<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 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
(Exact name of registrant as specified in its charter)
DELAWARE 41-1404495
(State of incorporation) (I.R.S. Employer Identification No.)
47436 FREMONT BLVD. FREMONT, CALIFORNIA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 623-4400
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Title of Each Class Outstanding at July 9, 1999
------------------- ---------------------------
<S> <C>
Common stock, par value $0.10 per share 4,171,702
</TABLE>
<PAGE>
GATEFIELD CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations and Comprehensive Loss
for the Three Months Ended June 30, 1999 and 1998 and for the Six
Months Ended June 30, 1999 and 1998 (Restated) 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements, June 30, 1999 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
2
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GATEFIELD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,423 $ 3,832
Accounts receivable, less allowance for doubtful
accounts of $359 in 1999 and $244 in 1998 263 463
Inventories 9 117
Other current assets 1,207 556
-------- ---------
Total current assets 7,902 4,968
Property and equipment, net 1,303 1,783
Other assets 7 102
-------- ---------
Total assets $ 9,212 $ 6,853
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 287 $ 393
Accounts payable 387 1,372
Accrued expenses 1,722 1,941
Deferred revenues 4,294 4,772
-------- ---------
Total current liabilities 6,690 8,478
Long-term obligations 8,208 330
-------- ---------
Total liabilities 14,898 8,808
Redeemable Preferred Stock:
$0.10 par value; 2,000,000 shares authorized; shares issued
and outstanding: 318,000 in 1999 and 318,000 in 1998 3,084 3,083
Stockholders' deficit:
Common stock:
$0.10 par value; 65,000,000 shares authorized; shares issued
and outstanding: 4,221,000 in 1999 and 4,193,000 in 1998 422 419
Additional paid-in capital 83,289 81,900
Accumulated other comprehensive loss (771) (737)
Accumulated deficit (91,710) (86,620)
-------- ---------
Total stockholders' deficit (8,770) (5,038)
-------- ---------
Total liabilities and stockholders' deficit $ 9,212 $ 6,853
======== =========
</TABLE>
3
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATEFIELD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
(As restated, See Note 5) (As restated, See Note 5)
<S> <C> <C> <C> <C>
Revenues:
Product $ 482 $ 1,359 $ 624 $ 1,999
Service 180 2,109 490 3,318
------- -------- --------- ---------
Total revenues 662 3,468 1,114 5,317
------- -------- --------- ---------
Cost of revenues:
Product 332 1,486 569 2,536
Service -- 605 138 1,365
------- -------- --------- ---------
Total cost of revenues 332 2,091 707 3,901
------- -------- --------- ---------
Gross profit 330 1,377 407 1,416
------- -------- --------- ---------
Operating expenses:
Sales and marketing 197 1,359 385 2,274
Research and development 1,079 1,399 2,426 2,696
General and administrative 693 785 1,433 1,550
------- -------- --------- ---------
Total operating expenses 1,969 3,543 4,244 6,520
------- -------- --------- ---------
Operating loss (1,639) (2,166) (3,837) (5,104)
------- -------- --------- ---------
Other income (expense):
Interest expenses, net (1,209) (20) (1,221) (110)
Other income (expense), net 1 (134) (31) (69)
------- -------- --------- ---------
Total other income (expense) (1,208) (154) (1,252) (179)
Net loss $(2,847) $ (2,320) $ (5,089) $ (5,283)
Other comprehensive loss:
Currency translation adjustments $ 18 $ 90 $ 2 $ 1
======== ======== ========== ========
Comprehensive loss $(2,829) $(2,230) $ (5,087) $(5,282)
Loss attributable to common stockholders $(2,848) $(2,355) $ (5,090) $(5,352)
======== ======== ========== ========
Basic and diluted net loss per share* $ (0.68) $ (0.57) $ (1.21) $ (1.31)
======== ======== ========== ========
Basic and diluted weighted average shares outstanding* 4,207 4,135 4,215 4,084
======= ======= ========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
GATEFIELD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
(IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net loss $(5,089) $(5,283)
Reconciliation to net cash used in operating activities:
Depreciation and amortization 480 640
Noncash subordinated convertible debt interest 1,231 --
Changes in assets and liabilities:
Accounts receivable 213 849
Inventories 108 64
Other assets (544) (10)
Accounts payable and accrued expenses (1,185) (1,565)
Deferred revenues (478) (326)
-------- --------
Net cash used in operating activities (5,264) (5,631)
-------- --------
Investing activities:
Purchases of marketable securities -- (15)
Property and equipment purchases, net -- (627)
-------- --------
Net cash used in investing activities -- (642)
-------- --------
Financing activities:
Proceeds from issuance of convertible note 8,000 --
Principal payments on long term debt & capital lease obligations (228) --
Proceeds from issuance of common stock 161 4,926
-------- --------
Net cash provided by financing activities 7,933 4,926
Effect of exchange rate changes on cash and cash equivalents (78) 9
-------- --------
Net change in cash and cash equivalents 2,591 (1,338)
Cash and cash equivalents, beginning of period 3,832 4,189
-------- --------
Cash and cash equivalents, end of period $ 6,423 $ 2,851
======== ========
Supplemental disclosure of cash flow information:
Noncash activities:
Accrued dividends on preferred stock (As restated - See Note 5) $ 1 $ --
Equipment acquired under capital leases $ -- $ 465
Cash activities:
Cash paid during the year for interest $ 25 $ 186
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the financial
statements, during the quarters ended June 30, 1999 and 1998, GateField
Corporation, (the "company") incurred net losses of approximately $2,829,000 and
$2,411,000, respectively and had stockholders deficits of approximately
$8,770,000 at June 30, 1999 and $5,038,000 at December 31, 1998. The company
must successfully introduce its .25 micron products into the market and
successfully manufacture sufficient quantities to support its sales and
marketing introduction to reach cash flow breakeven. If the company fails to
significantly increase revenues within the next six to nine months it will have
to obtaining additional financing in order to fund planned operating levels or
cease or significantly reduce operations.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the company be
unable to continue as a going concern. The company's continuation as a going
concern is dependent upon its ability to complete its new product development
and begin commercial sales, and ultimately obtain sufficient customer demand to
attain profitable operations. Management intends to closely manage its operating
expenses, begin sales of new products currently in development and obtain
additional financing to cover its additional cash flow requirements until it
reaches a break-even level of operations. No assurance can be given that the
company will be successful in these efforts.
Interim results of operations are not necessarily indicative of the
results to be expected for the full year. The company's interim fiscal quarter
ended on June 30, 1999 and 1998, respectively. In the opinion of the Company,
all adjustments (consisting only of normal, recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
June 30, 1999, and for all periods presented, have been made. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's December 31, 1998 Annual Report on Form 10-K.
2. INVENTORIES
On June 30, 1999 and December 31, 1998 the company had finished goods
inventory of $9,000 and $117,000, respectively.
3. CONVERTIBLE PROMISSORY NOTE
In May 1999, the company issued a convertible promissory note in the
aggregate principal amount of $8.0 million (the Note). The Note accrues interest
at 5.22% per annum, has a five-year term and is secured by a lien against all
the assets of the company. The Note is convertible into 420,000 shares of the
company's Series C-1 Convertible Preferred Stock. The Series C-1 Convertible
Preferred Stock is in turn convertible into 1,230,769 shares of the company's
common stock, or the equivalent price of $6.50 per share of common stock.
The Note is convertible at the option of the noteholder. On the date of
issuance the Note was convertible into common stock at a price equal to
approximately a 13% discount (the Conversion Discount) to the closing market
price as reported on the OTCBB. The Conversion Discount of $1.2 million was
recognized during the second quarter of 1999 by the company as a non-cash
interest expense with a corresponding increase in the common stock additional
paid in capital.
6
<PAGE>
4. REVERSE STOCK SPLIT
In March 1999 the company's Board of Directors approved a ten for one
reverse stock split of the company's common stock. In June 1999 the company's
shareholders approved the reverse stock split. The reverse split became
effective on June 30, 1999 (the "Effective Date"). No fractional shares were
issued. In lieu of any such fractional share interest, each holder will receive
cash in an amount equal to the product obtained by multiplying (i) the closing
sales price of the company's Common Stock on the Effective Date as reported on
the OTCBB by (ii) the number of shares of Common Stock held by such holder that
would otherwise have been exchanged for such fractional share interest. Basic
and diluted net loss per share have been adjusted retroactively for all periods
presented to reflect the reverse stock split.
5. RESTATEMENT
Subsequent to the issuance of the Company's unaudited financial
statements for the quarterly period ended June 30, 1998, the Company's
management determined that stock dividends on the Series B preferred stock
had not been properly recorded As a result the Company's financial statements
for the three and six months ended June 30, 1998 have been restated from
amounts previously reported to appropriately record Series B preferred stock
dividends and include such amounts as a component of loss available to common
stockholders. A summary of the significant effects of the restatement is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- --------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
FOR THE PERIOD ENDED JUNE 30, 1998
Loss attributable to common stockholders $ -- $ (2,355) $ -- $ (5,352)
Basic and diluted net loss per share $ (0.56) $ ( 0.57) $ ( 1.29) $ (1.31)
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION IN THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT
PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING THE COMPANY'S
EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "FACTORS AFFECTING FUTURE RESULTS" AS WELL AS THOSE DISCUSSED IN
THIS SECTION AND ELSEWHERE IN THIS REPORT, AND THE RISKS DISCUSSED IN THE
COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
RESTATEMENT
Subsequent to the issuance of the Company's unaudited financial
statements for the quarterly period ended June 30, 1998, the Company's
management determined that stock dividends on the Series B preferred stock had
not been properly recorded. As a result the Company's financial statements for
the three and six months ended June 30, 1998 have been restated from amounts
previously reported to record Series B preferred stock dividends and include
such amounts as a component of loss available to common stockholders. The
effects of the restatement are presented in Note 5 of Notes to the Condensed
Consolidated Financial Statements and have been reflected herein.
7
<PAGE>
REVENUES
Total revenues declined to $662,000, or 81%, in the quarter ended June
30, 1999 from $3,468,000 for the same period last year. Total product revenues
in the quarter ended June 30, 1999 declined to $482,000 from $1,359,000 for the
same period last year. ProASIC product revenues for the quarter ended June 30,
1999 include the recognition of $312,000 in license fees from Rohm Co. Ltd. in
Kyoto, Japan that were collected and deferred in fiscal 1998. The decline in
ProASIC revenues was due to the company's decision to halt active sales efforts
for the 0.72-micron product in the third quarter of 1998 and ultimately
terminate the sale of these products in the second quarter of 1999. The company
expects that a significant portion of future revenues, if any, will come from
the commercialization of its 0.25-micron products. The company believes that it
will begin selling its 0.25-micron product in the third quarter of fiscal 1999.
However, no assurance can be given that the company's design and introduction
schedules for such products can be met. Moreover, there can be no assurances
that, even if such products are introduced into the market on a timely basis,
they will be successfully developed or that they will achieve market acceptance.
To the extent that the company's development and commercialization efforts with
respect to the 0.25-micron products are unsuccessful or if these products do not
achieve market acceptance, the company's business, financial condition and
results of operations would be materially adversely affected.
Service revenues declined to $180,000 for the quarter ended June 30,
1999 from $2,109,000 for the same quarter last year. Service revenues are
comprised of two components: (i) maintenance contracts on the company's
verification systems and (ii) design services. Revenues from maintenance
contracts on the company's verification systems were $176,000 in the second
quarter of 1999 as compared to $1,258,000 in the second quarter of 1998. The
decline in verification maintenance revenues is the result of the sale of the
verification product assets in 1997. Revenues from maintenance contracts on the
company's verification systems earned in the second quarters of 1999 and 1998
represent the company's portion of a profit sharing agreement with the purchaser
of the verification assets. The company expects revenues from this source to
continue to decline at an accelerated rate and to cease in 1999. The company did
not generate any service fees from its design services for the quarter ended
June 30, 1999 because the company sold those assets to Actel Corporation in
August 1998. Service fees related to the company's design services were $851,000
in the quarter ended June 30, 1998.
Total revenue for the six months ended June 30, 1999 decreased to
$1,114,000 from $5,317,000 for the same period last year. Product revenue for
the six months ended June 30, 1999 was $624,000, compared to $1,999,000 for the
comparable period last year. Service revenue was $490,000 for the six months
ended June 30, 1999; compared to $3,318,000 for the same period last year. The
decrease in product revenue and service revenue represents the transition of the
company's business as a manufacturer of verification products to a designer,
developer and marketer of high-density, high-performance FPGA products. The
company expects that service revenue will decline to zero over the balance of
the year.
GROSS PROFIT
Gross profit for the quarter ended June 30, 1999 was $330,000, as
compared to $1,377,000, for the same period last year. Gross profit from
ProASIC product revenues for the quarter ended June 30, 1999 was $173,000 as
compared to a gross loss of ($127,000) for the quarter ended June 30, 1998.
Poor manufacturing yields on the 0.72-micron product wafers caused actual
costs to exceed revenues on those products for the quarter ended June 30,
1998. As the design and manufacturing processes are different for the
0.72-micron and the 0.25-micron products, the yields and, hence, the gross
profits on the two products are unrelated. Furthermore, the 0.25-micron
product has not been manufactured in commercial quantities. Therefore, the
company cannot predict its margins for 1999 with any degree of certainty.
Gross profit related to 0.72-micron products is expected to cease in the
third quarter of 1999 as the company does not expect to sell this product in
future quarters.
Gross profit from service revenues was $180,000 in the quarter ended
June 30, 1999, as compared to $1,504,000 in the same period last year. Gross
profit related to maintenance contracts on the verification systems was
$176,000 in the quarter ended June 30, 1999, as compared to $1,256,000 in the
same period last year. The company expects that revenues
8
<PAGE>
related to maintenance contracts on the verification systems will decline to
zero in the remainder of 1999 and, therefore, will not contribute to gross
profit. Gross profit related to design services were $248,000, or 29% of
revenue for the quarter ended June 30, 1998. Because revenue from design
services ceased in August 1998, the company does not expect any gross profit
contribution from this source for the remainder of 1999. Therefore, gross
profit from service revenues is not expected to be significant over the
balance of 1999.
Gross profit for the six-month period ended June 30, 1999 was $407,000
compared to $1,416,000 for the same period last year. The gross profit from
product revenues was $55,000 or 9% of revenues, for the six month period ended
June 30, 1999 as compared to a loss of $537,000 for the same period last year.
Gross profit from service revenues was $352,000, or 72% of revenues, for the six
months ended June 30, 1999 compared to $1,953,000, or 59%, for the same period
last year.
SALES AND MARKETING
Sales and marketing expenses were $197,000 for the three months
ended June 30, 1999 as compared to $1,359,000 for the three months ended June
30, 1998. Sales and marketing expenses for the six months ended June 30, 1999
and June 30, 1998 were $385,000 and $2,274,000, respectively. The decrease
represents the termination of the company's sales and marketing personnel in
connection with the sale of the company's worldwide distribution rights to
its 0.25-micron and below products to Actel in August 1998. Expenses incurred
in the second quarter of 1999 relate to the company's efforts to prepare for
the 0.25-micron product introduction and the company's efforts to support
strategic initiatives and new product designs. The company expects quarterly
sales and marketing expenses to remain relatively flat for the remainder of
the year.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended June
30, 1999 were $1,079,000 as compared to $1,399,000 for the three months ended
June 30, 1998. Research and development expenses for the six months ended
June 30, 1999 and June 30, 1998 were $2,426,000 and $2,696,000, respectively.
The decrease in the quarter ended June 30, 1999 represents a decrease in mask
costs for the 0.25-micron product development and normal fluctuations in
operating expenses. The company expects quarterly research and development
expenses to be between $1.2 million and $1.5 million per quarter for the
remainder of the year.
9
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended June
30, 1999 and 1998 were $693,000 and $785,000, respectively. The decrease
represents reduced head count. General and administrative expenses for the
six months ended June 30, 1998 and 1997 were $1,433,000 and $1,550,000
respectively. The company expects these expenses to remain relatively flat
for the remainder of the year. However, general and administrative expenses
may increase in future quarters due to legal and accounting expenses incurred
in connection with future financings.
OTHER INCOME AND EXPENSES
Other expenses for the quarter ended June 30, 1999 were $1,208,000
as compared to other expenses of $154,000 for the quarter ended June 30,
1998. Other expenses for the six months ended June 30, 1998 and 1997 were
$1,252,000 and $179,000 respectively. The increase in 1999 is due to a $1.2
million non-cash interest expense that the company recognized on the date of
issuance of a convertible promissory note in the aggregate principal amount
of $8.0 million to Actel (see note 3).
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the company had cash and cash equivalents of
approximately $6,423,000 and working capital of $1,212,000. During the six
month periods ended June 30, 1999 and 1998, the company incurred net losses
of approximately $5,053,000 and $5,284,000, respectively. The company expects
to continue to generate such losses for at least the remainder of 1999. As a
result, the company estimates it will have utilized all of its currently
available capital resources on or about March 31, 2000. If the company cannot
generate significant revenues by that date or obtain additional funding, the
company would be unable to continue as a going concern. Many factors could
increase or decrease the company's utilization of its capital resources
during this period. The company cannot predict the timing or the magnitude of
those factors with any degree of certainty. Therefore, the company may need
additional financing at an earlier date. The company cannot assure you that
additional financings will be available, or if available, will be on
reasonable terms, nor can we assure you that these financings will not be
dilutive to our shareholders.
The company will need to increase revenue significantly in a
relatively short period of time in order to have enough capital to attain
breakeven cash flow from operations. Should the company's product development
costs or the amount of time required to manufacture sufficient quantities of
product increase or should the company's expenditures be greater than
anticipated the company may not have sufficient capital to reach breakeven
cash flow from operations. Therefore, there can be no assurance that the cash
and cash equivalents balance as of June 30, 1999 will be sufficient to meet
the company's capital requirements through March 31, 2000.
The company has historically used private offerings of convertible
debt and convertible preferred stock, public and private offerings of common
stock, sale and leaseback arrangements and bank financing and credit lines to
finance its business. The company has contacted a number of potential
providers of additional capital, including investment banking firms,
financial investors, customers, potential customers, strategic partners and
potential strategic partners and continues to seek additional funds. If the
company is unable to obtain additional financing on a timely basis when and
if needed, the company will be required to terminate its operations.
Cash used in operations was $5,264,000 in the first six months of
1999 compared to $5,631,000 for the first six months of 1998. Net cash used
by investing activities during the six-month period ended June 30, 1998 was
$642,000 substantially all of which was for equipment acquisitions. The
company did not acquire any new capital equipment in the first six months of
1999. The company expects to invest a minimum of $500,000 and possibly as
much as $1,200,000 in mask sets for its new 0.25-micron product in 1999 but
does not anticipate any other significant capital asset acquisitions during
the upcoming year.
Net cash provided by financing activities was $7,933,000 in the six
months ended June 30, 1999 and represents a convertible promissory note in
the aggregate principal amount of $8.0 million issued to Actel and $161,000
in employee purchases of stock under certain option plans. That amount
compares to $4,926,000 for the same six month period in 1998
10
<PAGE>
which represents the sale of the company's common stock to Idanta Partners,
Ltd. in the amount of $4,583,000 and $300,000 to other option and warrant
holders, respectively.
YEAR 2000 ISSUES
The following constitutes "Year 2000 Disclosure" under the Year 2000
Information and Readiness Disclosure Act of 1998.
Background of Year 2000 issues. Many existing information
technology (IT) systems, such as computer systems and software products, as
well as non-IT systems that include embedded technology, were not designed to
correctly process date and time information after December 31, 1999.
Accordingly, computer programs and software may need to be modified prior to
the year 2000 in order to remain functional. Failure to complete necessary
modifications could cause a disruption or failure of such program and system.
The company has defined Year 2000 compliant as the ability to:
- Correctly handle date information needed for the December 31,
1999 to January 1, 2000 date change;
- Function according to the product documentation provided for
this date change, without changes in operation resulting from
the advent of a new century, assuming correct configuration;
- Respond to two-digit date input in a way that resolves the
ambiguity as to century in a disclosed, defined and
predetermined manner;
- Store and provide output of date information in ways that are
unambiguous as to century if the date elements in interfaces and
data storage specify the century; and
- Recognize Year 2000 as a leap year.
The company has formed a "Year 2000 Team" to identify, access
and resolve Year 2000 compliance issues. The team has completed an inventory
of all material Year 2000 issues.
Products and IT systems. The company has tested all of its
current products for Year 2000 compliance. The company derived its testing
method from a review and analysis of the Year 2000 testing practices of
software vendors, relevant industry Year 2000 compliance standards and the
specific functionality and operation environments of its products. These
tests were run on all supported platforms for each current release of our
product and included testing for date calculations and internal storage of
date information with test numbers starting in 1999 and going beyond the year
2000. Based on these tests, the company believes its products are Year 2000
compliant with respect to date calculations and internal storage of date
information. However there can be no assurance that its tests detected every
possible contingency and no assurance the company will not receive claims
from its customers asserting liability, including liability for breach of
warranties related to the failure of its products and services to function
properly.
To date, the company has not identified any significant areas
of noncompliance with respect to its internal IT systems. It expects that the
assessment and all remedial action for all of its IT systems will be
completed by the end of calendar year 1999. The company intends to take the
necessary steps to make its systems Year 2000 compliant. These steps may
require the company to modify, upgrade or replace some of its internal
financial and operational systems. The cost of bringing all internal systems,
equipment and operations into Year 2000 compliance has not yet been
determined. While these efforts may involve additional costs, the company
believes, based upon currently available information, that these costs will
not have a material adverse effect on the business, financial condition or
results of operations of the company--although no assurances can be given.
Customers, suppliers, and service providers. The company has surveyed
its significant customers, suppliers, service providers and the sole
manufacturer of its silicon wafers to determine their plans to address Year 2000
issues. The company has received assurances from most of its customers and third
party vendors and anticipates further cooperation in
11
<PAGE>
these efforts, however there can be no assurance such third parties will
indeed be Year 2000 compliant. If any customers have a business interruption
due to Year 2000 compliance issues the company's revenue could be
significantly impacted and the resulting loss in sales for the quarter could
have a material adverse effect on the company's business, financial condition
and results of operation. If any suppliers, service providers or the sole
manufacturer of its silicon wafers fails to appropriately address their Year
2000 issues, such failure could have a material adverse effect on the
company's business, financial condition and results of operation. The company
may not find alternative suppliers, service providers, or an alternative to
its sole manufacturer. In the event that any of our significant suppliers,
service providers or our sole manufacturer does not achieve Year 2000
compliance successfully and in a timely manner, and we are unable to replace
them with alternate sources, our business would be harmed. The Year 2000 Team
has developed contingency plans in the event a third party fails to
appropriately address their Year 2000 issues for every supplier except the
sole manufacturer of our silicon wafers for which an alternative supplier is
not available. Even if the company's assessments, resolutions and contingency
plans are completed and put in place on time, there can be no assurance that
such actions will be sufficient to address any third-party failures. Nor can
the company be assured that unresolved or undetected internal and external
Year 2000 issues with third parties will not have a material adverse effect
on the company's business, financial condition and results of operations.
The most reasonably likely "worst case" scenario for the company
with respect to the Year 2000 problem is the failure of the company's major
distributor or the company's sole manufacturer of silicon wafers to be Year
2000 compliant such that the sale or distribution of GateField products or
the supply of components for such products is interrupted. This could result
in the company not being able to produce or distribute products for a period
of time, which in turn could result in lost sales and profits. If the
company's strategic partners were to incur a sustained interruption in their
ability to manufacture GateField wafers or sell GateField products, the
impact on the company's business, financial condition and results of
operations would be material.
Recent legislation. Legislation was recently passed by Congress that
purports to limit liability for failure to be Year 2000 compliant. We cannot
assure you that this legislation will limit our liability.
Although the company believes its Year 2000 Team will identify all
of the company's material Year 2000 issues, given the pervasiveness of Year
2000 issues and the complex interrelationships among Year 2000 issues both
internal and external to the company, there can be no assurance that the
company will be able to identify and accurately evaluate all such issues. As
the process of identifying, accessing and resolving Year 2000 compliance
issues proceeds, the company may identify situations that present material
Year 2000 risks and/or that will require substantial time and material
expense to address. Even if the company's assessments and resolutions are
completed on time and put in place, there can be no assurance that such plans
will be sufficient to address any failures or that unresolved or undetected
internal and external Year 2000 issues will not have a material adverse
effect on the company's business, financial condition and results of
operations. The discussion above regarding estimated completion dates, costs,
risks and other forward-looking statements regarding Year 2000 is based on
the company's best estimates given information that is currently available
and is subject to change as the company continues to progress with its Year
2000 initiatives, it may discover that actual results will differ materially
from these estimates.
FACTORS AFFECTING FUTURE RESULTS
IMMEDIATE NEED FOR ADDITIONAL FUNDING
At June 30, 1999, the company had cash and cash equivalents of
approximately $6.4 million and working capital of $1,158,000. During the six
months ended June 30, 1999 and 1998, the company incurred net losses of
approximately $5.2 million and $5.3 million, respectively. The company
expects to continue to generate losses for at least the remainder of 1999. As
a result, the company expects that it will have utilized all of its currently
available cash on or about March 31, 2000. Many factors could increase or
decrease the company's utilization of its capital resources during this
period and the company may need additional financing at an earlier date.
There can be no assurance that such financing will be available on terms
acceptable to the company and its stockholders, if at all. If the company is
unable to obtain additional financing the company may be required to
terminate its operations.
12
<PAGE>
DEPENDENCE ON THE SUCCESSFUL DEVELOPMENT OF 0.25-MICRON PRODUCTS
GateField's success is highly dependent upon the timely completion
and introduction of new products at competitive price and performance levels,
especially the timely introduction of its next generation of 0.25-micron
products. GateField is currently completing initial testing of its
0.25-micron products and related software. The joint Actel / GateField
marketing team began sampling initial customers in the first quarter of 1999.
The company believes the product will be ready for introduction in the third
quarter of 1999. However, no assurance can be given that the company's design
and introduction schedules for such products will be met. Moreover, there can
be no assurances that, even if such products are introduced into the market
on a timely basis, they will be successfully developed or that they will
achieve market acceptance. To the extent that the company's development and
commercialization efforts with respect to the 0.25-micron products is
unsuccessful or if these products do not achieve market acceptance, the
company's business, financial condition and results of operations would be
materially adversely affected.
The company's 0.25-micron products are highly complex and may
contain undetected or unresolved defects when first introduced or as new
versions are released. There can be no assurance that, despite testing by the
company, defects will not be found in new products, including the company's
0.25-micron products, or new versions of such products following commercial
release. This could result in loss of market share, delay in or loss of
market acceptance or product recall. Any such occurrence could have a
material adverse effect upon the company's business, financial condition and
results of operations.
DEPENDENCE ON INDEPENDENT WAFER MANUFACTURERS
GateField currently uses a single independent manufacturer, Infineon
Corporation ("Infineon") to provide wafers used in the production of its
products, including its 0.25-micron products. The company has invested
significant amounts of time and resources in working with Infineon to develop
and improve the manufacturing processes relating to GateField's 0.25-micron
product family. Although Infineon has also invested significant resources
into its relationship with GateField, if Infineon were unable or unwilling to
manufacture such products as anticipated by GateField, GateField would be
unable to introduce such products to market on a timely basis, which would
have a material adverse effect on the company's business, financial condition
and results on operations. If this relationship were terminated, the company
would be required to redesign its wafers to make them compatible with the
manufacturing process of a new manufacturer. This process could take up to
twelve (12) months. In addition, the company could lose significant revenue
opportunities while working to achieve volume production with a new vendor.
No assurance can be given that any additional qualified wafer foundries would
become available or be able to satisfy GateField's requirements on a timely
basis.
GateField's dependence on Infineon for the manufacture of its
products subjects the company to a number of risks associated with an
interruption of supply from a single source. In particular, with respect to
the manufacture of GateField's 0.25-micron products, Infineon will require
significant lead-time to reach volume production on new processes.
Accordingly, no assurance can be given that volume production or acceptable
yields with respect to GateField's new 0.25-micron product family will be
achieved on a timely basis or at all. GateField has in the past experienced
delays in obtaining wafers from its foundries, and there can be no assurance
that the company will not experience similar or more severe delays in the
future. Although GateField has supply agreements with Infineon, a shortage of
raw materials or production capacity could lead Infineon to allocate
available capacity to customers other than GateField. In addition, internal
uses within Infineon could delay manufacture of GateField products and
interrupt GateField's capability to meet its product delivery obligations.
Any inability or unwillingness of Infineon to provide adequate quantities of
finished wafers to satisfy GateField's needs in a timely manner would delay
production and product shipments and could have a material adverse effect on
GateField's business, financial condition and results of operations.
Furthermore, Infineon is in the process of being spun off from its parent
Siemens Aktiengesellschaft, there can be no assurance that the
wafer-manufacturing portion of such operations will be willing and capable of
continuing to support the manufacture of GateField's products.
RELIANCE ON ACTEL RELATIONSHIP
In August 1998, GateField entered into a strategic relationship with
Actel Corporation. In a product marketing agreement, Actel acquired the
exclusive right to distribute GateField's standard ProASIC products based on
0.25 micron
13
<PAGE>
and smaller geometries. As a result, GateField terminated its entire sales
force and does not anticipate creating a new sales force in the foreseeable
future. Consequently, GateField is highly dependent on Actel's sales efforts
and the success of its sales force in marketing GateField's 0.25-micron
products.
Actel will continue to market its own products, including products
that are competitive with GateField's products. Accordingly, there is a risk
that Actel may give higher priority to its own Actel products, thus reducing
its efforts to sell GateField's products. In addition, GateField's agreement
with Actel is terminable by Actel under a variety of circumstances, including
GateField's material breach of the product marketing agreement. As GateField
would require significant amounts of time and resources to rebuild its sales
force, reduction in sales efforts by Actel or a termination of its agreement
with GateField would have a material adverse effect on GateField's business,
financial condition and results of operations. Furthermore, if Actel's sales
and marketing efforts do not achieve anticipated growth rates, GateField
would be forced to reduce the amount of product that is manufactured. As a
result, the company's profit margins on future sales of higher cost products
would be reduced because GateField may be unable to take full advantage of
Infineon's manufacturing cost reductions.
COMPETITION
The semiconductor industry is intensely competitive and is
characterized by rapid technological change, product obsolescence, and price
erosion. The company expects competition to increase in the future. Increased
competition would likely reduce our prices. GateField's existing competitors
include suppliers of conventional gate arrays, complex programmable logic
devices (CPLDs) and FPGAs. The company's two principal competitors are
Xilinx, a supplier of FPGAs based on SRAM technology, and Altera, a supplier
principally of CPLDs. GateField also faces competition in the future from
major domestic and international semiconductor suppliers and suppliers of
logic products based on new or emerging technologies.
The company's competitors may respond more quickly to emerging
technologies. In addition many of the company's competitors have longer
operating histories, more resources, broader customer relationships and
broader product lines. Important competitive factors in GateField's market
are: price, performance, number of usable gates, ease of use and
functionality of development system software, installed base of development
systems, adaptability of products to specific applications, length of
development cycle (including reductions to finer micron design rules), number
of I/Os, reliability, adequate wafer fabrication capacity and sources of raw
materials, protection of products by effective utilization of intellectual
property laws and technical service and support. Failure of GateField to
compete successfully in any of these or other areas could have a material
adverse effect on its business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
GateField's success is dependent in large part on the continued
service of its key management, engineering, marketing and support employees.
Competition for qualified personnel, particularly skilled engineers, is
intense in the semiconductor industry. The loss of GateField's current key
employees, or the inability of the company to attract other qualified
personnel, could have a material adverse effect on GateField. The company
does not have employment agreements with any of its key employees.
PRICE EROSION
The semiconductor industry is characterized by intense competition.
Historically, average selling prices in the semiconductor industry in
general, and for GateField's products in particular, have declined
significantly over the life of each product. Moreover, GateField is highly
dependent on Actel for the marketing of the company's next generation of
ProASIC products. While GateField expects that the average selling prices of
its products will be reduced over time as the company achieves manufacturing
cost reductions, GateField may from time to time be required by competitive
pressures to reduce the prices of its products more quickly than such cost
reductions can be achieved. In addition, GateField occasionally approves
price reductions on specific sales to meet competition. If these reductions
are not offset by reductions in manufacturing costs or by a shift in the mix
of products sold toward higher-margin products, declines in the average
selling prices of GateField's products will reduce gross margins and could
have a material adverse effect on the
14
<PAGE>
company's business, financial condition and results of operations.
MANUFACTURING YIELDS
The manufacture of high-performance ProASIC products is a complex
process that requires a high degree of technical skill, state-of-the-art
equipment and effective cooperation between the wafer supplier and the
circuit designer to produce acceptable yields. Minute impurities, errors in
any step of the fabrication process, defects in the masks used to print
circuits on a wafer and other factors can cause a substantial percentage of
wafers to be rejected or numerous die on each wafer to be nonfunctional.
GateField has from time to time experienced in the past, and expects that it
will experience in the future, production yield problems and delivery delays.
Any prolonged inability to obtain adequate yields or deliveries of the
0.25-micron products would adversely effect GateField's business, financial
condition and results of operations.
SEMICONDUCTOR INDUSTRY RISKS
The semiconductor industry has historically been cyclical and
periodically subject to significant economic downturns, which are
characterized by rapid technological change, product obsolescence, diminished
product demand, accelerated price erosion and overcapacity. Currently, the
semiconductor industry is in the midst of such a downturn. These downturns
often occur in connection with, or in anticipation of, maturing product
cycles (of both the semiconductor companies and their "end customers") and
declines in general economic conditions. Some of these downturns have lasted
for more than a year. Also, during such periods, customers of semiconductor
manufacturers benefiting from shorter lead times may delay some purchases of
semiconductors into future periods.
The current semiconductor industry downturn began in the fourth
quarter of 1995. The economic recessions in Japan and in other countries in
the Asia Pacific region have made the current downturn in the semiconductor
industry worse. The economies in these regions are contracting, and demand
for semiconductors and silicon wafers in these regions has decreased
significantly.
DEPENDENCE ON DESIGN WINS
For GateField to sell its ProASIC products to a customer, the
customer must incorporate the company's ProASIC technology into the
customer's product in the design phase. GateField is highly dependent on
Actel's sales marketing and FAE team, in conjunction with the support of
GateField resources, to persuade potential customers to incorporate the
company's standard ProASIC product into new or updated products. These
efforts may precede by many months (and sometimes a year or more) the
generation of volume sales, if any, by the customer. The value of any design
win, moreover, will depend in large part upon the ultimate success of the
customer's product. No assurance can be given that GateField will win
sufficient designs or that any design win will result in significant revenues.
In addition, there are some costs associated with marketing the
company's licensing of its ProASIC technology for embedded applications. Such
costs would not be recovered if GateField were unable to win additional
licenses.
DEPENDENCE ON INDEPENDENT ASSEMBLY SUBCONTRACTORS
GateField relies primarily on foreign subcontractors for the
assembly and packaging of its products and, to a lesser extent, for the
testing of its finished products. The company generally relies on a few key
subcontractors to provide particular services and has from time to time
experienced difficulties with the timeliness and quality of product
deliveries. GateField has no long-term contracts with its subcontractors, and
certain of those subcontractors are currently operating at or near full
capacity. There can be no assurance that these subcontractors will continue
to be able and willing to meet GateField's requirements for components or
services. Any significant disruption in supplies from, or degradation in the
quality of components or services supplied by, these subcontractors could
delay shipments and result in the loss of customers or revenues or otherwise
have a material adverse effect on GateField's business, financial condition
and results of operations.
15
<PAGE>
PATENT INFRINGEMENT
Although GateField has obtained patents covering aspects of its
ProASIC and related technologies, no assurance can be given that GateField's
patents will be determined to be valid or that any assertions of infringement
or invalidity by other parties (or claims for indemnity from customers
resulting from any infringement claims) will not be successful. Although the
company is not currently a party to any material litigation, the
semiconductor industry is characterized by frequent claims regarding patent
and other intellectual property rights. As is typical in the semiconductor
industry, the company from time to time receives communications from third
parties asserting patents on certain of the company's technologies. In the
event any third party were to make a valid claim against the company, the
company could be required to discontinue the use of certain processes or
cease the use, import and sale of infringing products, to pay substantial
damages and to develop non-infringing technologies or to acquire licenses to
the alleged infringed technology. The company's business, financial condition
and results of operations could be materially and adversely affected by such
developments. Litigation, which could result in substantial cost to and
diversion of resources of the company, may also be necessary to enforce
patents or other intellectual property rights of the company or to defend the
company against claimed infringement of the rights of others. The failure to
obtain necessary licenses or the occurrence of litigation relating to patent
infringement or other intellectual property matters could have a material
adverse effect on the company's business, financial condition and results of
operations.
PROTECTION OF INTELLECTUAL PROPERTY
GateField has historically devoted significant resources to research
and development. It believes that the intellectual property derived from
research and development is a valuable asset that has been and will continue
to be important to the success of the company's business. GateField relies
primarily on a combination of nondisclosure agreements, other contractual
provisions, and patent and copyright laws to protect its proprietary rights.
No assurance can be given that the steps taken by GateField will be adequate
to protect its proprietary rights. In addition, the laws of certain
territories in which GateField's products are or may be developed,
manufactured or sold, including Asia and Europe, may not protect the
company's products and intellectual property rights to the same extent as the
laws of the United States. Failure of GateField to enforce its patents or
copyrights or to protect its trade secrets could have a material adverse
effect on the company's business, financial condition and results of
operations.
RELIANCE ON INTERNATIONAL SALES
In the past, GateField has operated sales offices in England,
Germany and Japan. Sales from these offices were in the local currency and,
therefore, exposed the company to currency exchange fluctuations. Sales to
customers located outside the United States accounted for approximately 30%
in 1998, 48% in 1997 and 31% in 1996. Of these sales, sales to customers
located in the Asia Pacific region and Japan accounted for approximately 25%,
28% and 18% of net revenues for 1998, 1997 and 1996, respectively. Revenue
from customers located in the Asia Pacific region and Japan in the second
quarter of 1999 and 1998 was $92,000 and $258,000 respectively. Revenue from
customers located in the Asia Pacific region and Japan for the six-month
period ended June 30, 1999 and 1998 was $361,000 and $714,000 respectively.
GateField is in the process of closing down the operations of all of
its foreign offices and expects such closures to occur by the end of the
third quarter of 1999. GateField expects international revenues to continue
to decline each quarter from their current level.
Although GateField is closing its foreign sales offices, it expects
that revenues derived from international sales will continue to represent a
significant portion of the company's total revenues because of its marketing
relationship with Actel. Further, such direct foreign sales are denominated
in U.S. dollars. Therefore, GateField's products become less price
competitive in countries with currencies that are declining in value against
the dollar. International sales are subject to a variety of risks, including
longer payment cycles, greater difficulty in accounts receivable collection,
currency restrictions, tariffs, trade barriers, taxes, export license
requirements and the impact of recessionary environments in economies outside
the United States.
16
<PAGE>
DEPENDENCE ON NEW PRODUCT DEVELOPMENT; RAPID TECHNOLOGICAL CHANGE
The market for GateField's products is characterized by rapidly
changing technology, frequent new product introductions, and declining
average selling prices over product life cycles. Thus GateField's future
success is highly dependent upon the timely completion and introduction of
new products at competitive price and performance levels, including the
timely introduction of its next generation of 0.25-micron ProASIC products.
In evaluating new product decisions, GateField must anticipate both
the future demand and the technology that will be available to supply such
demand. Failure to anticipate customer demand, delays in developing new
products and failure to coordinate the design and development of silicon and
associated software products each could have a material adverse effect on
GateField's business, financial condition and results of operation. No
assurance can be given that any other new products will gain market
acceptance or that GateField will respond effectively to new technological
changes or new product announcements by others. Any failure of GateField or
its strategic partners to successfully define, develop, market, manufacture,
assemble or test competitive new products could have a material adverse
effect on its business, financial condition and results of operations.
FORWARD-LOOKING STATEMENTS
All forward-looking statements contained in this Quarterly Report on
Form 10-Q, including all forward-looking statements contained in any document
incorporated herein by reference, are made pursuant to the safe harbor
provisions of the Public Securities Litigation Reform Act of 1995. Words such
as "anticipates," "believes," "estimates," "expects," intends," "plans,"
"seeks" and variations of such words and similar expressions are intended to
identify the forward-looking statements. The forward-looking statements
include projections relating to trends in markets, revenues, average selling
prices, gross margin, wafer yields, research and development expenditures,
selling, general and administrative expenditures and the Year 2000 compliance
issue.
All forward-looking statements are based on current expectations and
projections about the semiconductor industry and programmable logic market,
and assumptions made by GateField's management that reflect its best judgment
based on other factors currently known by management, but they are not
guarantees of future performance. Accordingly, actual events and results may
differ materially from those expressed or forecast in the forward-looking
statements due to the risk factors identified herein or for other reasons.
GateField undertakes no obligation to update any forward-looking statement
contained in this Quarterly Report on Form 10-Q or incorporated by reference
in the company's Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The GateField Corporation is exposed to market risk related to
fluctuations in interest rates and in foreign currency exchange rates:
INTEREST RATE EXPOSURE. GateField maintains its funds in money
market and Certificate of Deposit accounts at banks. The company's exposure
to market risk due to fluctuations in interest rates relates primarily to its
interest earnings on its cash deposits. These securities are subject to
interest rate risk inasmuch as their fair value will fall if market interest
rates increase. If market interest rates were to increase immediately and
uniformly by 10% from the levels prevailing at December 31, 1998, the fair
value of the portfolio would not decline by a material amount. GateField does
not use derivative financial instruments to mitigate risks. However, it does
have an investment policy that would allow it to invest in short-term
investments such as money market instruments and corporate debt securities.
The company's policy does attempt to reduce such risks by typically limiting
the maturity date of such securities to no more than eighteen months with a
maximum average maturity to its whole portfolio of such investments at six
months, placing its investments with high credit quality issuers and limiting
the amount of credit exposure with any one issuer.
FOREIGN CURRENCY EXCHANGE RATE EXPOSURE. GateField's exposure to
market risk due to fluctuations in foreign currency exchange rates relates
primarily to the intercompany balances with its U.K., German and Japanese
subsidiaries. Although the company transacts business in various foreign
countries, settlement amounts are usually based on U.S. currency. Transaction
gains or losses have not been significant in the past, and there is no
hedging activity on sterling,
17
<PAGE>
mark, yen or other currencies. GateField is in the process of closing these
subsidiaries and expects to receive approximately $500,000 in cash transfers
during 1999 from these closings. The company would not experience a material
foreign exchange loss based on a hypothetical 10% adverse change in the price
of the sterling, mark or yen against the U.S. dollar. Consequently, GateField
does not expect that a reduction in the value of such accounts denominated in
foreign currencies resulting from even a sudden or significant fluctuation in
foreign exchange rates would have a direct material impact on the company's
financial position, results of operations or cash flows.
Notwithstanding the foregoing analysis of the direct effects of
interest rate and foreign currency exchange rate fluctuations on the value of
certain of GateField's investments and accounts, the indirect effects of such
fluctuations could have a material adverse effect on the company's business,
financial condition and results of operations. For example, international
demand for GateField's products is affected by foreign currency exchange
rates. In addition, interest rate fluctuations may affect the buying patterns
of the company's customers. Furthermore, interest rate and currency exchange
rate fluctuations have broad influence on the general condition of the U.S.
foreign and global economics, which could materially adversely affect the
company.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 30, 1999 (the "Effective Time") the company effected a
reverse stock split of its outstanding common stock whereby each ten (10)
shares of the company's Common Stock, par value $0.10 per share, issued and
outstanding or held in treasury at the Effective Time were automatically and
without any action on the part of the respective holders thereof combined,
converted and changed into one (1) share of Common Stock, par value $0.10 per
share, of the company (the "Reverse Stock-Split"). No fractional shares were
issued and, in lieu thereof, any holder of less than one share of Common
Stock received cash for such holder's fractional share based on the closing
price per share of the Common Stock on the Nasdaq Unaffiliated Over the
Counter Bulletin Board as of the Effective Time of the Reverse Stock-Split.
In May 1999 the company issued a convertible promissory note in the
aggregate principal amount of $8.0 million to one purchaser. The note is
convertible at the option of the holder into 420,000 shares of the company's
Series C-1 convertible preferred stock (the "Stock"). The Stock converts into
1,230,769 shares of the company's common stock. The sale and issuance of the
note and the securities issuable upon conversion of the note were deemed to
be exempt from registration under the Securities Act of 1933, as amended, by
virtue of Rule 4(2) or Regulation D promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In April 1999, in connection with its 1999 annual meeting of
stockholders (the "Annual Meeting") held on June 7, 1999 the company
requested that its stockholders vote on the following matters.
Proposal 1: To elect one Class II director to hold office until the 2002
Annual Meeting of Stockholders pursuant to the classified board provisions of
the company's Restated Certificate of Incorporation (the "Certificate"). In
addition, in accordance with Section 2115 of the California General
Corporation Law the company is permitting the stockholders of the company
("the "Stockholders") to vote to elect all three current directors until the
next annual meeting. Accordingly, there will be two separate votes regarding
the election of directors.
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<PAGE>
At the Annual Meeting, the voting of stockholders with respect to Proposal 1
was as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
<S> <C> <C>
Slate One
Michael J. Kucha 38,203,757 1,723,629
Slate Two
Michael J. Kucha 38,213,636 1,713,750
Horst G. Sandfort 38,975,296 952,090
Timothy Saxe 39,067,742 859,644
</TABLE>
Proposal 2: To approve the company's 1999 Stock Option Plan, under which plan
3,000,000 shares of Common Stock shall be authorized for issuance.
At the Annual Meeting the voting of stockholders with respect to Proposal 2 was
as follows:
<TABLE>
<CAPTION>
For Against Abstain Broker Nonvotes
<S> <C> <C> <C>
19,081,502 3,016,903 365,676 17,463,305
</TABLE>
Proposal 3: To approve the company's 1999 Employee Stock Purchase Plan, under
which plan 1,000,000 shares of Common Stock shall be authorized for issuance.
At the Annual Meeting the voting of stockholders with respect to Proposal 3
was as follows:
<TABLE>
<CAPTION>
For Against Abstain Broker Nonvotes
<S> <C> <C> <C>
19,942,113 2,164,171 357,797 17,463,305
</TABLE>
Proposal 4: To approve an amendment to the company's Certificate to effect,
at any time prior to the 2000 Annual Meeting of Stockholders, a reverse stock
split of the company's Common Stock whereby each outstanding ten (10) shares
would be combined, converted and changed into one (1) share of Common Stock.
At the Annual Meeting the voting of stockholders with respect to Proposal 4
was as follows:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
34,021,906 5,605,382 300,098
</TABLE>
Proposal 5: To approve an amendment to the company's Certificate to increase
the authorized number of shares of Common Stock from 65,000,000 to
120,000,000 shares and to increase the authorized number of shares of
Preferred Stock from 2,000,000 to 10,000,000. If the amendment set forth in
Proposal 4 above and the amendment set forth in this Proposal 5 are both
approved by the Stockholders, the Board of Directors intends to abandon the
amendment set forth in this Proposal 5 as permitted by Section 242(c) of the
Delaware General Corporation Law.
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<PAGE>
At the Annual Meeting the voting of stockholders with respect to Proposal 5
was as follows:
<TABLE>
<CAPTION>
For Against Abstain Broker Nonvotes
<S> <C> <C> <C>
18,125,652 4,923,491 483,710 16,394,533
</TABLE>
Proposal 6: To ratify the selection of Deloitte & Touche LLP as independent
auditors of the company for its fiscal year ending December 31, 1999.
At the Annual Meeting the voting of stockholders with respect to Proposal 6
was as follows:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
39,216,826 493,040 217,520
</TABLE>
All proposals were approved by the stockholders except for Proposal 5
regarding an amendment to the company's Restated Certificate of Incorporation
to increase the authorized number of shares of Common Stock from 65,000,000
to 120,000,000 shares and the authorized number of shares of Preferred Stock
from 2,000,000 to 10,000,000 shares.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) Exhibits
4.1 Certificate of Amendment of Restated Certificate of Incorporation of
GateField Corporation.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
</TABLE>
Current Report on Form 8-K dated May 28, 1999.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 30, 1999 GATEFIELD CORPORATION
/s/ Timothy Saxe
-------------------------------------
Timothy Saxe
President and Chief Executive Officer
/s/ James B. Boyd
-------------------------------------
James B. Boyd
Chief Accounting Officer & Corporate Controller
21
<PAGE>
<PAGE>
Exhibit 4.1
CERTIFICATE OF AMENDMENT OF
RESTATED CERTIFICATE OF INCORPORATION OF
GATEFIELD CORPORATION
GATEFIELD CORPORATION, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, DOES
HEREBY CERTIFY:
FIRST: The name of this Corporation is GATEFIELD CORPORATION (the
"Corporation").
SECOND: The instrument being amended is entitled "RESTATED
CERTIFICATE OF INCORPORATION OF GATEFIELD CORPORATION" and said instrument
was filed in the office of the Secretary of State of the State of Delaware on
August 28, 1998.
THIRD: The Board of Directors of the Corporation, acting in
accordance with the provisions of Sections 141(f) and 242 of the General
Corporation Law of the State of Delaware, adopted resolutions to amend the
Restated Certificate of Incorporation, as amended, as follows:
Section A of Article IV shall be amended in its entirety to read as
follows:
"A. The Corporation is authorized to issue a total of 67,000,000
shares of all classes of stock, of which, 65,000,000 shall be shares of
Common Stock with a par value of $.10 per share and 2,000,000 shall be shares
of series preferred stock with a par value of $.10 per share. Effective at
the time of the filing with the Secretary of State of the State of Delaware
of this Certificate of Amendment to the Corporation's Restated Certificate of
Incorporation (the "Effective Time"), each ten (10) shares of the
Corporation's Common Stock, par value $0.10 per share, issued and outstanding
or held in treasury at the Effective Time shall, automatically and without
any action on the part of the respective holders thereof, be combined,
converted and changed into one (1) share of Common Stock, par value $0.10 per
share, of the Corporation (the "Reverse Stock-Split"). No fractional shares
will be issued and, in lieu thereof, any holder of less than one share of
Common Stock shall be entitled to receive cash for such holder's fractional
share based on the closing price per share of the Common Stock on the Nasdaq
Unaffiliated Over the Counter Bulletin Board as of the Effective Time of the
Reverse Stock-Split."
FOURTH: The foregoing amendment to the Restated Certificate of
Incorporation, as amended and corrected, was duly approved and adopted by the
required vote of the stockholders of the Company in accordance with Section
242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, GATEFIELD CORPORATION has caused this
Certificate of Amendment to be signed by its President this 7th day of June,
1999.
GATEFIELD CORPORATION
By: /s/ Tim Saxe
Tim Saxe, Chief Executive Officer
22
