<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
-------------------------
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
------- EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
------- SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________ TO __________.
Commission File Number: 0-13244
-------------------------
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
(Exact name of Registrant as specified in its charter)
DELAWARE 41-1404495
(State of Incorporation) (I.R.S. Employer Identification No.)
47100 BAYSIDE PARKWAY (510) 623-4400
FREMONT, CALIFORNIA 94538 (Registrant's telephone number,
(Address of principal executive offices) 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, $.10
par value per Share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent fliers 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 Form 10-KA or any
amendment to this Form 10-KA. ( X )
The aggregate market value of voting stock held by non-affiliates of the
registrant on March 16, 1998, based upon the closing price of the Common Stock
on the Nasdaq National Market on such date and assuming a market value of
$4.5825 per share for the Series B Convertible Preferred Stock was approximately
$44,931,943.
Registrant had 40,798,143 shares of Common Stock and 1,000,000 shares of Series
B Convertible Preferred Stock outstanding as of March 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1997 Annual Report to Stockholders are
incorporated by reference into Parts II and IV hereof. The Annual Report shall
be deemed "filed" with the Commission only with respect to those portions
specifically incorporated by reference herein. Portions of the registrant's
definitive Proxy Statement for its Annual Meeting of Stockholders for 1997,
which will be filed with the Securities and Exchange Commission within 120 days
after the end of the Company's fiscal year, are incorporated by reference into
Part III hereof.
This report contains 29 pages.
<PAGE>
Form 10-K/A
Amendment No. 1
The undersigned registrant hereby amends the following items of its
Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as set
forth in the pages attached hereto:
Part II
Item 6. SELECTED FINANCIAL DATA
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
Exhibit 23.1 -- Consent of Independent Auditors, Deloitte & Touche LLP
Exhibit 27.1 -- Financial Data Schedule
<PAGE>
PART II
Item 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company are qualified by reference
to and shall be read in conjunction with "The Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in the 10-K
as filed as of April 15, 1998 and with the financial statements, related notes
and other financial information included elsewhere in this report.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
- ------------------
Revenues $ 15,792(e) $ 33,577 $ 51,117(a) $ 50,051(a) $ 41,478
Gross profit $ 4,889 $ 16,569 $ 33,624 $ 30,094 $ 24,769
Operating income (loss) $(16,715) $(18,435) $ 2,550 $ (9,511) $ (8,565)
Net income (loss) $(15,076) $(21,376) $ 1,957 $ (9,748)(b) $ (4,480)(c)
Net income (loss) per share- as restated $ (0.73)(f) $ (1.03) $ 0.09 $ (0.52) $ (0.26)
Weighted average common shares and
common share equivalents outstanding 30,303 20,655 20,904 18,598 16,908
- --------------------------------------------------------------------------------------------------------------
YEAR END FINANCIAL DATA:
- ------------------------
Working capital (deficit) $ (47) $ (1,240) $ 6,741 $ 1,621 $ 6,030
Total assets $ 11,256 $ 29,527(d) $ 28,980 $ 29,825 $ 28,606
Long-term debt $ 58 $ 8,061 $ 1,207 $ 1,874 $ 81
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Revenues, net income or loss and net income or loss per share for 1995
and 1994 included amounts related to a technology distributed by
GateField and owned by a U.K. Company. Effective January 1, 1996, a joint
venture was formed by the two companies. Consequently, specific revenues
and costs related to this product will no longer be consolidated in
GateField's financial statements (see Note 3 of Notes to Consolidated
Financial Statements).
(b) The net loss in 1994 included a charge for asset write-downs and staff
reductions of $6,800,000, primarily related to the Company's decision to
discontinue selling the Paradigm ViP-TM- (VHDL instruction processor)
product.
(c) The net loss in 1993 included $2,900,000 of staff reduction costs and
asset write-downs and $3,900,000 of gain related to the sale of another
company's common stock.
(d) Total assets included a reduction of the purchase price of Attest
Software, Inc. in the quarter ended June 1996 of $345,000 relating to the
value ascribed to GateField restricted stock issued to Attest
shareholders.
(e) Revenues decreased in 1997 due to the sale of several product families
(see Note 3 of Notes to Consolidated Financial Statements).
(f) As restated; see Note 11 of Notes to Consolidated Financial Statements.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets at December 31, 1997 (Restated) and 1996
Consolidated Statements of Operations for the three years ended December 31,
1997 (Restated)
Consolidated Statements of Stockholders' Equity (Deficit) for the three years
ended December 31, 1997 (Restated)
Consolidated Statements of Cash Flows for the three years ended December 31,
1997 (Restated)
Notes to Consolidated Financial Statements
Report of Deloitte & Touche LLP, Independent Auditor
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
(In thousands, except share amounts) 1997 1996
- ----------------------------------------------------------------------------
(As Restated
--Note II)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,189 $ 1,703
Short-term investments 98 100
Accounts receivable, less allowance for doubtful
accounts of $528 in 1997 and $1,337 in 1996 2,763 12,088
Inventories 735 2,664
Other current assets 524 956
-------- --------
Total current assets 8,309 17,511
Property and equipment, net 2,660 5,101
Purchased technology -- 2,776
Other assets 287 4,139
-------- --------
Total assets $ 11,256 $ 29,527
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Bank financing $ -- $ 3,203
Current portion of long-term obligations 516 1,958
Accounts payable 3,741 5,715
Accrued expenses 3,118 5,345
Deferred revenues 981 2,530
-------- --------
Total current liabilities 8,356 18,751
Subordinated convertible debenture notes -- 7,342
Long-term obligations 58 719
Other long-term liabilities 13 146
-------- --------
Total liabilities 8,427 26,958
Commitments and contingencies (Note 5)
Redeemable Preferred Stock
$0.10 par value; 2,000,000 shares authorized;
shares issued and outstanding: 1,000,000 in 1997 4,594 --
and none in 1996 - at redemption value
Stockholders' equity
Common stock
$0.10 par value; 65,000,000 shares authorized;
shares issued and outstanding: 36,222,326 in
1997 and 23,226,444 in 1996 3,622 2,323
Additional paid-in capital 72,642 55,784
Accumulated translation adjustments (544) (48)
Accumulated deficit (77,485) (55,490)
-------- --------
Total stockholders' equity (deficit) (1,765) 2,569
-------- --------
Total liabilities and stockholders' equity $ 11,256 $ 29,527
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands, except per share amounts) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Product $ 5,385 $ 18,232 $ 28,422
Service 10,407 15,345 22,695
-------- -------- --------
Total revenues 15,792 33,577 51,117
-------- -------- --------
Cost of revenues
Product 6,421 8,439 6,407
Service 4,482 8,569 11,086
-------- -------- --------
Total cost of revenues 10,903 17,008 17,493
-------- -------- --------
Gross profit 4,889 16,569 33,624
-------- -------- --------
Operating expenses
Sales and marketing 9,664 14,325 16,911
Research and development 7,854 15,783 11,263
General and administrative 4,086 4,896 2,900
-------- -------- --------
Total operating expenses 21,604 35,004 31,074
-------- -------- --------
Operating income (loss) (16,715) (18,435) 2,550
-------- -------- --------
Other income (expense)
Interest expense, net (1,360) (3,184) (343)
Other income (expense), net 2,999 243 (250)
-------- -------- --------
Total other income (expense) 1,639 (2,941) (593)
-------- -------- --------
Net income (loss) $(15,076) $(21,376) $ 1,957
-------- -------- --------
-------- -------- --------
Basic net income (loss) per share (a) $ (0.73) $ (1.03) $ 0.10
(As restated-Note 11) -------- -------- --------
-------- -------- --------
Diluted net income (loss) per share (a) $ (0.73) $ (1.03) $ 0.09
(As restated-Note 11) -------- -------- --------
-------- -------- --------
Basic weighted average shares outstanding 30,303 20,655 19,395
-------- -------- --------
-------- -------- --------
Diluted weighted average shares outstanding 30,303 20,655 20,904
-------- -------- --------
-------- -------- --------
</TABLE>
(a) Loss attributable to common stockholders used in computation of basic and
diluted loss per share for the year ended December 31, 1997 was $21,995,000
(See Note 1)
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock
------------------------------
Additional Accumulated
Paid-In Notes Translation Accumulated
(In thousands) Shares Amount Capital Receivable Adjustments Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995 19,034 $ 1,903 $ 46,739 $ (900) $ (156) $(36,071) $ 11,515
Exercise of common stock
options 636 64 877 -- -- -- 941
Sale of common stock to
employees 28 3 38 -- -- -- 41
Issuance of common stock
under warrants, net 54 5 183 -- -- -- 188
Collection of note receivable
from stockholder -- -- -- 900 -- -- 900
Current translation adjustment -- -- -- -- 137 -- 137
Net income -- -- -- -- -- 1,957 1,957
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 19,752 1,975 47,837 -- (19) (34,114) 15,679
Exercise of common stock
options 370 37 609 -- -- -- 646
Sale of common stock to
employees 26 3 75 -- -- -- 78
Issuance of common stock
for purchase of Attest, net 387 39 2,101 -- -- -- 2,140
Issuance of common stock
for debentures, net 2,691 269 5,162 -- -- -- 5,431
Current translation adjustment -- -- -- -- (29) -- (29)
Net loss -- -- -- -- -- (21,376) (21,376)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 23,226 2,323 55,784 -- (48) (55,490) 2,569
Exercise of common stock
options 278 28 225 -- -- -- 253
Compensation for accelerated
vesting of stock options -- -- 47 -- -- -- 47
Sale of common stock to
employees 93 9 70 -- -- -- 79
Issuance of common stock
to nonemployees for services 55 5 65 -- -- -- 70
Issuance of common stock
for debentures, net 7,418 742 6,681 -- -- -- 7,423
Accrued dividends on preferred stock -- -- -- -- -- (1,053) (1,053)
Conversion of preferred stock to
common stock 4,547 454 2,698 -- -- -- 3,152
Issuance of common stock
by exercise of warrants 105 11 45 -- -- -- 56
Subscribed common stock 500 50 711 -- -- -- 761
Accretion of preferred stock -- -- 5,866 -- -- (5,866) --
Issuance of warrants -- -- 450 -- -- -- 450
Current translation adjustment -- -- -- -- (496) -- (496)
Net loss -- -- -- -- -- (15,076) (15,076)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 36,222 $ 3,622 $ 72,642 $ -- $ (544) $(77,485) $ (1,765)
(As restated-Note 11)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $(15,076) $(21,376) $ 1,957
Reconciliation to net cash provided by (used in) operating activities
Depreciation and amortization 3,124 4,307 4,732
Noncash subordinated convertible debt interest 678 2,773 --
Asset write-downs and staff reductions -- -- 233
Loss on disposition of property and equipment 722 -- 226
Gain on sale of assets, net (2,741) -- --
Stock compensation expense 9 -- --
Sales under capital leases (606) (1,420) (854)
Collections under capital leases 620 459 209
Changes in assets and liabilities
Accounts receivable 9,543 724 845
Inventories 143 (876) (840)
Other assets 31 (90) 382
Accounts payable and accrued expenses (5,951) 3,174 (966)
Deferred revenues (1,549) (292) (527)
-------- -------- --------
Net cash provided by (used in) in operating activities (11,053) (12,617) 5,397
-------- -------- --------
Investing activities
Property and equipment purchases, net (1,568) (1,773) (1,775)
Proceeds from sale of assets 12,750 -- --
Capitalized software -- (1,698) (1,683)
Collection of notes receivable -- -- 1,500
-------- -------- --------
Net cash used in investing activities 11,182 (3,471) (1,958)
-------- -------- --------
Financing activities
Proceeds from issuance of convertible debenture notes, net 3,500 10,000 --
Proceeds from issuance of common stock 458 724 1,170
Proceeds from issuance of redeemable preferred stock 4,583 -- --
Repurchase of preferred stock (1,827) -- --
Proceeds from subscribed stock 761 -- --
Proceeds from warrants 450 -- --
Bank financing, net (3,203) 3,203 (2,897)
Borrowings under debt obligations 199 882 217
Repayments of debt obligations (2,161) (930) (1,084)
-------- -------- --------
Net cash provided by (used in) financing activities 2,760 13,879 (2,594)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents (403) 190 16
-------- -------- --------
Net change in cash and cash equivalents 2,486 (2,019) 861
Cash and cash equivalents, beginning of year 1,703 3,722 2,861
-------- -------- --------
Cash and cash equivalents, end of year $ 4,189 $ 1,703 $ 3,722
-------- -------- --------
Supplemental disclosure of cash flow information
Noncash activities
Common stock issued for convertible debentures $ 7,423 $ 5,431 $ --
Preferred stock issued for convertible debentures $ 3,937 $ -- $ --
Accretion of redeemable preferred stock (As restated--Note 11) $ 5,866 $ -- $ --
Accrued dividends on preferred stock $ 1,053 $ -- $ --
Common stock issued for preferred stock $ 3,152 $ -- $ --
Common stock issued for the acquisition of all the
outstanding shares of Attest Software, Inc. $ -- $ 2,140 $ --
Promissory notes issued in exchange for reduction of
accounts payable $ -- $ 901 $ --
Equipment acquired under capital leases $ 19 $ 490 $ 229
Cash activities
Cash paid during the year for interest $ 363 $ 471 $ 562
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
GateField Corporation, formerly Zycad Corporation, (the Company), based in
Fremont, California, designs, develops and markets logic solutions in
high-density reprogrammable ASIC technology (ProASIC-TM-) with related
development system software. During 1997, the Company disposed of its
verification and simulation businesses (see Note 3). The Company also provides
system engineering services and custom solutions to military, aerospace and
commercial companies, primarily in the U.S., Asia and Europe.
The Company incurred a loss of $15,076,000 in 1997 and had working capital
deficit of $47,000 as of year-end. Management's plan to sustain operations in
1998 includes an increased level of revenue relative to expenses and obtaining
additional financing. In January 1998, the Company sold $4,583,000 of its Common
Stock as part of this plan (See Note 10).
At December 31, 1997, the Company was not in compliance with the requirement
of the Nasdaq National Market (a distinct tier of the Nasdaq Stock Market) to
maintain minimum net tangible assets (as defined) of $4,000,000. However, with
the sale of Common Stock in January 1998 the Company met the compliance
requirements. (See Note 10 for subsequent events relating to stock market
delisting).
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation. The functional currency of the Company's
foreign subsidiaries is the local currency.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Such estimates include allowances for potentially uncollectible accounts
receivable, inventory valuation reserves, warranty costs, sales returns and a
valuation allowance for deferred tax assets. Actual results could differ from
those estimates.
CASH EQUIVALENTS
Cash and cash equivalents consist of cash on deposit with banks and money
market instruments with original maturities of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments consist of Certificates of Deposit, stated at cost
plus accrued interest, which approximates market.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents, short-term
investments and trade accounts receivable. The Company invests only in high
credit quality short-term debt investments and limits the amount of credit
exposure to any one entity. The majority of the Company's trade accounts
receivables are derived from sales to manufacturers in the semiconductor,
computer, military and aerospace industries. The Company performs ongoing credit
evaluations of its customers' financial condition and limits the amount of
credit extended when deemed necessary, but generally requires no collateral. The
Company maintains reserves for estimated potential credit losses.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market.
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment acquired under capital
lease obligations is stated at the lower of fair value or the present value of
future minimum lease payments at the inception of the lease. Depreciation and
amortization is provided over the estimated useful lives of the assets or over
the life of the lease, as applicable, using the straight-line method. The
Company has adopted Statement of Financial Accounting Standards No. 121 (SFAS
No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". The adoption of this standard had no effect on the
Company's financial condition or results of operations.
CAPITALIZED SOFTWARE
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards No. 86 (SFAS No. 86), "Accounting
for the Costs of Computer Software to be Sold, Leased or otherwise Marketed".
Amortization of capitalized software development costs begins upon initial
product shipment. Software development costs are amortized (a) over the
estimated life of the related product, generally thirty-six months, using the
straight-line method, or (b) based on the ratio of current revenues from the
related products to total estimated revenues for such products, whichever is
greater.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees". The Company has presented the pro
forma disclosures of compensation expense under the fair value provisions of
Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting
for Stock-Based Compensation" in Note 9.
REVENUE RECOGNITION
The Company generally recognizes product revenues at the time of shipment,
but may delay revenue recognition until products are installed or accepted,
depending on the particular product and contract terms. Design and verification
service revenues are recognized as the services are performed. Revenues from the
sale of maintenance contracts are recognized over the term of the respective
contract.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109
(SFAS No. 109), "Accounting for Income Taxes," which requires an asset and
liability approach to account for income taxes and requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax basis of assets and liabilities and net operating loss and tax credit
carryforwards.
NET INCOME (LOSS) PER SHARE
In the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings
Per Share" which requires a dual presentation of basic and diluted earnings per
share ("EPS"). Basic EPS excludes dilution and is computed by dividing net
income or loss attributable to common stockholders by the weighted average of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
(convertible preferred stock, warrants to purchase common stock and common stock
options using the treasury stock method) were exercised or converted into common
stock. Potential common shares in the diluted EPS computation are excluded in
net loss periods as their effect would be antidilutive. In the computation of
loss per share, loss attributable to common stockholders includes the accretion
of Series B Preferred Stock totaling $5,866,000 and the accrual of dividends on
Series A Preferred Stock totaling $1,053,000 in 1997. EPS for all periods have
been computed in accordance with SFAS No. 128.
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which requires an enterprise to
report, by major components and as a single total, the change in net assets
during the period from nonowner sources; and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes annual
and interim reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic areas and major
customers. In October 1997, the American Institute of Certified Public
Accountants issued Statement of Position 97-2, "Software Revenue Recognition"
which requires revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the relative fair values of
the elements. Adoption of these statements will not impact the Company's
financial position, results of operations or cash flows.
NOTE 2: PURCHASED TECHNOLOGY
In June 1996, the Company acquired Attest Software, Inc. (Attest),
located in Santa Clara, California, in exchange for approximately 387,000
shares of the Company's Common Stock, valued at approximately $2,140,000, for
all the outstanding Common Stock of Attest. This transaction was accounted
for as a purchase; accordingly, the operations of Attest have been included
in the consolidated results of the Company since the day of acquisition. The
operating results of Attest prior to the acquisition were not significant. As
part of this transaction, the technology purchased, used for fault simulation
and automatic test pattern generation tools, was valued at $2,055,000 which
is being amortized over seven years. Accumulated amortization was $165,000 at
December 31, 1996. In August 1997, the Company sold these assets related to
the TDX product line (see Note 3).
NOTE 3: SALE OF ASSETS
DISPOSITION OF THE VERIFICATION PRODUCT FAMILY
In August 1997, the Company sold its assets relating to its verification
business, excluding the maintenance and support business, for a total of
$4,450,000, of which $4,250,000 was received as of December 31, 1997. As defined
in the purchase agreement, all of the rights, title and interest to the
intangible assets of the XP and PXP hardware fault simulation product business
were sold for $2,200,000. In a separate agreement, all of the assets of the
Attest business were sold for $2,250,000. See table below for details of the
transaction.
DISPOSITION OF THE LIGHTSPEED PRODUCT FAMILY
In April 1997, the Company sold its software and hardware simulation
technology relating to its LightSpeed product family for $5,000,000. Revenues in
1997 were nominal. See table below for details of the transaction.
SALE OF QUALITY SYSTEMS SOFTWARE, INC.
The 1995 financial statements of the Company include service revenues of
$5,400,000 with a gross profit of $3,700,000 and operating income of $1,600,000
for the activities related to the distribution of third party owned technology,
DOORS. In January 1996, the Company and Quality Systems Software, Ltd. (QSS
Ltd.), an U.K. company and owner of the DOORS technology, established a joint
venture, QSS Inc., to continue the distribution operations of the DOORS
technology and other products in the North American market. In January 1997, QSS
Inc. was restructured such that QSS Ltd. became a subsidiary of QSS Inc. in
which the Company owned a 22% interest. In May 1997, the Company sold its
interest in QSS Inc. for $3,500,000.
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 3: SALE OF ASSETS (Continued)
The details of these transactions are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C> <C>
Net income (loss) As reported $ (15,076) $ (21,376) $ 1,957
Pro forma $ (15,913) $ (22,280) $ 1,793
Diluted net income (loss) As reported $ (0.73) $ (1.03) $ 0.09
per share Pro forma $ (0.76) $ (1.08) $ 0.09
</TABLE>
When the Company sold its rights, title, and interest in the assets of the XP
and PXP hardware fault simulation product, the related maintenance contracts
were transferred to Zycad TSS Corporation in October 1997 for future royalties.
Zycad TSS is a company formed by former employees of the Company to perform
maintenance services. The agreement with Zycad TSS entitles the Company to
receive 30% of all domestic XP/PXP maintenance revenue in the first two years
and 10% in the third year. In addition, the Company is generally entitled to
receive 40% of Japanese revenues for the first five years up to a $1.8 million
and then 10% thereafter.
NOTE 4: BANK FINANCING AND LONG-TERM DEBT
LOAN AGREEMENT
In January 1997 the Company entered into a loan and security agreement for
working capital purposes. The Company may borrow up to $5,000,000 against its
accounts receivable, based on 80% of eligible receivables. The Agreement earns
interest at the bank's prime rate plus 2.25% and matures in January 1999. The
Company is not currently in compliance with certain covenants as required in the
agreement. There is no outstanding balance under the Agreement as of December
31, 1997. The Company has received a waiver from the Bank through March 31,
1998.
TERM LOANS
In 1995 and 1996, the Company entered into long-term loan agreements
totaling $2,179,000 that bear interest rates of 10.66% to 15.33% and mature over
36 months. These loans are secured by specific capital assets. At December 31,
1997, the balance outstanding under these loans was $96,000 due in 1998. In
1996, the Company obtained promissory notes totaling $901,000 from key vendors
that bear interest rates from 12% to 18%. In 1997, an additional note of
$194,000 was obtained which bears interest at 18%, and $972,000 was repaid on
the outstanding notes. At December 31, 1997, $124,000 remains payable.
SUBORDINATED CONVERTIBLE DEBENTURE NOTES
In May 1996, the Company sold a total of $10,000,000 of subordinated
convertible debenture notes (the Notes) to institutional investors as part of a
private placement. The Notes accrue interest at an annual rate of 6%, beginning
on the date of issue, with the principal due and payable three years from the
date of issue if and to the extent that the Notes are not previously converted.
The Notes are convertible at the option of the noteholders (subject to the
maximum share limitations set forth below) into Common Stock at a price equal to
80% to 85% of the average closing bid price for the Common Stock on the Nasdaq
National Market for the five trading days prior to the date of conversion. At
December 31, 1997 there was no outstanding balance on the Notes and
approximately 10,109,000 shares of Common Stock have been issued upon conversion
of the Notes.
The conversion of the Notes at 80% to 85% of the average closing bid price
of the Company's Common Stock results in the Notes being issued at a 15% to 20%
discount (the Conversion Discount). The Conversion Discount of $2,500,000 was
recognized during 1996 by the Company as non-cash interest expense from the date
of issuance through the date the security was most favorably convertible to the
noteholders, with a corresponding increase to the original principal amount of
the Notes. In addition, the stated 6% annual interest is being recognized
ratably over the term of the Notes. During the year ended December 31, 1997, a
total of $240,000 was recorded as interest expense relating to the Notes.
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 4: BANK FINANCING AND LONG-TERM DEBT (Continued)
As required as part of the Notes agreement in 1996, the Company issued 2 1/2
year warrants to purchase 59,500 shares of Common Stock at an exercise price of
$10 per share. The warrants are redeemable by the Company for $0.01 for each
10,000-share warrant if the Company's stock price is above $12. No value was
assigned to the warrants as the value was deemed to be nominal. During 1997, an
aggregate of $7,414,000 ($5,700,000 of the original principal of the Notes and
$1,714,000 of accrued interest) had been converted into 7,418,000 shares of
Common Stock. During 1996, an aggregate of $5,431,000 ($4,300,000 of the
original principal of the Notes and $1,131,000 of accrued interest) had been
converted into 2,691,000 shares of Common Stock.
In February 1997, the Company completed a $3,500,000 private placement with
investors whereby the Company issued 6% Subordinated Convertible Debenture (the
Debentures) with warrants to purchase 500,000 shares of Common Stock at $2.25
per share. The Debentures accrue interest at an annual rate of 6%, beginning on
the date of issue, with principal due and payable three years from the date of
issue, if and to the extent that the Debentures are not previously converted.
The Debentures are convertible at the option of the holder into the Company's
Common Stock at a discount up to 20% from market price (the Conversion
Discount). In May 1997, the Debentures were converted into 100,000 shares of the
Company's Series A Convertible Preferred Stock having an aggregate stated value
of $3,500,000. The conversion terms of the Preferred Stock were effectively the
same as the conversion terms of the original Debentures. During the year ended
December 31, 1997, a total of $438,000 was recorded as interest expense relating
to the Debentures and $438,000 was recorded as accrued dividends on the Series A
Convertible Preferred Stock. The interest expense and dividend principally
include a charge for the Conversion Discount. During 1997, 51,972 shares of the
Series A Preferred Stock had been converted to 4,546,928 shares of the Company's
Common Stock. In August 1997, the Company redeemed all of the remaining
outstanding shares of the Company's Convertible Series A Preferred Stock for
$1,827,000 and all of the outstanding warrants were exchanged for 350,000
warrants for the Company's Common Stock at an exercise price of $0.53 per share.
In September 1997, 105,000 of the warrants were exercised for $56,000.
NOTE 5: LEASES AND COMMITMENTS
The Company leases its facilities and other equipment under operating lease
agreements, which expire at various dates through 2002. The Company also leases
certain manufacturing equipment under capital leases that expire in 1999.
Approximate future minimum lease payments under these leases are as follows (in
thousands):
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 5: LEASES AND COMMITMENTS (Continued)
<TABLE>
<CAPTION>
Capital Operating
Year Leases Leases
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 346 $ 966
1999 58 551
2000 2 131
2001 - 136
2002 - 140
Thereafter - 12
- ---------------------------------------------------------------------------------------------------------
406 $ 1,936
----------------------- --------------------
----------------------- --------------------
Less amount representing
imputed interest 52
-----------------------
354
Less current portion 296
-----------------------
$ 58
-----------------------
-----------------------
</TABLE>
Accumulated depreciation of equipment under capital leases totaled
$620,000 and $561,000 at December 31, 1997 and 1996, respectively.
Depreciation expense on equipment under capital leases was $203,000 in 1997,
$264,000 in 1996 and $204,000 in 1995.
The Company leases office facilities under operating leases. Rent expense of
$1,582,000, $1,732,000 and $1,602,000 was incurred in 1997, 1996, and 1995,
respectively.
NOTE 6: SELECTED BALANCE SHEET INFORMATION
Selected Balance Sheet information is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------
<S> <C> <C>
Accounts receivable
Accounts receivable $ 3,170 $ 12,344
Current portion lease receivables 121 1,081
Less allowance for doubtful
accounts (528) (1,337)
-------- --------
$ 2,763 $ 12,088
-------- --------
-------- --------
Inventories
Raw materials and supplies $ 306 $ 2,045
Finished goods 429 619
-------- --------
$ 735 $ 2,664
-------- --------
-------- --------
</TABLE>
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 6: SELECTED BALANCE SHEET INFORMATION (Continued)
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
----------------------------
<S> <C> <C>
Property and equipment
Engineering, manufacturing, and
general office equipment $ 4,260 $ 18,842
Leasehold improvements 1,539 1,559
Equipment under capital lease 1,085 1,714
------------ ------------
6,884 22,115
Less accumulated depreciation
and amortization (4,224) (17,014)
------------ ------------
$ 2,660 $ 5,101
------------ ------------
------------ ------------
Other Long-Term Assets
Capitalized software $ -- $ 6,208
Accumulated amortization -- (2,799)
------------ ------------
-- 3,409
Long-term portion of
employee loans 9 25
Long-term portion of
lease receivables -- 348
Other assets 278 357
------------ ------------
$ 287 $ 4,139
------------ ------------
------------ ------------
Accrued expenses
Salaries and commissions $ 1,023 $ 1,771
Warranty expense 151 550
Other accrued expenses 1,944 3,024
------------ ------------
$ 3,118 $ 5,345
------------ ------------
------------ ------------
</TABLE>
Included in accounts payable at December 31, 1997 is $1,667,000 due to a
supplier which is in dispute. During 1998, the Company has paid $500,000 and
intends to renegotiate the balance.
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 7: INCOME TAXES
The provision (benefit) for income taxes reconciles to the amount computed
by applying the statutory federal rate to income or loss before taxes as follows
(in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ------------------
<S> <C> <C> <C>
Provision (benefit) at
statutory rate $ (4,667) $ (7,482) $ 757
Foreign losses not
currently utilizable 33 217 21
Increase (decrease) in
valuation allowance
for reversing temporary
differences (326) - (1,056)
Domestic losses not
currently utilizable 4,700 6,986 164
Other 260 279 114
--------------------- --------------------- ------------------
$ - $ - $ -
--------------------- --------------------- ------------------
--------------------- --------------------- ------------------
</TABLE>
The Company was not required to pay income taxes in 1997, 1996 or 1995 due
to its net operating loss carryforwards.
Significant components of the Company's deferred tax asset are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
--------- ----------
<S> <C> <C>
Deferred tax asset
Net operating loss carryforwards $ 21,362 $ 18,112
Tax credit carryforwards 3,422 3,114
Capitalized software and
other research and development 893 (933)
Tax basis depreciation 1,391 1,411
Accruals and reserves
recognized in different
periods 1,108 2,340
Other 7 80
Valuation allowance (28,183) (24,124)
--------- ----------
$ $
--------- ----------
--------- ----------
</TABLE>
The valuation allowance was established due to uncertainty regarding the
utilization of the net operating loss carryforwards. The net change in valuation
allowance was an increase of $4,059,000, an increase of $8,804,000 and a
decrease of $991,000 in 1997, 1996 and 1995, respectively.
Net pretax foreign income (losses) were ($93,000), ($620,000) and $185,000
in 1997, 1996 and 1995, respectively. The Company intends to indefinitely
reinvest the unremitted earnings of its foreign subsidiaries. The Company has
net operating loss
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 7: INCOME TAXES (Continued)
carryforwards of approximately $58,000,000 for federal tax purposes that will
begin to expire in 2005. State operating loss carryforwards expires as follows:
$335,000 in 1998, $30,000 in 1999, $94,000 in 2000, $6,113,000 in 2001 and
$3,672,000 in the year 2002. The Company's tax credit carryforwards of
$2,872,000 and $550,000 available to reduce future federal and California income
taxes, respectively. These credits will expire beginning in 1999. The Company
also has foreign net operating loss carryforwards of approximately $3,600,000
that may be used to offset future foreign taxable income.
The Tax Reform Act of 1986 and California Conformity Act of 1987 impose
substantial restrictions on the utilization of net operating losses and tax
credit carryforwards in the event of an "ownership change" as defined by the
Internal Revenue Code. If there should be such a change, the Company's ability
to utilize the stated carryforwards could be significantly limited.
NOTE 8: GEOGRAPHIC SEGMENT INFORMATION
Information concerning the Company's operations by geographic area is as
follows:
Net revenues to unaffiliated customers by geographic region (in thousands):
<TABLE>
<CAPTION>
1997 1996 1996
------- ------- -------
<S> <C> <C> <C>
United States $ 9,854 $25,396 $42,107
Europe 1,556 2,307 4,355
Japan 4,382 5,784 4,655
------- ------- -------
$15,792 $33,577 $51,117
------- ------- -------
------- ------- -------
</TABLE>
The amounts reported for Europe and Japan reflect amounts sold by foreign
subsidiaries. Included in the domestic revenue amounts are sales directly to
Japan and other Asian countries amounting to $1,648,000 in 1997, $2,116,000 in
1996 and $6,100,000 in 1995. Outside the United States, the Company operates
three subsidiaries in Europe, one subsidiary in Japan and also supports a branch
office in Taiwan. For the years ended December 31, 1997, 1996 and 1995, export
sales (including sales by foreign subsidiaries), principally to Europe and
Japan, comprised approximately 38%, 31% and 30% of consolidated revenues,
respectively. During 1997, 1996 and 1995, one customer accounted for 16%, 10%
and 17% of consolidated revenues, respectively.
Operating results and identifiable assets by geographic location are as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Operating income (loss)
United States $ (16,218) $ (17,338) $ 2,836
Europe (651) (861) (383)
Japan 154 (236) 97
---------- ---------- ---------
$ (16,715) $ (18,435) $ 2,550
---------- ---------- ---------
---------- ---------- ---------
1997 1996 1995
---------- ---------- ---------
Identifiable assets
United States $ 7,886 $ 25,324 $ 25,040
Europe 1,344 2,171 2,785
Japan 2,026 2,032 2,155
---------- ---------- ---------
$ 11,256 $ 29,527 $ 29,980
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 9: STOCKHOLDERS' EQUITY
REDEEMABLE PREFERRED STOCK
On November 10, 1997 the Board of Directors authorized the designation of
1,000,000 shares of series preferred stock, par value $0.10 per share, as Series
B Preferred Stock ("Series B Preferred Stock"). In November 1997, the Company
issued 1,000,000 shares of Series B Convertible Preferred Stock for $4.583
million. Each share is convertible into 4.5825 shares of Common Stock at the
discretion of the holder and accrues a dividend of $0.137475 per share per
annum. Additionally, under the terms of the Stock Purchase Agreement, the
Company is committed to issue 4,582,500 shares of Common Stock. The preferred
stock agreement requires the Company amongst other matters, to maintain a
listing on a public market (as defined). In the event of default, the holders of
the Series B Preferred Stock can redeem the preferred stock at a redemption
price of $4,5825 in cash per share plus accrued and unpaid dividends thereon or
be convertible, at the option of the holder, into 6.11 shares of Common Stock.
In addition, the holders of outstanding shares of Series B Preferred Stock are
entitled to vote as a separate class with respect to certain actions (as defined
by the preferred stock agreement) by the Company. The Company has granted demand
registration rights for the common stock to be issued pursuant to the
conversion. The calculated imbedded yield representing the discount on the
assumed potential conversion of the preferred stock was allocated to a
accumulated deficit and accreted to additional paid in capital. (See Note 10).
COMMON STOCK
The Company's Certificate of Incorporation was duly amended by a proposal by
the Board of Directors on November 10, 1997 and by vote of the stockholders at
the Annual Meeting of Stockholders on December 15, 1997, to increase the
Company's Common Stock from 40,000,000 shares to 65,000,000 shares of Common
Stock authorized at $0.10 par value. At December 31, 1997 there were 36,222,326
shares of the Company's Common Stock outstanding including 500,000 unissued
shares of subscribed stock.
In October 1997, the Company entered into a $3,250,000 Strategic Partnership
Agreement which principal terms included the delivery of technology, software,
equipment, engineering services, a warrant to purchase Common Stock and 500,000
shares of Common Stock. The Company has valued the Common Stock at $761,000 and
the warrant to purchase common stock at $450,000 (see Warrants). At December 31,
1997, subscribed stock represents cash received for this Common Stock, which has
not been issued as of that date. The remaining approximate $750,000 under the
agreement will be recognized in 1998 as the Company completes the terms of the
agreement.
STOCK COMPENSATION PLANS
The 1984 Stock Option Plan (the "1984 Plan"), as amended, provides for
4,000,000 shares of Common Stock to be issued under the 1984 Plan. The 1984 Plan
terminated in March 1994 and no further options may be granted under this plan.
The 1993 Stock Option Plan (the "1993 Plan"), as amended, provides for
3,000,000 shares of Common Stock to be issued under the 1993 Plan.
The 1996 Stock Option Plan (the "1996 Plan"), as amended, provides for
750,000 shares of Common Stock to be issued under the 1996 Plan.
Under the Company's stock option Plans, incentive stock options granted must
have a per share exercise price of not less than the fair market value per share
at the date of grant. Non-qualified stock options may be granted at such price
as may be determined by the Board of Directors. Dependent upon the Plan, options
generally vest at specific intervals over a three to four year period and expire
eight to ten years after the grant date. In the event of termination, the
Company has the right to cancel any vested options not exercised within 90 days
of termination.
During 1995, stockholders approved a Non-Employee Directors' stock option
plan (the "Director Option Plan") whereby 200,000 shares of Common Stock have
been reserved for issuance. Under the Company's Director Option Plan, each
non-employee director initially elected to the Board of Directors in the future
will be granted an option, upon his or her initial election
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 9: STOCKHOLDERS' EQUITY (Continued)
as a director, to purchase 15,000 shares of Common Stock. Each non-employee
director is also entitled to receive an option for 7,500 shares on the date of
each Annual Meeting of Stockholders. All options granted under the Director
Option Plan have or will have an exercise price equal to the fair market value
of the Common Stock on the date of grant, will vest over a two-year period,
provided the option holder continues to serve as a director of the Company, and
will expire ten years from the date of grant (subject to earlier termination in
the event the optionee ceases to serve as a director of the Company). The
Company granted 22,500 options to purchase Common Stock at $1.50 per share to
Directors in 1997.
In July 1997, the Board of Directors authorized the exchange of outstanding
stock options held by all employees for new options with an exercise price of
$0.47 per share, the fair market value of the Common Stock on such date. In
return, participating employees who chose to exchange their options agreed to
accept stock options which will vest on a quarterly basis upon achievement of
certain management goals to be established quarterly for each such employee, or
in any event, in July 1999, should the employee still be employed by the
Company. Options covering a total of 1,744,099 shares were exchanged under this
program. The effect of such exchange reduced the weighted average exercise price
of the outstanding options from $1.79 to $.80 per share.
In October 1996, the Company agreed to exchange outstanding options to
purchase the Company's Common Stock held by all employees for an equal number of
options with an exercise price of $1.63, the then-current fair market value of
the Company's Common Stock. In return, participating employees who chose to
exchange their options agreed to accept stock options which will vest on a
quarterly basis upon achievement of certain management goals to be established
quarterly for each such employee, or in any event, in October 2000, should the
employee still be employed by the Company. Options covering a total of 1,040,100
shares were exchanged under this program. The effect of such exchange reduced
the weighted average exercise price of the outstanding options from $3.24 to
$1.90 per share. The effects of these exchanges in 1997 and 1996 have been
included in the accompanying table as options granted and cancelled.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, which establishes financial accounting and reporting standards for
stock-based employee compensation plans. This statement defines a fair value
based method of accounting for an employee stock option of similar equity
instrument. Under this method, compensation costs are measured at the grant
date based on the value of the award and are recognized over the service
period, which is the vesting period.
The Company continues to account for its stock-based awards using the
intrinsic value method in accordance with APB No. 25 and its related
interpretations. Had compensation cost for the Company's various stock option
plans been determined consistent with SFAS No. 123, the Company's net income or
loss and diluted net income or loss per share would have been changed to the pro
forma amounts indicated below (in thousands, except net income or loss per share
amounts):
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Net income (loss) As reported $(15,076) $(21,376) $ 1,957
Pro forma $(15,913) $(22,280) $ 1,793
diluted net income (loss) As reported $ (0.73) $ (1.03) $ 0.09
per share Pro forma $ (0.76) $ (1.08) $ 0.09
</TABLE>
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 9: STOCKHOLDERS' EQUITY (Continued)
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, 1996 and 1995 respectively; expected
volatility of 145% for 1997, 90% for 1996 and 84% for 1995, risk-free interest
rates of 5.91%, 6.07%, and 6.16% for 1997, 1996, and 1995 respectively, and
expected lives of 3.5 years from the grant date for 1997, 1996 and 1995.
Options under the employee stock option plans have been granted, exercised and
cancelled as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------
Weighted-
Shares Average
Available Exercise
for grant Shares Price
----------- ---------- ---------
<S> <C> <C> <C>
Balance,
January 1, 1995 917,650 2,398,323 $ 1.868
Additional shares
authorized 1,500,000 - -
Granted (1,538,826) 1,538,826 4.347
Exercised - (634,983) 1.472
Cancelled 221,190 (428,262) 2.060
----------- ---------- ---------
Balance,
December 31, 1995 1,100,014 2,873,904 3.254
Additional shares
authorized 750,000 - -
Granted (2,311,120) 2,311,120 2.353
Exercised - (369,877) 1.531
Cancelled 1,517,026 (1,517,026) 5.286
----------- ---------- ---------
Balance,
December 31, 1996 1,055,920 3,298,121 1.881
Additional shares
authorized - - -
Granted (3,743,196) 3,743,196 0.417
Exercised - (278,002) 1.365
Cancelled 3,360,346 (3,360,346) 1.659
----------- ---------- ---------
Balance
December 31, 1997 673,070 3,402,969 $ 0.678
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
The weighted average per share fair value of the stock options granted in
1997, 1996 and 1995 was $0.42, $1.54 and $2.68, respectively. At December 31,
1997, 1996 and 1995, outstanding options under the employees stock option plans
were exercisable for 1,423,209, 1,065,835 and 1,067,024 shares respectively. All
outstanding options are nonqualified options.
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 9: STOCKHOLDERS' EQUITY (Continued)
The following tables summarize information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Ountstanding
----------------------------
Weighted-avg.
Exercise Price Number Remaining
- -------------- Outstanding Contractual
From To at 12/31/97 Life
- ------ ------ ----------- -------------
<S> <C> <C> <C>
$ 0.47 $ 1.00 3,040,519 6.90
$ 1.31 $ 1.50 48,500 9.91
$ 1.56 $ 2.06 263,950 4.81
$ 2.38 $ 3.50 50,000 5.42
- ------ ------ ----------- -------------
$ 0.47 $ 3.50 3,402,969 6.76
- ------ ------ ----------- -------------
- ------ ------ ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
----------------------------
Exercise Price Number Weighted-avg.
- -------------- Outstanding Exercise
From To at 12/31/97 Price
- ------ ------ ----------- -------------
<S> <C> <C> <C>
$ 0.47 $ 1.00 1,175,926 $ 0.610
$ 1.31 $ 1.50 - -
$ 1.56 $ 2.06 213,950 2.060
$ 2.38 $ 3.50 33,333 2.630
- ------ ------ ----------- -------------
$ 0.47 $ 3.50 1,423,209 $ 0.870
- ------ ------ ----------- -------------
- ------ ------ ----------- -------------
</TABLE>
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 9: STOCKHOLDERS' EQUITY (Continued)
EMPLOYEE STOCK PURCHASE PLAN
Through the Company's Employee Stock Purchase Plan, eligible employees of
the Company may purchase Common Stock at the fair market value of the stock at
the beginning or end of each offering period (calendar quarters), whichever is
lower. Each participant may contribute from 3% to 10% of total compensation, up
to a limit of $25,000 annually. Additionally, each participant is prohibited
from owning more than 5% of the Company's Common Stock. In December 1995, an
additional 200,000 shares of Common Stock were made available for purchase under
this plan, of which 105,635 shares were issued at December 31, 1997. During
1997, 92,747 shares were purchased for prices ranging from $0.56 to $1.66 with
an average price of $1.04 per share and 13,025 shares were issued in January
1998 related to 1997 purchases. At December 31, 1997, 94,365 shares were
reserved for future issuance under the Purchase Plan. The fair value of the 1997
awards was not considered significant.
EMPLOYEE 401(K) PLAN
Through the Company's elective 401(k) savings plan, eligible U.S. employees
of the Company may contribute up to 17.6% of their pre-tax earnings, subject to
current IRS restrictions. Under the plan, the Company may make discretionary
matching contributions up to $1,500 of 25% of an employee's contributions. The
participants vest in the Company's contribution over five years. Company
contributions to this plan were $161,000 in 1997, $200,000 in 1996 and $198,000
in 1995.
WARRANTS
At December 31, 1997, total warrants outstanding were 4,535,584. Purchase
price of the securities subject to these warrants range from $.47 to $10.00 and
they expire at various dates through July 2005.
In connection with the Series B Preferred Stock financing pursuant to the
November 1997 Stock Purchase Agreement, the Company agreed to issue warrants to
purchase 997,751 shares of common stock at $1.00 per share. The warrants will
terminate upon the approval by the stockholders of an increase in the Company's
authorized common stock and the closing of the common stock financing
contemplated by the agreement. Both these conditions were satisfied by January
1998, accordingly these warrants expired at that date.
During October 1997, the Company entered into a licensing agreement under
which the Company granted a stock warrant to purchase 9.9% of its outstanding
shares of Common Stock to a strategic partner for an exercise price equal to 80%
of the Market Price of the Company's Common Stock on the trading day immediately
prior to the date of exercise, subject to a minimum exercise price of $1.00 per
share. Market Price is defined as the last trade price for common stock as
reported on Nasdaq. In the event that the strategic partner's interest is
decreased to less than 9.9% by future equity offerings, they will have the right
to increase the stock warrant for additional shares at the same conditions as
the equity offering such to maintain its 9.9% interest in the Company. The term
of this warrant is for five years and is exercisable as follows: the first 1/3
shares after 6 months, an additional 1/3 shares after 12 months, and the final
1/3 after 18 months.
In July 1997, the Board of Directors approved the exchange of Common Stock
warrants and nonqualifying stock options held by certain directors for new
Common Stock warrants to purchase 202,595 shares of Common Stock at an exercise
price of $0.47 per shares, the fair market value of the common stock on that
date of exchange. The effect of such exchange reduced the weighted average
exercise price of the warrants and nonqualifying options from $1.97 to $0.47 per
share. In November 1997, a director was issued warrants to purchase 7,500 shares
of Common Stock at an exercise price of $1.44 per share. In February 1998,
certain directors exercised their warrants for 137,595 shares of Common Stock.
During 1996, 59,500 warrants were issued relating to the subordinated
convertible debenture note. No warrants were exercised or cancelled in 1996.
In 1995, warrants for 53,860 shares were exercised and warrants for 32,058
issued in prior years were cancelled.
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 10: SUBSEQUENT EVENTS
SALE OF COMMON STOCK
In January 1998, the Company issued 4,582,500 shares of Common Stock to an
outside investor for an aggregate purchase price of $4.583 million pursuant to a
Stock Purchase Agreement entered into in November 1997. The issuance of Common
Stock completes the second and final phase of the private placement of
securities contemplated by the Agreement.
STOCK MARKET LISTING
At December 31, 1997, the Company was not in compliance with the requirement
of the Nasdaq Stock Market (NASD) for listing on the Nasdaq National Market
(a distinct tier of the Nasdaq Stock Market) to maintain minimum net tangible
assets (as defined) of $4.0 million. Effective July 16, 1998 the Nasdaq
Listings Qualification Panel granted the Company's Common Stock a listing on
the Nasdaq SmallCap Market, which is another tier of the Nasdaq Stock Market.
The Panel granted the listing pursuant to that Market's maintenance
requirements and with the exception that the Company must make a public
filing with the Securities and Exchange Commission on or before August 14,
1998 evidencing a minimum of $6.0 million in net tangible assets. On August
14, 1998 the Company filed a Form 8-K evidencing it had complied with the net
tangible asset requirement principally achieved through a business
relationship with Actel Corporation which included the sale of $3.0 million
of Series C Convertible Preferred Stock. Effective September 17, 1998 the
Company's stock was delisted from The Nasdaq SmallCap Market for failure to
meet the on-going minimum bid price requirement. Since that time, the
Company's stock has traded on the OTC Bulletin Board. As a result of the
delisting, the Company's Series B Preferred Stock became redeemable at the
option of the holders thereof, to the extent permitted by applicable law. In
October 1998, the Company was notified by the Series B stockholders of their
desire to redeem 981,997 of the 1,000,000 outstanding shares of the Series B
Preferred Stock for approximately $4.6 million. A special subcommittee of the
Board of Directors has been appointed and is currently assessing whether, or
to what extent, the redemption is permitted by applicable law. If the above
Series B redemption is permitted and if the holders of the remaining 18,003
shares of Series B elect to redeem all of their shares, then the holders of
the Company's Series C Preferred Stock would have the right to redeem their
shares for a total of $3.0 million, to the extent permitted by applicable
law. If the Series B redemption is not permitted, the conversion rate of the
Series B Preferred Stock shall be increased according to a formula set forth
in the Company's Certificate of Incorporation, resulting in additional
dilution to the common stockholders.
NOTE 11: RESTATEMENT
Subsequent to the issuance of the Company's 1997 consolidated financial
statements, the Company determined that the application of a technical
accounting treatment required the 1997 net loss per share calculation to
include $5,866,000 for the accretion of the assumed beneficial conversion
feature of the Series B Preferred Stock issued in November 1997 and
$1,053,000 for preferred stock dividends. The effect of the accretion is a
non-cash charge to stockholders' deficit and does not impact the previously
reported net loss for the year ended December 31, 1997 nor does it result in
a net change to stockholders' deficit. The effect of the restatement was to
increase net loss per share by $0.23 to $0.73 for the year ended December 31,
1997.
In addition, the Certificate of Designation of the Series B Convertible
Preferred Stock requires the Company to maintain a listing on a public market
(as defined in the agreement). As discussed in Note 10, the Company is not in
compliance with this provision and accordingly the Series B Preferred Stock
is now redeemable at the option of the holders or convertible at 6.11 shares
of Common Stock if the redemption is not possible or not permitted by
applicable law. Accordingly, the Series B Convertible Redeemable Preferred
Stock is classified as mezzanine equity separate from stockholders' equity
(deficit). A summary of the significant effects of the restatement is as
follows (in thousands, except net income (loss) per share amounts):
<PAGE>
GATEFIELD CORPORATION
(Formerly Zycad Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 11: RESTATEMENT (Continued)
<TABLE>
<CAPTION>
As
Previously
Reported As Restated
- -----------------------------------------------------------------------------------
<S> <C> <C>
AT DECEMBER 31, 1997
Redeemable preffered stock
$0.10 par value; 2,000,000 shares authorized;
shares issued and outstanding: 1,000,000 in 1997
and none in 1996 - at a redemption value $ - $ 4,594
Stockholders' equity
Preferred stock
$0.01 par value; 2,000,000 shares authorized;
shares issued and outstanding; 1,000,000 in 1997
and none in 1996 $ 100 $ -
Additional paid-in capital, preferred stock $ 4,494 $ -
Additional paid-in capital, common stock $ 66,776 $ 72,642
Accumulated deficit $ (71,619) $ (77,485)
Total stockholders' equity (deficit) $ 2,829 $ (1,765)
FOR THE YEAR ENDED DECEMBER 31, 1997:
Net loss attributable to common stockholders $ 15,076 $ 21,995
Basic net income (loss) per share $ (0.50) $ (0.73)
Diluted net income (loss) per share $ (0.50) $ (0.73)
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
GateField Corporation:
We have audited the accompanying consolidated balance sheets of GateField
Corporation (formerly Zycad Corporation) and its subsidiaries at December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of GateField Corporation and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 11, the accompanying financial statements have been
restated.
DELOITTE & TOUCHE LLP
San Jose, California
April 8, 1998 (November 4, 1998 as to Note 11 and the second paragraph of
Note 10)
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
1. Financial Statements
Reference is made to the Index to Financial Statements under Item 8 of
Part II hereof, where these documents are included.
2. Financial Statement Schedules
There are no financial statement schedules filed as part of this report
because such schedules are not required to be set forth therein or the
information is shown in the financial statements or notes thereto.
3. Exhibits filed with this Report on Form 10-K
Exhibit 23.1 -- Consent of Independent Auditors, Deloitte & Touche LLP
Exhibit 27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
GateField Corporation's Current Report on Form 8-K filed January 23,
1998, reporting on a Stock Purchase Agreement with Idanta Partners Ltd.
For 4,582,000 shares of GateField Corporation's Common Stock.
GateField Corporation's Current Report on Form 8-K filed August 15,
1998, reporting on an Asset Purchase Agreement with Actel Corporation.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
GATEFIELD CORPORATION
--------------------------------
Registrant
Date: November 19, 1998 By: /s/ James B. Boyd
--------------------------------
James B. Boyd
Corporate Controller, Chief
Accounting Officer
By: /s/ James R. Fiebiger
--------------------------------
James R. Fiebiger
Chief Executive Officer and Director
(Principal Executive Officer)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements No.
333-42363 and No. 333-60417 of GateField Corporation on Form S-8, and No.
333-08089 and No. 333-27283 on Form S-3 of our reports dated April 8, 1998
(November 4, 1998 as to Note 11 and the second paragraph of Note 10) (which
expresses an unqualified opinion and includes an explanatory paragraph
relating to the restatement described in Note 11), appearing in this Annual
Report on Form 10-K/A of GateField Corporation for the year ended December
31, 1997.
DELOITTE & TOUCHE LLP
San Jose, California
November 13, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 4,189 1,703 3,722
<SECURITIES> 98 100 224
<RECEIVABLES> 3,291 13,425 12,419
<ALLOWANCES> 528 1,337 296
<INVENTORY> 735 2,664 1,788
<CURRENT-ASSETS> 8,309 17,511 18,622
<PP&E> 2,660 5,101 5,598
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 11,256 29,527 28,980
<CURRENT-LIABILITIES> 8,356 18,751 11,881
<BONDS> 0 0 0
0 0 0
4,594 0 0
<COMMON> 3,622 2,323 1,975
<OTHER-SE> 72,642 55,784 47,837
<TOTAL-LIABILITY-AND-EQUITY> 11,256 29,527 28,980
<SALES> 5,385 18,232 28,422
<TOTAL-REVENUES> 15,792 33,577 51,117
<CGS> 6,421 8,439 6,407
<TOTAL-COSTS> 10,903 17,008 17,493
<OTHER-EXPENSES> 21,604 35,004 31,074
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1,360 3,184 343
<INCOME-PRETAX> (15,076) (21,376) 1,957
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (15,076) (21,376) 1,957
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (15,076) (21,376) (1,957)
<EPS-PRIMARY> (0.73) (1.03) 0.10
<EPS-DILUTED> (0.73) (1.03) 0.09
</TABLE>
