of Kulicke & Soffa, a global leader in the design and manufacture of semiconductor assembly equipment. Prior to that, he served as Vice President of Finance and Corporate Controller for Cypress Semiconductor. He also held various financial positions at Ephigraphx, Kraft Foodservice and Motorola Corporation.

 

Dr. Hamdy, one of our founders, was our 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 our Senior Vice President of Technology and Operations since September 1996. From November 1985 to July 1991, he held a number of management positions with our 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. Mubarak joined Actel in November 1992, was our Director of Product and Test Engineering until October 1997, and became our Vice President of Engineering in October 1997, our Senior Vice President of Engineering in February 2006, and our Senior Vice President of Engineering & Marketing in October 2007. From 1989 until joining us, 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.

 

Mr. Legenhausen joined Actel in October 2007 as Senior Vice President of Worldwide Sales. From 1990 until joining us, he held various management, sales, marketing and engineering positions with Cypress Semiconductor, a semiconductor manufacturer, with the most recent position of Vice President of Sales, Americas.

 

Mr. Farinaro joined Actel in August 1998 as Vice President & General Manager of Design Services. From February 1990 until joining us, 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 its spin-off, Plessey Electronic Systems Corporation.

Ms. McArthur joined Actel in July of 2000 as Vice President of Human Resources. From 1997 until joining us, she was Vice President of Human Resources at Talus Solutions. Before that, Ms. McArthur held senior human resource positions at Applied Materials from 1993 to 1997, at 3Com Corporation from 1987 to 1993, and at Saga Corporation from 1978 to 1986.

 

Mr. Van De Hey joined Actel in July 1993 as Corporate Counsel, became our Secretary in May 1994, and has been our 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 our outside legal counsel. From August 1985 until October 1988, he was an associate with the Cleveland office of Jones Day, a law firm.

 

Our executive officers are appointed by, and serve at the discretion of, our board of directors, subject to their rights under any contract of employment or other agreement. There are no immediate family relationships between or among any of our directors or our executive officers.

 

 

Our Common Stock has been traded on the Nasdaq Global Market under the symbol “ACTL” since our initial public offering on August 2, 1993. The following table sets forth, for the fiscal quarters indicated, the high and low sale prices per share of our Common Stock as reported on the Nasdaq Global Market.

 

 

The closing sale price of our Common Stock was $13.77 on March 10, 2010, and according to the records of our transfer agent, there were 113 shareholders of record on that date. A substantially greater number of holders of our stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.

 

Dividend Policy

 

We have never declared or paid a cash dividend on our Common Stock. Any future declaration of dividends is within the discretion of our Board of Directors and will be dependent on our earnings, financial condition, and capital requirements as well as any other factors deemed relevant by our Board of Directors.

Company Stock Performance

 

The following information shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulations 14A or 14C, or to the liabilities of Section 18 of the Exchange Act, except to the extent that Actel specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act or the Exchange Act.

 

The following graph shows a comparison of cumulative total return for Common Stock, The Nasdaq Stock Market (US), and Nasdaq Electronic Component Stocks. In preparing the graph, we assumed that $100 was invested on December 31, 2004, in (i) Actel’s Common Stock, (ii) The Nasdaq Stock Market (US) index, and (iii) the Nasdaq Electronic Component Stocks index, and that all dividends were reinvested.

 

Comparison of Cumulative Total Return

 

 

Shareholder returns over the indicated period should not be considered indicative of future shareholder returns. The closing sale price of our Common Stock on December 31, 2009, was $11.88. The closing sale price of our Common Stock on March 10, 2010, was $13.77.

 

The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below.

 

ACTEL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA

 

 

 

 

 

 

You should read the following discussion of our financial condition and results of operations in conjunction with our Consolidated Financial Statements and the related “Notes to Consolidated Financial Statements,” “Financial Statement Schedules,” and “Supplementary Financial Data” included in this Annual Report on Form 10-K. This Annual Report on Form 10-K, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and the future results of our Company that are based on current expectations, estimates, forecasts, and projections about the industry in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. These forward looking statements are made in reliance upon the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Factors that might cause or contribute to such differences include, but are

not limited to, those discussed in Item 1A of Part I of this Annual Report under the heading “Risk Factors”. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

 

Overview

 

The purpose of this overview is to provide context for the discussion and analysis of our financial statements that follows by briefly summarizing the most important known trends and uncertainties, as well as the key performance indicators, on which our executives are primarily focused for both the short and long term.

 

Actel Corporation designs, manufactures, and sells a range of FPGAs serving customers in the aerospace, avionics, communications, consumer, industrial and military markets. As the leading supplier of nonvolatile, low-power programmable technologies, Actel offers the industry’s lowest power FPGAs and unique mixed-signal FPGAs along with supporting tools to enable power-efficient design. Further, the security and reliability inherent to flash and antifuse technologies give Actel devices a competitive advantage in system critical applications.

 

 

• Semiconductor Industry

 

According to the Semiconductor Industry Association (“SIA”), total sales for 2009 were $226.3 billion compared with $248.6 billion reported for 2008 and a 2009 SIA forecast of $219.7 billion. According to the SIA, a strong focus on inventories throughout the supply chain mitigated the impact of the worldwide economic downturn and positioned the industry for growth as the global economy recovers. SIA projects that 2010 sales will grow by 10.2 percent to $242.1 billion in 2010 and by 8.4 percent to $262.3 billion in 2011.

 

• Logic Market

 

The logic market is highly fragmented and includes ASICs and PLDs. FPGAs are one type of PLD. Price, performance, reliability, power consumption, security, density, features, ease of use, and time to market determine the degree to which PLDs compete for specific applications. Unlike ASICs, which are customized for use in a specific application at the time of manufacture, PLDs are manufactured as standard components and customized “in the field,” allowing the same device type to be used for many different applications. Using software tools, users program their design into a PLD, resulting in lower development costs and inventory risks, shorter design cycles, and faster time to market.

 

• Technology

 

To a great extent, the characteristics of an FPGA are dictated by the technology used to make the device programmable. Devices based on nonvolatile flash or antifuse programming elements offer significant power, single-chip, live-at-power-up, security, and firm-error immunity advantages over volatile FPGAs based on SRAM technology.

 

• Flash

 

We believe that our long-term future lies with flash technology, which permits us to make FPGAs that are both nonvolatile and reprogrammable. Perhaps the single most important benefit of a nonvolatile flash-based FPGA is significantly reduced power consumption. While our flash technology is unique, the process is similar to standard embedded flash processes, so we are able to share much of the burden of developing and proving the process. We were the first, and are still the only, company to develop and sell flash-based FPGAs. Several suppliers of SRAM-based FPGAs claim to offer “single-chip, flash-based” solutions. However, many of these “hybrid” solutions are

merely combinations of flash memory components with the underlying SRAM FPGA technology. True flash-based FPGAs, like the ones we offer, have many significant advantages over SRAM-based devices including standby power, security, reliability, firm-error immunity, live at power up, and integration opportunities not available with standard SRAM technology such as embedded flash memory and high voltage analog.

 

• Antifuse

 

Antifuse FPGAs offer excellent advantages for system-critical military and aerospace applications in which reprogrammability is not required. For almost two decades, Actel FPGAs have been used in mission-critical applications, Earth-orbiting satellites and space exploration vehicles, and, our antifuse FPEAs continue to be designed into such systems.

 

• Strategy

 

Our strategy is to offer FPGAs to those markets in which our nonvolatile flash- and antifuse-based technologies have an inherent competitive advantage. Our strategy involves considerable risk as unique technologies and products can take years to develop, if at all, and markets that we target may fail to emerge. However, in addition to single-chip, live-at-power-up, security, and firm-error immunity benefits, we believe that our nonvolatile FPGA solutions offer substantial low-power advantages over volatile devices based on SRAM technology and we plan to exploit those advantages.

 

• Key Indicators

 

Although we measure the condition and performance of our business in numerous ways, the key quantitative indicators that we generally use to manage the business are bookings, design wins, margins, yields, and backlog. We also carefully monitor the progress of our product development efforts. Of these, we think that bookings and backlog are the best indicators of short-term performance and that designs wins and product development progress are the best indicators of long-term performance.

 

Our bookings (measured as end-customer and distributor orders placed on us) were lower in 2009 compared with 2008 by an amount commensurate with the year-to-year revenue decline. However, our bookings increased quarter-over-quarter in the fourth quarter, indicating expected higher revenues exiting 2009. Our backlog (which may be cancelled or rescheduled by customers on short notice without significant penalty) increased throughout the year and was at its highest point of the year as we exited 2009. The number of design wins achieved in 2009 was roughly flat compared with 2008, despite the adverse economic conditions in 2009. In addition, the estimated revenue per design win increased for the second consecutive year, indicating that we are winning more designs at larger, more strategic customers.

 

Results of Operations

 

The following table sets forth certain financial data from the Consolidated Statements of Operations expressed as a percentage of net revenues:

 

• Net Revenues

 

We derive our revenues primarily from the sale of FPGAs, which accounted for over 92% of net revenues in 2009, 95% in 2008 and 96% in 2007. Non-FPGA revenues are derived from our Protocol Design Services organization, royalties, and the licensing of software and sale of hardware used to design and program our FPGAs.

 

The Company generally does not use average selling price (ASP) as an internal measure due to the fact that, even within product families, there is a wide dispersion of selling prices and averages move as much from changes in the mix of customers and products as from actual changes in selling prices.

 

 

Net revenues in 2009 were $190.6 million, a 12.7% decline from 2008. This decrease was largely due to the worldwide economic downturn that affected all aspects of the semiconductor industry. The key drivers for the 12.7% decrease in net revenues were decreased volume for antifuse products and decreased selling prices for flash products, partially offset by increased volume for flash products and better pricing/mix for antifuse products.

 

Net revenues in 2008 were $218.4 million, a 10.8% increase over 2007. This increase was driven by a strong economy and an increased focus on selling products into the consumer market. The key drivers were increases in flash volume and antifuse pricing offset by decreases in antifuse volume and flash pricing.

 

We recognized approximately 70% of our net revenues through the distribution sales channel in 2009 compared with 74% in 2008 and 77% in 2007. We generally do not recognize revenue on product shipped to a distributor until the distributor resells the product to its customer.

 

Sales to customers outside the United States accounted for 48% of net revenues in 2009, 51% in 2008 and 50% in 2007 with European customers representing 25% of net revenues in 2009 compared with 27% of net revenues for 2008 and 29% for 2007.

 

• Gross Margin

 

 

Gross profit dollars dropped $28.9 million from 2008 to 2009. This was primarily due to two factors: the revenue reduction of $27.8 million and an inventory write off of $13.3 million dollars. The revenue decline was driven by the worldwide economic downturn. The inventory write down was also related to the worldwide economic downturn as we built inventory during 2008 to support business that did not materialize. Gross margin percent fell by 660 basis points, almost all due to the inventory write down.

 

Gross profit dollars increased by $14.0 million dollars from 2007 to 2008. This was largely driven by the revenue increase of $21.4 million dollars. Gross margin percent increased by 70 basis points.

 

We seek to reduce costs and improve gross margins by improving wafer yields, negotiating price reductions with suppliers, increasing the level and efficiency of our testing and packaging operations, achieving economies of scale by means of higher production levels, and increasing the number of die produced per wafer, principally by shrinking the die size of our products.

• Research and Development (R&D)

 

R&D expenditures were $60.7 million, or 31.9% of net revenues, in 2009 compared with $65.7 million, or 30.1% of net revenues, in 2008 and $63.7 million, or 32.3% of net revenues, in 2007. R&D spending in 2009 decreased due to decreases in salaries, payroll taxes and benefits as a result of the reductions in force of $1.7 million; the absence of bonus payouts of $1.2 million; and lower costs associated with material purchases of $1.9 million. R&D spending in 2008 included generally higher costs associated with expanded R&D efforts and increased headcount. Stock-based compensation expenses were $3.8 million in 2009 compared with $4.1 million in 2008 and $4.0 million in 2007.

 

Our R&D consists of circuit design, software development, and process technology activities. We believe that continued substantial investment in R&D is critical to maintaining a strong technological position in the industry. Since our FPGAs are manufactured using customized processes that require a substantial time to develop, our R&D expenditures will probably always be higher as a percentage of net revenues than that of our major competitors using standard manufacturing processes.

 

• Selling, General and Administrative (SG&A)

 

SG&A expenses in 2009 were $54.7 million, or 28.7% of net revenues, compared with $63.1 million, or 28.9% of net revenues, in 2008 and $63.1 million, or 32.0% of net revenues, in 2007. Costs associated with the Company’s stock option investigation and restatements were $0 in 2009, $1.6 million in 2008 and $5.5 million in 2007. SG&A costs decreased in 2009 due to decreases in salaries, payroll taxes and benefits as a result of the reductions in force of $2.8 million; lower selling costs, commissions and incentive compensation associated with the decrease in net revenues of $1.5 million; lower costs for outside services of $0.6 million; reduced spending due to cost-saving initiatives of $0.4 million; savings in stock compensation expenses of $1.0 million; and savings in professional fees of $1.6 million which related to the Company’s stock option investigation and restatements. Excluding the impact of the stock option investigation costs of $1.6 million in 2008 compared with $5.5 million in 2007, SG&A costs increased in 2008 due to higher selling costs, commissions and incentive compensation associated with the increase in net revenues. Stock-compensation expenses were $3.4 million in 2009 compared with $4.5 million in 2008 and $3.3 million in 2007.

 

• Restructuring Charge

 

During the first quarter of 2009, we announced a Company-wide restructuring plan that, in conjunction with cost-reduction initiatives taken in the fourth quarter of 2008, is expected to result in a quarterly reduction in expenses of approximately $6.5 million in the third quarter of 2010 compared with the third quarter of 2008. From the fourth quarter of 2008 through fiscal 2009, we have incurred approximately $5.0 million for severance and other costs related to reductions in force. In addition, the Company has recorded $5.5 million in restructuring costs related to asset impairments. The Company expects to record additional reduction in force charges of approximately $0.5 million during fiscal 2010 through the beginning of the third quarter of 2010, when the restructuring will be substantially complete. As of January 3, 2010, approximately $0.6 million in restructuring charges remain on our consolidated balance sheet and are included in “Accounts payable” and “Accrued compensation and employee benefits”.

 

Restructuring and asset impairment charges in 2009 were $8.1 million, or 4.2% of net revenues, compared with $2.4 million, or 1.1% of net revenues, in 2008. We recorded restructuring charges totaling $2.6 million and $2.4 million relating to termination benefits in 2009 and 2008, respectively. We recorded non-cash asset impairment charges totaling $5.5 million in 2009 for certain manufacturing fixed assets that were determined to be in excess of current and expected future manufacturing requirements.

 

• Amortization of Other Acquisition-Related Intangibles

 

Amortization of other acquisition-related intangibles was $0.8 million in both 2009 and 2008 and $0 in 2007. During the third quarter of fiscal 2008, the Company acquired $5.4 million of identified intangible assets in connection with the acquisition of Pigeon Point Systems.

• Interest Income and Other, Net

 

Interest income and other, net, was $3.3 million, $5.4 million and $8.6 million in 2009, 2008 and 2007, respectively. Our average investment portfolio balance was $141.2 million in 2009 compared with $155.0 million in 2008 and $162.9 million in 2007. For 2009, our average investment portfolio return was 2.8% compared with 4.7% in 2008 and 4.8% in 2007, resulting in lower interest income during fiscal 2009 as compared with prior years. As of January 3, 2010, the Company assessed its investments to determine if there were any other than temporary impairments (OTTI) apart from the OTTI recorded in fiscal 2009 relating to a corporate bond investment. As a result of the sale of a bond in January 2010 at a realized loss of $0.3 million, the Company recorded an OTTI loss of $0.3 million as of January 3, 2010. During 2008, we determined that one of our corporate bonds was other-than-temporarily impaired and therefore wrote down the investment to its fair market value. The impairment charge of $0.9 million was included in interest income and other, net, on our consolidated statement of operations for the year ended January 4, 2009. This contributed to the lower interest income recorded in 2008 compared with 2007. We invest funds not immediately required for operations in investment portfolios consisting primarily of corporate bonds, floating rate notes, and federal and municipal obligations. In periods where market interest rates are falling, and for some time after rates stabilize, we typically experience declines in interest income as our older debt investments at higher interest rates mature and are replaced by new investments at the lower rates available in the market.

 

• Tax Provision (Benefit)

 

Significant components affecting the effective tax rate include pre-tax net income or loss, federal R&D tax credits, non-deductible stock-based compensation, the state composite tax rate, and recognition of a valuation allowance against deferred tax assets.

 

Our tax provision for 2009 was $24.9 million based on pretax losses of $21.3 million. The difference between the effective tax rate and the statutory tax rate is due primarily to recognition of a valuation allowance of $31.6 million against the Company’s deferred tax assets and non-deductible stock-based compensation offset by research tax credits. The increase in the valuation allowance results from uncertainties surrounding the nature and timing of the taxable income required to realize deferred tax assets.

 

Our tax provision for 2008 was $13.8 million based on income before income taxes of $2.1 million. The difference between the effective tax rate and the statutory tax rate is due primarily to recognition of a valuation allowance of $12.7 million against a portion of the Company’s deferred tax assets, non-deductible stock-based compensation partially offset by research tax credits and state tax benefits. The increase in the valuation allowance results from uncertainties surrounding the nature and timing of the taxable income required to realize certain tax credits and net operating loss carry forwards.

 

Our tax benefit for 2007 was $0.6 million representing an effective tax rate of 17%. The difference between the effective tax rate and the statutory tax rate is due primarily to non-deductible stock-based compensation partially offset by research tax credits and state tax benefits.

 

Financial Condition

 

Our total assets were $307.0 million at the end of 2009 compared with $343.3 million at the end of 2008. The decrease in total assets was attributable principally to decreases in inventory, deferred tax assets and property and equipment, which were partially offset by an increase in cash, cash equivalents, accounts receivable and other assets. The following table sets forth certain financial data from the consolidated balance sheets expressed as the percentage change from January 4, 2009, to January 3, 2010.

 

 

• Cash, Cash Equivalents, and Investments

 

Our cash, cash equivalents, and short-term investments were $152.7 million at the end of 2009 compared with $146.6 million at the end of 2008. This increase of $6.1 million from the end of 2008 was due to $8.3 million of net cash provided by operating activities combined with $2.3 million of cash provided by financing activities, and $1.9 million of changes in short and long term investments which were partially offset by $5.8 million of cash used to purchase property and equipment.

 

Cash provided by operating activities for 2009 included adjustments for non-cash charges of $50.7 million for depreciation and amortization, asset impairment charges, stock based compensation costs and deferred income taxes and. These were partially offset by a net loss of $46.2 million; increases in accounts receivables of $75 million; increases in other assets, net, of $5.9 million; decreases in inventory of $23.3 million; decreases in accounts payable and other liabilities of $3.7 million; and decreases in deferred income of $1.4 million.

 

Cash provided by operating activities for 2008 included adjustments for non-cash charges of $21.7 million for depreciation and amortization and for non-cash stock compensation. These were partially offset by a net loss of $11.7 million; decreases in accounts receivable of $7.4 million; decreases in deferred tax assets of $12.8 million; increase in accounts payable and other liabilities of $5.7 million; increases in inventory of $24.6 million; increases in other assets, net, of $3.8 million; and decreases in deferred income of $1.9 million. The increase in inventory relates to the build-up of flash products.

 

Cash provided by operating activities for 2007 included non-cash charges of $22.0 million for depreciation and amortization, non-cash stock compensation and a charge against certain wafer prepayments. These were partially offset by a net loss of $2.9 million; decreases in accounts receivable of $3.9 million; decreases in inventory of $3.5 million; decreases in accounts payable and other liabilities of $8.6 million; increases in license obligations of $1.9 million; and decreases in deferred income of $3.2 million. The decreases in accounts payable and other liabilities is due primarily to payments made under accrued license obligations and payments of accruals for legal settlements recorded in 2006. Spending on property and equipment amounted to $13.0 million in 2007.

 

Cash proceeds from the issuance of Common Stock under employee stock plans amounted to $2.8 million in 2009 and $6.5 million in 2008.

 

• Accounts Receivable

 

Our net accounts receivable was $19.1 million at the end of 2009 compared with $11.6 million at the end of 2008. Typically, shipments are higher in the last month of a quarter but shipments were lower in December 2008, due to the Company having a two week shutdown. The shutdown in December 2009 was shorter than the shutdown in December 2008 and as a result shipments were higher in December 2009 compared with December 2008. As a result of the increased shipments in December 2009, net accounts receivable represented 37 days of sales outstanding at the end of fiscal 2009 compared with 19 days at the end of fiscal 2008.

 

• Inventories

 

Our net inventories were $37.3 million at the end of 2009 compared with $60.6 million at end of 2008. Net inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). We believe that a certain level of inventory must be carried to maintain an adequate supply of product for customers. We typically build-up inventories of new products early in their life cycles in order to support anticipated demand and to provide stock inventory to distributors to support initial sales of the product. We typically do not establish excess inventory

reserves for newer products until we have developed sufficient trend information to support reasonable assumptions regarding acceptance of the product and future demand trends. Once the product has been available on the market for a sufficient period of time, generally two years or more, we will begin to assess the need for reserves for excess inventory based on history and forecasted demand.

 

The build-up in inventory beginning in the second quarter of 2008 for our new flash products was particularly pronounced due to a conscious effort to support increased turns business and shorter lead times for the end consumer products at which the flash products are targeted. In an effort to reduce our inventory levels, we will continue to restrict flash wafer starts based on inventory levels and forecast sales of flash products. However, in order to preserve our relationships with our foundries, we will continue to build certain minimum levels of flash products during 2010 and thereafter, so an extended period of time will probably be necessary in order to draw down inventory levels closer to historical norms. We believe our flash products are still attractive to our targeted customer base. We continue to focus our efforts on growing the flash business and are aggressively marketing our flash products in an effort to reduce our inventory. This may include certain promotional pricing for large volume orders, which may negatively affect our gross margins. We are also monitoring market trends and significant events that may have an adverse impact on the carrying value of our inventory.

 

In accordance with our normal quarterly inventory review, during the second quarter of 2009, we performed an in-depth analysis of our inventory levels, and in particular our flash inventory levels to determine whether additional reserves for excess quantities should be established. Some of the newer flash product lines were then in production for two years or more, which triggered our initial analysis of potential excess inventory. The analysis took into consideration the general acceptance of the products on the market, short and mid-term forecasted demand, the high levels of flash inventory on hand relative to the historical norms, and the results of recent promotional efforts to reduce inventory levels of flash products. Although we have been able to reduce some of our flash inventory in recent quarters, we determined, as part of our normal quarterly inventory review, that additional reserves of $13.3 million, $0.6 million and $1.2 million for excess inventory were required as of the end of the second, third and fourth quarters of 2009, respectively.

 

We continue to hold material from “last time buy” inventory purchases made in 2003, 2005, 2007 and 2009 from certain wafer manufacturers for some of our mature product families. Last time buys occur when a wafer supplier is about to shut down the manufacturing line used to make a product and we believe that our then-current inventories are insufficient to meet foreseeable future demand. In March 2009, Panasonic informed us of their intention to cease production of Actel’s legacy ACT products. In order to support our customers’ future demands for the ACT products, we commit to purchase from Panasonic approximately $8.0 million of last-time-buy wafers. As of the end of fiscal 2009, we had purchased approximately $3.8 million of last-time-buy wafers from Panasonic. Inventory purchased in last-time-buy transactions is evaluated on an ongoing basis for indications of excess or obsolescence based on rates of actual sell through, expected future demand for those products, and any other qualitative factors that may indicate the existence of excess or obsolete inventory. Inventory at January 3, 2010, included $5.1 million of inventory purchased in last-time buys, of which $3.8 million relates to the Panasonic last-time-buy wafers. Inventory at January 4, 2009, included $1.4 million of inventory purchased in last-time buys. There were no write downs of last-time-buy inventory during 2009. During 2008, we recorded a write down against last-time-buy inventory of $0.5 million.

 

Our FPGAs are manufactured using customized steps that are added to the standard manufacturing processes of our independent wafer suppliers, so our manufacturing cycle is generally longer and more difficult to adjust in response to changing demands or delivery schedules than our competitors using standard processes. Accordingly, our inventory levels will probably always be higher than that of our major competitors using standard processes.

 

• Property and Equipment

 

Our net property and equipment was $23.0 million at the end of 2009 compared with $34.7 million at the end of 2008. We invested $5.8 million in property and equipment in 2009 compared with $21.4 million in 2008. The decrease in capital expenditures for 2009 was due primarily to purchases made in 2008 relating to additional offshore testing and manufacturing equipment and the installation of solar panels at the Company’s headquarters in Mountain View, California. We recorded non-cash asset impairment charges totaling $5.5 million for certain

manufacturing fixed assets that were determined to be in excess of current and expected future manufacturing requirements in 2009. Capital expenditures during the past two years have been primarily for engineering, manufacturing, and office equipment. Depreciation of property and equipment was $12.1 million in 2009 compared with $11.9 million in 2008. We currently expect to incur capital expenditures of approximately $5.3 million in 2010.

 

• Goodwill and Other Intangible Assets, Net

 

Our net goodwill and other intangible assets were $34.9 million at the end of 2009 and $35.5 million at the end of 2008. The slight decrease is due to the realization of certain net operating loss carry forwards associated with our acquisition of Gatefield Corporation in 2000. We had originally established a valuation allowance for a portion of the net operating loss carry forwards acquired in connection with the acquisition of Gatefield. FASB ASC 805 Business Combinations, which became effective on the first day of our 2009 fiscal year, changes how business acquisitions are accounted for and affects financial statements both on the acquisition date and in subsequent periods. Under FASB ASC 805, the release of any valuation allowance for acquired tax attributes related to Gatefield will now result in a tax benefit as opposed to an adjustment to the carrying amount of goodwill.

 

During the third quarter of fiscal 2008, we acquired $5.4 million of identified intangible assets in connection with the acquisition of Pigeon Point Systems. As a result of this, we recorded $0.8 million for both 2009 and 2008 relating to amortization of identified intangible assets.

 

Goodwill is recorded when consideration paid in an acquisition exceeds the fair value of the net tangible and intangible assets acquired. We account for goodwill in accordance with FASB ASC 350 Goodwill and Other Intangible Assets, which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition. Under FASB ASC 350, we do not amortize goodwill, but instead test for impairment annually or more frequently if certain events or changes in circumstances indicate that the carrying value may not be recoverable. We completed our annual goodwill impairment tests during the fourth quarters of 2009 and 2008 and noted no indicators of impairment.

 

• Other Assets, Net

 

Our other assets, net, were $30.1 million at the end of 2009 compared with $22.0 million at the end of 2008. The increase was due primarily to an increase of $6.0 million in license obligations and an increase in deferred compensation plan assets of $1.4 million.

 

• Current Liabilities

 

Our total current liabilities were $51.8 million at the end of 2009 compared with $59.5 million at the end of 2008. The decrease was due primarily to a decrease in accounts payable of $4.4 million, a decrease in accrued compensation and employee benefits of $3.0 million and a decrease in deferred income on shipments to distributors of $1.4 million, which were partially offset by an increase in accrued license obligations of $1.0 million.

 

• Shareholders’ Equity

 

Shareholders’ equity was $233.5 million at the end of 2009 compared with $268.3 million at the end of 2008. The decrease in 2009 was due mostly to the net loss of $46.2 million. This was partially offset by stock-based compensation charges of $7.6 million, issuances of Common Stock under our employee stock plans of $2.3 million, net of tax withholding on restricted stock units and changes in unrealized gain on investments of $1.4 million.

 

In 2009, our Board of Directors adopted a plan under Rule 10b5-1 promulgated by the Securities and Exchange Commission under the Exchange Act that will permit us to purchase shares of our Common Stock under our stock repurchase program at any time the criteria under the Rule 10b5-1 plan are met. In February 2009, our Board of Directors amended the criteria for the Company to purchase shares under the Rule 10b5-1 plan.

 

Liquidity and Capital Resources

 

We meet all of our funding needs for ongoing operations with internally generated cash flows from operations and with existing cash and short-term investment balances. We believe that existing cash, cash equivalents, and

short-term investments, together with cash generated from operations, will be sufficient to meet our cash requirements for the following twelve months. A portion of available cash may be used for investment in or acquisition of complementary businesses, products, or technologies. Wafer manufacturers have at times demanded financial support from customers in the form of equity investments and advance purchase price deposits, which in some cases have been substantial. If we require additional capacity, we may be required to incur significant expenditures to secure such capacity.

 

The following represents contractual commitments associated with operating leases and capital leases ($0.4 million relates to a capital lease which runs through 2013 and is not shown separately) as of January 3, 2010:

 

 

 

 

Purchase orders or contracts for the purchase of raw materials, apart from the last-time-buy inventory disclosed above, and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations because as purchase orders may represent authorizations to purchase rather than binding agreements. In order to support our customers’ future demands for the ACT products, we entered into a commitment to purchase from Panasonic approximately $8 million of last-time-buy wafers relating to our ACT products. As of fiscal 2009, we have purchased approximately $3.8 million of last-time-buy wafers from Panasonic.

 

We believe that the availability of adequate financial resources is a substantial competitive factor. To take advantage of opportunities as they arise, or to withstand adverse business conditions when they occur, it may become prudent or necessary for us to raise additional capital. No assurance can be given that additional capital would become available on acceptable terms if needed, if available at all.

 

Impact of Recently Issued Accounting Standards

 

In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06 relating to FASB ASC 820 Fair Value Measurements and Disclosures. ASU 2010-06 provides amendments to topic 820-10 requiring new disclosures regarding transfers in and out of Levels 1 and 2 and guidance regarding disclosure of activity in Level 3 fair value measurements using significant unobservable inputs. This ASU also provides amendments to topic 820-10 that clarify existing disclosures regarding level of disaggregation and disclosures relating to inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures relating to activity in Level 3, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this ASU in the first fiscal quarter of 2010 is not expected to have a significant impact on our consolidated financial statements.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. The U.S. Securities and Exchange Commission has defined critical accounting policies as

those that are most important to the portrayal of our financial condition and results and also require us to make the most difficult, complex and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Based upon this definition, our most critical policies include revenue recognition, inventories, stock-based compensation, legal matters, goodwill and long-lived asset impairment and income taxes. These policies, as well as the estimates and judgments involved, are discussed below. We also have other key accounting policies that either do not generally require us to make estimates and judgments that are as difficult or as subjective or are less likely to have a material impact on our reported results of operations for a given period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. In addition, if these estimates or their related assumptions change in the future, it could result in material expenses being recognized on the consolidated statements of operations.

 

• Revenues

 

We sell our products to OEMs and to distributors who resell our products to OEMs or their contract manufacturers. We recognize revenue on products sold to our OEMs upon shipment. Revenues generated by the Protocol Design Services organization are recognized as the services are performed. Because sales to our distributors are generally made under agreements allowing for price adjustments, credits, and right of return under certain circumstances, we generally defer recognition of revenue on products sold to distributors until the products are resold by the distributor and price adjustments are determined, at which time our final net sales price is fixed. Deferred revenue net of the corresponding deferred cost of sales are recorded in the caption “deferred income on shipments to distributors” in the liability section of the consolidated balance sheet. Deferred income effectively represents the gross margin on the sale to the distributor; however, the amount of gross margin we recognize in future periods will be less than the originally recorded deferred income as a result of negotiated price concessions. Distributors resell our products to end customers at various negotiated price points that vary by end customer, product, quantity, geography and competitive pricing environments. When a distributor’s resale is priced at a discount from list price, we credit back to the distributor a portion of their original purchase price after the resale transaction is complete. Thus, a portion of the deferred income on shipments to distributors balance will be credited back to the distributor in the future. Based upon historical trends and inventory levels on hand at each of our distributors as of January 3, 2010, we currently estimate that approximately $7.1 million of the deferred income on shipments to distributors on the Company’s consolidated balance sheet as of January 3, 2010, will be credited back to the distributors in the future. In other words, we expect that this amount will not be recognized as revenue and gross margin in our consolidated statement of operations. Since we expect our distributors to “turn” their inventory balances five to six times a year, we expect that a majority of the inventory held by our distributors at the end of any quarter will be resold to end customers over the next two quarters.

 

Revenue recognition depends on notification from the distributor that product has been resold. This reported information includes product resale price, quantity, and end customer information as well as inventory balances on hand. Our revenue reporting is dependent on us receiving timely and accurate data from our distributors. In determining the appropriate amount of revenue to recognize, we use this data from our distributors and apply judgment in reconciling differences between their reported inventory and sell-through activities. Because of the time involved in collecting, assimilating and analyzing the data provided by our distributors, we receive actual sell-through revenue one month in arrears. This practice requires us to make an estimate of one month’s distributor sell-through activity at the end of each fiscal quarter. This estimate is adjusted the following month to reflect actual sell through activity reported by our distributors.

 

We record a provision for price adjustments on unsold merchandise shipped to distributors in the same period as the related revenues are recorded. If market conditions were to decline, we may need to take action with our distributors to ensure the sell-through of inventory already in the channel. These actions during a market downturn could result in incrementally greater reductions to net revenues than otherwise would be expected. We also record a provision for estimated sales returns on products shipped directly to end customers in the same period as the related revenues are recorded. The provision for sales returns is based on historical sales returns, analysis of credit memo

data, and other factors. If our calculation of these estimates does not properly reflect future return patterns, future net revenues could be materially different.

 

• Inventories

 

We believe that a certain level of inventory must be carried to maintain an adequate supply of product for customers. This inventory level may vary based upon orders received from customers or internal forecasts of demand for these products. Other considerations in determining inventory levels include the stage of products in the product life cycle, design win activity, manufacturing lead times, customer demand, strategic relationships with foundries, and competitive situations in the marketplace. If any of these factors develop other than anticipated, inventory levels may be materially and adversely affected.

 

We write down our inventory for estimated obsolescence or lack of sales activity equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future demand and market conditions. To address this difficult, subjective, and complex area of judgment, we apply a methodology that includes assumptions and estimates to arrive at the net realizable value. First, we identify any inventory that has been previously written down in prior periods. Second, we examine inventory line items that may have some form of non-conformance with electrical and mechanical standards. Third, we assess the inventory not otherwise identified to be written down against product history and forecasted demand. Finally, we analyze the result of this methodology in light of the product life cycle, design win activity, and competitive situation in the marketplace to derive an outlook for consumption of the inventory and the appropriateness of the resulting inventory levels. If actual future demand or market conditions are less favorable than those we have projected, additional inventory write-downs may be required.

 

We typically build-up inventories of new products early in their life cycles in order to support anticipated demand and to provide stock inventory to distributors respond quickly to sales of the product. Accordingly, we typically do not establish excess inventory reserves for newer products until we have developed sufficient trend information to support reasonable assumptions regarding acceptance of the product and future demand trends. After the product has been available on the market for a sufficient period of time, generally two years or more, the Company will begin to assess the need for excess inventory reserves based on history and forecasted demand as noted above.

 

We continue to hold material from “last time buy” inventory purchases made in 2003, 2005, 2007 and 2009 from two wafer manufacturers for some of our mature product families. Last time buys occur when a wafer supplier is about to shut down the manufacturing line used to make a product and we believe that our then-current inventories are insufficient to meet foreseeable future demand.. In March 2009, Panasonic informed us of their intention to cease production of Actel’s legacy ACT products. In order to support our customers’ future demands for the ACT products, we committed to purchase from Panasonic approximately $8 million of last-time-buy wafers. As of the end of fiscal 2009, we had purchased approximately $3.8 million of last-time-buy wafers from Panasonic. Inventory purchased in last-time-buy transactions is evaluated on an ongoing basis for indications of excess or obsolescence based on rates of actual sell through, expected future demand for those products, and any other qualitative factors that may indicate the existence of excess or obsolete inventory. Inventory at January 3, 2010, and January 4, 2009, included $5.1 million and $1.4 million, respectively, of inventory purchased in last-time-buys. Last-time-buy inventory as of January 3, 2010, includes approximately $3.8 million of Panasonic last-time-buy wafers. There were no write downs of last-time-buy inventory during 2009. During 2008, we recorded a write down against last-time-buy inventory of $0.5 million.

 

• Legal Matters and Loss Contingencies

 

From time to time we are notified of claims, including claims that we may be infringing patents owned by others, or otherwise become aware of conditions, situations, or circumstances involving uncertainty as to the existence of a liability or the amount of a loss. When probable and reasonably estimable, we make provisions for estimated liabilities. As we sometimes have in the past, we may settle disputes and/or obtain licenses under patents that we are alleged to infringe. We can offer no assurance that any pending or threatened claim or other loss contingency will be resolved or that the resolution of any such claim or contingency will not have a materially

adverse effect on our business, financial condition, and/or results of operations. Our failure to resolve a claim could result in litigation or arbitration, which can result in significant expense and divert the efforts of our technical and management personnel, whether or not determined in our favor. Our evaluation of the impact of these claims and contingencies could change based upon new information. Subject to the foregoing, we do not believe that the resolution of any pending or threatened legal claim or loss contingency is likely to have a materially adverse effect on our financial position at January 3, 2010 or results of operations or cash flow for the year then ended.

 

• Income Taxes

 

We account for income taxes in accordance with FASB ASC 740, Accounting for Income Taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. We are required to evaluate the realizability of our deferred tax assets by assessing our valuation allowance and, if necessary, adjusting the amount of such allowance. The factors used to assess the likelihood of realization include our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. We assessed the realization of our deferred tax assets quarterly throughout 2009 and recorded a full valuation allowance against our deferred tax assets at the end of the second quarter. For the remainder of 2009, we continued to record a full valuation allowance against our deferred tax assets because it was more likely than not that we would not be able to realize these deferred tax assets based upon our forecast of future taxable income and other relevant factors. The valuation allowance at the end of 2009 was $52.8 million. We currently intend to maintain a full valuation allowance against our deferred tax assets. If factors change that affect our forecast of future taxable income in determining the realizability of our net deferred tax assets, adjustments will be made to the amount of the valuation allowance in future periods.

 

• Stock-Based Compensation Expense

 

We account for stock-based compensation in accordance with FASB ASC 718, Compensation — Stock Compensation. Under the fair value recognition provisions of FASB ASC 718, we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes-Merton option pricing model, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of expected volatility of the market price of our stock and the expected term of the stock award. We have determined that historical volatility is the best predictor of expected volatility and the expected term of our awards was determined taking into consideration the vesting period of the award, the contractual term and our historical experience of employee stock option exercise behavior. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, we could change our assumptions used to value employee stock-based awards granted in future periods. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those awards expected to vest. If our actual forfeiture rate were materially different from our estimate, the stock-based compensation expense would be different from what we have recorded in the current period. The fair value of restricted stock units is calculated based upon the fair value of our Common Stock at the date of grant. Further, FASB ASC 718 requires that employee stock-based compensation costs be recognized over the vesting period of the award and we have elected the straight-line method as the basis for recording our expense.

 

The Company recorded $7.6 million, $9.1 million, and $7.9 million of stock-based compensation expense for the years ended January 3, 2010, January 4, 2009, and January 6, 2008, respectively. As required by FASB ASC 718, Compensation — Stock Compensation, management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest. As of January 3, 2010, the total compensation cost related to options and nonvested stock granted to employees under the Company’s stock option plans but not yet recognized was $11.5 million, net of estimated forfeitures of $1.4 million. This cost will be amortized over a weighted-average period of 1.87 years and will be adjusted for subsequent changes in estimated forfeitures. As of January 3, 2010, the total compensation cost related to options to purchase shares of the Company’s Common Stock under the Employee Stock Purchase Plan (ESPP) but not yet recognized was approximately $0.3 million. This cost will be amortized over a weighted-average period of 1.25 years.

• Long-Lived Asset Impairment

 

We review property and equipment and intangible assets, excluding goodwill, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If property and equipment or intangible assets are considered to be impaired, the impairment recognized equals the amount by which the carrying value of the asset exceeds its fair market value. During the first quarter of 2008, we began to experience significant increases in bookings for flash product families that include Fusion, Igloo and ProASIC3. To support the expected ramp up in manufacturing, we ordered additional testing and sorting equipment. However, as a result of the worldwide economic crisis, a significant number of these product orders were cancelled in the second half of 2008 and the new product sale opportunities did not materialize in the volumes originally anticipated. As a result, the Company recorded a non-cash impairment charge of $5.5 million during the second quarter of 2009, for certain manufacturing fixed assets that were determined to be in excess of current and expected future manufacturing requirements and those assets were taken out of service.

 

We account for goodwill and other intangible assets under FASB ASC 350, Goodwill and Other Intangible Assets. Under this standard, goodwill is tested for impairment annually or more frequently if certain events or changes in circumstances indicate that the carrying amount of goodwill exceeds its implied fair value. The two-step impairment test identifies potential goodwill impairment and measures the amount of a goodwill impairment loss to be recognized (if any). The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. We are a single reporting unit under FASB ASC 350 and we use an enterprise approach to determine our total fair value. Since the best evidence of fair value is quoted market prices in active markets, we start with our market capitalization as the initial basis for the analysis. We also consider other factors including control premiums from observable transactions involving controlling interests in comparable companies as well as overall market conditions. As long as we determine our total enterprise fair value is greater than our book value and we remain a single reporting unit, our goodwill will be considered not impaired, and the second step of the impairment test under FASB ASC 350 will be unnecessary. If our total enterprise fair value were to fall below our book value, we would proceed to the second step of the goodwill impairment test, which measures the amount of impairment loss by comparing the implied fair value of our goodwill with the carrying amount of our goodwill. As a result of this analysis we may be required to write down our goodwill, and recognize a goodwill impairment loss, equal to the difference between the book value of goodwill and its implied fair value.

 

FASB ASC 350 also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable in accordance with FASB ASC 360, Impairment or Disposal of Long Live Assets. Currently, we amortize our acquired intangible assets with definite lives over periods ranging primarily from one to seven years.

 

 

As of January 3, 2010, our investment portfolio consisted primarily of asset backed obligations, corporate bonds, floating rate notes, and federal and municipal obligations. The principal objectives of our investment activities are to preserve principal, meet liquidity needs, and maximize yields. To meet these objectives, we invest funds not immediately required for operations only in high credit quality debt securities with average maturities of less than two years. We also limit the percentage of total investments that may be invested in any one issuer. Corporate investments as a group are also limited to a maximum percentage of our investment portfolio.

 

Our investments in debt securities, which totaled $115.9 million at January 3, 2010, are subject to interest rate risk. An increase in interest rates could subject us to a decline in the market value of our investments. These risks are mitigated by our ability to hold these investments for a period of time sufficient to recover the carrying value of the investment, which may not be until maturity. A hypothetical 100 basis point increase in interest rates compared with interest rates at January 3, 2010, and January 4, 2009, would result in a reduction of approximately $0.8 million and $1.2 million, respectively, in the fair value of our available-for-sale debt securities held at January 3, 2010, and January 4, 2009, respectively.

In addition to interest rate risk, we are subject to market risk on our investments. We monitor all of our investments for impairment on a periodic basis. In the event that the carrying value of the investment exceeds its fair value and the decline in value is determined to be other than temporary, the carrying value is reduced to its current fair market value. In the absence of other overriding factors, we consider a decline in market value to be a potential indicator of an other than temporary impairment when a publicly traded stock or a debt security has traded below amortized cost for a consecutive six-month period. If an investment continues to trade below amortized cost for more than six months, and mitigating factors such as general economic and industry specific trends, including the creditworthiness of the issuer are not present, this investment would be evaluated for impairment and written down to a balance equal to the estimated fair value at the time of impairment, with the amount of the write-down recorded in Interest income and other, net, on the consolidated statements of operations. If management concludes it does not intend to sell an impaired debt security and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis, and the issuers of the securities are creditworthy, no other-than-temporary impairment is deemed to exist.

 

As of January 3, 2010, the Company assessed its investments to determine if there were any other than temporary impairments (OTTI) apart from the OTTI recorded in fiscal 2008 relating to a corporate bond investment. As a result of the sale of a bond in January 2010, at a realized loss of $0.3 million the Company recorded an OTTI loss of $0.3 million as of January 3, 2010. We invest funds not immediately required for operations in investment portfolios consisting primarily of corporate bonds, floating rate notes, and federal and municipal obligations. In periods when market interest rates are falling, and for some time after rates stabilize, we typically experience declines in interest income as our older debt investments at higher interest rates mature and are replaced by new investments at the lower rates available in the market.

 

ACTEL CORPORATION

 

CONSOLIDATED BALANCE SHEETS

 

 

See Notes to Consolidated Financial Statements

ACTEL CORPORATION

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

See Notes to Consolidated Financial Statements

ACTEL CORPORATION

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND ACCUMULATED OTHER

COMPREHENSIVE INCOME (LOSS)

 

 

See Notes to Consolidated Financial Statements

ACTEL CORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS