<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 MARCH 31, 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 May 7, 1999
------------------- --------------------------
<S> <C>
Common stock, par value $0.10 per share 4,166,919
</TABLE>
<PAGE>
GATEFIELD CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations and Comprehensive Loss
for the Three Months Ended March 31, 1999 and March 31, 1998 (Restated) 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and March 31, 1998 5
Notes to Condensed Consolidated Financial Statements, March 31, 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 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities & Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATEFIELD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,204 $ 3,832
Accounts receivable, less allowance for doubtful
accounts of $359 in 1999 and $244 in 1998 38 463
Inventories 98 117
Other current assets 330 556
--------- -----------
Total current assets 1,670 4,968
Property and equipment, net 1,536 1,783
Other assets 28 102
--------- -----------
Total assets $ 3,234 $ 6,853
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 347 $ 393
Accounts payable 656 1,372
Accrued expenses 1,483 1,941
Deferred revenues 4,625 4,772
--------- -----------
Total current liabilities 7,111 8,478
Long-term obligations 269 330
--------- -----------
Total liabilities 7,380 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: 42,025,000 in 1999 and
41,925,000 in 1998 4,202 4,191
Additional paid-in capital 78,183 78,128
Accumulated other comprehensive loss (753) (737)
Accumulated deficit (88,862) (86,620)
--------- -----------
Total stockholders' equity (7,230) (5,038)
--------- -----------
Total liabilities and stockholders' equity $ 3,234 $ 6,853
--------- -----------
--------- -----------
</TABLE>
3
<PAGE>
GATEFIELD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues: (As restated)
(See Note 3)
Product $ 142 $ 640
Service 311 1,209
-------- --------
Total revenues 453 1,849
-------- --------
Cost of revenues:
Product 237 1,050
Service 138 760
-------- --------
Total cost of revenues 375 1,810
-------- --------
Gross profit 78 39
-------- --------
Operating expenses:
Sales and marketing 188 915
Research and development 1,347 1,298
General and administrative 740 765
-------- --------
Total operating expenses 2,275 2,978
-------- --------
Operating loss (2,197) (2,939)
Other income (expense)
Interest expenses, net (12) (91)
Other income (expense), net (32) 67
-------- --------
Total other income (expense) (44) (24)
Net loss (2,241) (2,963)
Other comprehensive loss
Currency translation adjustments (16) (89)
-------- --------
Comprehensive loss $(2,257) $(3,052)
======== ========
Loss attributable to common stockholders (2,241) (2,997)
======== ========
Basic and diluted net loss per share $ (0.53) $ (0.73)
======== ========
Basic and diluted weighted average shares outstanding 4,195 4,133
-------- --------
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
GATEFIELD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
(IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net loss $(2,241) $(2,963)
Reconciliation to net cash used in operating activities:
Depreciation and amortization 247 289
Changes in assets and liabilities:
Accounts receivable 425 (77)
Inventories 19 (41)
Other assets 193 (41)
Accounts payable and accrued expenses (1,174) (395)
Deferred revenues (147) 236
--------- ---------
Net cash used in operating activities (2,678) (2,992)
--------- ---------
Investing activities:
Property and equipment purchases, net - (77)
--------- ---------
Net cash used in investing activities - (77)
--------- ---------
Financing activities:
Proceeds from issuance of common stock 66 4,864
Repayments of debt obligations - (91)
--------- ---------
Net cash provided by financing activities 66 4,773
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (16) (82)
--------- ---------
Net change in cash and cash equivalents (2,628) 1,622
Cash and cash equivalents, beginning of period 3,832 4,189
--------- ---------
Cash and cash equivalents, end of period $ 1,204 $ 5,811
========= =========
Supplemental disclosure of cash flow information:
Noncash activities -
Accrued dividends on preferred stock (As restated - See Note 3) $ - $ 34
Cash activities -
Cash paid during the year for interest $ 38 $ 103
</TABLE>
See Accompanying Notes To Condensed Consolidated Financial Statements.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 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 March 31, 1999 and 1998, GateField
Corporation, (the "Company") incurred net losses of approximately $2,241,000 and
$2,963,000, respectively. Additionally, the Company had stockholders deficits of
approximately $7,230,000 at March 31, 1999 and $5,038,000 at December 31, 1998,
and is highly dependent on obtaining additional financing in order to fund the
current and planned operating levels. These factors among others raise
substantial doubt about the ability of the Company to continue as a going
concern for a reasonable period of time.
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 obtain additional financing to complete
its new product development and begin commercial sales, and ultimately obtain
sufficient customer demand to attain profitable operations. Management intends
to reduce 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 March 31, 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
March 31, 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
<TABLE>
<CAPTION>
March 31, December 31,
(IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ - $ -
Finished goods 98 117
-------- ----------
$ 98 $ 117
======== ==========
</TABLE>
6
<PAGE>
3. RESTATEMENT
Subsequent to the issuance of the Company's unaudited financial
statements for the quarterly period ended March 31, 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 months ended March 31, 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
------------------
As
Previously As
Reported Restated
---------- --------
<S> <C> <C>
FOR THE PERIOD ENDED MARCH 31, 1998
Loss attributable to common stockholders $ -- $ (2,997)
Basic and diluted net loss per share $ (0.72) $ (0.73)
</TABLE>
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.
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 MONTHS ENDED MARCH 31, 1999 AND 1998
RESTATEMENT
Subsequent to the issuance of the Company's unaudited financial
statements for the quarterly period ended March 31, 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 months ended March 31, 1998 have been
7
<PAGE>
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 3 of Notes
to the Condensed Consolidated Financial Statements and have been reflected
herein.
REVENUES
Total revenues for the quarters ended March 31, 1999 and 1998 were
$453,000 and $1,849,000, respectively, a decrease of 76%. Total ProASIC product
revenues for the first quarter of 1999 declined to $142,000 from $640,000 in the
first quarter of 1998. ProASIC product revenues include license fees from Rohm
of approximately $300,000 in the quarter ended March 31, 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. The company
anticipates termination of the 0.72-micron product sales in the second quarter
of 1999. Most of the company's revenues in the balance of 1999, if any, will
come from the company's anticipated introduction of its 0.25-micron products. At
this time, the company believes 0.25-micron product sales will begin in the
second quarter of 1999. However, it does not know how many products will be
introduced in 1999 or in what packages. Furthermore, it is impossible to
anticipate the degree of market acceptance of this new technology, or whether it
will be accepted at all. Therefore, the revenues associated with the new
0.25-micron product cannot be predicted with any degree of accuracy. The
company's failure to introduce its 0.25-micron products on a timely basis and to
achieve market acceptance of such products would have a material adverse effect
on the company's business, financial condition and result of operations.
Service revenues for the quarters ended March 31, 1999 and 1998 were
$311,000 and $1,209,000, respectively. Service revenues are comprised of two
components: (i) maintenance contracts on the company's verification systems and
(ii) design services. Verification maintenance revenues were $299,000 in the
first quarter of 1999 and $817,000 in the first quarter of 1998. The decline in
verification maintenance revenues is the result of the sale of the verification
products assets in 1997. Verification maintenance revenue earned in the first
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
eventually to cease in 1999. Service fees related to the company's design
service product line were $392,000 in the quarter ended March 31, 1998. Those
assets were sold to Actel Corporation ("Actel") in August 1998, and, thus, these
products will not generate any revenue in 1999.
GROSS PROFIT
Gross profit for the quarters ended March 31, 1999 and 1998 was
$78,000, and $39,000, respectively. Gross profit as a percentage of total
revenues was 17% in the first quarter of 1999 and 2% in the first quarter of
1998. Gross profit is affected by many factors, including but not limited to:
license fees, pricing strategies, product mix, yield variations, inventory
obsolescence, and increased costs incurred in the introduction of new products.
Gross profit deficit from ProASIC product revenues for the quarter
ended March 31, 1999 was ($95,000) and ($410,000) for the quarter ended March
31, 1998. Poor manufacturing yields on the 0.72-micron product wafers caused the
negative margins for both periods. 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 .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 not expected to be significant
and will cease altogether in the second quarter of 1999.
Gross profit from service revenues was $173,000 in the quarter ended
March 31, 1998, and $449,000 in the quarter ended March 31, 1998. Gross profit
related to maintenance contracts on the verification systems was $173,000 in the
quarter ended March 31, 1998, and $443,000 in the quarter ended March 31, 1998.
The verification maintenance revenues and, hence, the related gross profits will
decline to zero in 1999. Margins related to design services were $6,000 or 2% in
1998. Because revenue from design services stopped in August 1998, the company
does not expect any gross margin contribution from this source in 1999. In
summary, gross profit from service revenues, if any, is not expected to be
significant over the balance of 1999.
8
<PAGE>
SALES AND MARKETING
Sales and marketing expenses were $188,000 for the quarter ended March
31, 1999 and $915,000 for the quarter ended March 31, 1998. The decrease
represents the termination of the company's sales and marketing force in
connection with the sale of the company's worldwide distribution rights to its
0.25 and below ProASIC products to Actel in August 1998. Expenses incurred in
the first quarter of 1999 related to its efforts to support strategic
initiatives and 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 quarter ended March 31, 1999
were $1,347,000 as compared to $1,298,000 for the quarter ended March 31, 1998.
The increase in quarterly expenses is due to mask costs for the 0.25-micron
product development. The company expects quarterly research and development
expenses to remain relatively flat for the remainder of the year.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended March
31, 1999 and 1998 were $740,000 and $765,000, respectively. The company expects
these expenses to remain relatively flat for the remainder of the year. However,
G&A could experience significant increases 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 March 31, 1999 were $44,000 as
compared to other expenses of $24,000 for the quarter ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the company had cash and cash equivalents of
approximately $1.2 million and a working capital deficit of $5.4 million. During
the first quarter ended March 31, 1999, and the year ended December 31, 1998,
GateField incurred net losses of approximately $2.2 million and $8.3 million,
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 May 31,
1999. Thus, the company will be unable to continue as a going concern if
sufficient funding is not immediately available.
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. In
this regard, management has held discussions with Idanta Partners Ltd.
("Idanta") and Actel Corporation ("Actel"), each a significant stockholder of
the company in which both Idanta and Actel have indicated their preliminary
interest in providing additional financing. Presently management is engaged in
discussion with Actel in which Actel has indicated on a preliminary basis its
willingness to extend loans to the Company, pursuant to a convertible promissory
note (the "Note"), in the aggregate principal amount of up to $8 million (the
"Note Financing"). It is anticipated that all or some portion of such Note would
be convertible into shares of the Company's equity securities. It is also
anticipated that the Common Stock issuable upon conversion of such equity
securities would be at a discount to the prevailing market price to reflect the
illiquidity of the shares, the Company's financial condition and other factors.
The issuance of additional shares of Common Stock in the Note Financing is
expected to be dilutive to the current stockholders, particularly in view of the
fact that such securities will likely be issued at a discount to the prevailing
market price of the Company's Common Stock.
Although Actel and Idanta have indicated their preliminary interest in
funding the Company, there can be no assurance that either the Note Financing or
any other proposed financings will be consummated prior to May 31, 1999, the
date on which the company will have utilized all of its currently available cash
on terms acceptable to the Company and its stockholders if at all. The terms of
the Note Financing have not been finalized and will be subject to compliance
with all
9
<PAGE>
applicable securities laws. If the Company is unable to obtain additional
financing on a timely basis, the Company will be required to terminate its
operations.
The Company currently anticipates that capital in the aggregate
principal amount of $6 million to $12 million would meet the Company's capital
requirements through 1999. However, the Company's capital requirements may be
greater than anticipated. Therefore, there can be no assurance that such amounts
will be sufficient to meet the Company's capital requirements through 1999.
GateField 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.
Cash used in operations was $2.7 million in the first quarter of 1999
compared to $3.0 million for the first quarter of 1998. Net cash used by
investing activities during the three-month period ended March 31, 1998 was
$77,000 for equipment acquisitions. GateField expects to invest a minimum of
$300,000 and possibly as much as $800,000 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 $66,000 in the first
three months of 1999 and represents employee purchases of stock under certain
option plans. That amount compares to $4.9 million for the same three month
period in 1998 which represents the sale of the company's common stock to Idanta
Partners, Ltd. in the amount of $4.6 million 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.
GateField Corporation is aware that 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 is currently assessing the impact of such "Year 2000"
issues on its internal IT and non-IT systems, as well as on its customers,
suppliers and service providers. The company has formed a "Year 2000 Team" to
identify, access and resolve Year 2000 compliance issues. The Year 2000 Team is
testing and evaluating GateField's products and the company's IT systems; the
team recently completed an inventory of all material Year 2000 issues.
To date, GateField has not identified any significant areas of
noncompliance with respect to its products or IT and non-IT systems. It expects
that the assessment and all remedial action for all of its products, IT systems
and non-IT systems will be completed by the end of calendar year 1999. GateField
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, GateField
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.
The company also has begun discussions with significant customers,
suppliers and service providers to determine their plans to address Year 2000
issues. Although GateField anticipates cooperation in these efforts, it may be
difficult for the company to obtain assurances of Year 2000 readiness from such
third parties. If any customers, suppliers or service providers fail to
appropriately address their year 2000 issues, such failure could have a material
adverse effect on GateField's business, financial condition and results of
operation. The Year 2000 Team intends to develop contingency plans in the event
any third party that provides goods or services essential to the company's
business fails to appropriately
10
<PAGE>
address their Year 2000 issues. Even if GateField'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 GateField 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.
Although GateField believes that 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 March 31, 1999, the Company had cash and cash equivalents of
approximately $1.2 million and a working capital deficit of $5.4 million. During
the first quarter ended March 31, 1999, and the year ended December 31, 1998,
the Company incurred net losses of approximately $2.2 million and $8.3 million,
respectively. The Company expects to continue to generate such losses for at
least the remainder of 1999 and early 2000. As a result, the company expects
that it will have utilized all of its currently available assets on or about May
31, 1999. If sufficient funding is not immediately available, the Company will
be unable to continue as a going concern.
NO ASSURANCE OF FUTURE FUNDING
The Company is in need of immediate additional financing in order to be
able to continue as a going concern. Although Actel and Idanta have indicated
their preliminary interest in funding the Company in the aggregate principal
amount of up to $ 8.0 million, there can be no assurance that such financing
will be consummated before the Company has utilized all of its currently
available capital resources on terms acceptable to the company and its
stockholders, if at all. If the Company is unable to obtain additional
financing, the Company will be required to terminate its operations.
The Company anticipates that capital in the aggregate principal amount
of $6 million to $12 million would meet the Company's capital requirements
through 1999. However, the Company's capital requirements may be greater than
anticipated. Therefore, there can be no assurance that such amounts would be
sufficient to meet the Company's capital requirements through 1999.
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. Production software and
a device programmer are scheduled to be available in the second quarter of 1999.
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.
11
<PAGE>
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 does not manufacture any of the wafers used in the production
of its products, including its 0.72-micron ProASIC products. This dependence on
independent wafer manufacturers puts GateField at risk should its suppliers be
unable or unwilling to produce GateField's products.
Currently, GateField's 0.72-micron ProASIC products are manufactured by
Rohm in Japan. In addition, GateField has an agreement with Siemens to
manufacture the company's new 0.25-micron products at Siemens' wafer fabrication
facility located in Germany, once initial testing of the GateField 0.25-micron
products is completed. As the company's products migrate to 0.25-micron
geometries, GateField will become increasingly dependent on Siemens for the
manufacture of its products. This dependence on a single foundry subjects the
company to risks associated with an interruption of supply from a single source.
Furthermore, Siemens is spinning off its semiconductor business, so 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.
GateField plans to initially produce its 0.25-micron products in
relatively low volumes. Still, it will be competing with Siemens' internal
requirements for production capacity and the attention of Siemens' process
engineers. The company's reliance on Siemens to fabricate its 0.25-micron
products involves significant risks, such as technical difficulties or damage to
production facilities that could limit production and reduce yields, lack of
control over capacity allocation and lack of control over delivery schedules.
Also, these risks are increased by the fact that GateField does not have second
source suppliers for any of its wafer products.
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 both Rohm and Siemens, a shortage of raw materials or
production capacity could lead either of them to allocate available capacity to
customers other than GateField. Or in the case of Siemens, internal uses could
delay manufacture of GateField products and interrupt GateField's capability to
meet its product delivery obligations. Any inability or unwillingness of
GateField's independent wafer manufacturers 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. These risks
are particularly pronounced with respect to the company's reliance on Siemens as
the only manufacturer of the company's 0.25-micron products.
If GateField's independent wafer manufacturers were unable or unwilling
to manufacture GateField's products as required, the company would have to
identify and qualify additional foundries. The development and qualification
process typically takes one year or longer. 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. In particular, the company
has invested significant amounts of time and resources in working with Siemens
to develop and improve the manufacturing processes relating to GateField's
0.25-micron product family. Although Siemens has also invested significant
resources into its relationship with GateField, if Siemens 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.
RELIANCE ON ACTEL RELATIONSHIP
In August 1998, GateField entered into a strategic relationship with
Actel Corporation. In a product marketing
12
<PAGE>
agreement, Actel acquired the exclusive right to distribute GateField's
standard ProASIC products based on 0.25 micron and smaller geometries. In
connection with the formation of the alliance, 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 the 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 would be unable to take full advantage of Siemens' manufacturing cost
reductions.
The Product Marketing Agreement with Actel contains certain GateField
milestones relating to the development schedule and manufacturing costs of the
.25 micron product family. The agreement also contains Actel milestones with
respect to the marketing and sale of the .25 products (including certain revenue
targets). GateField currently anticipates that it will fail to meet certain of
its milestones relating to the cost of manufacturing one of the .25 products. If
GateField fails to achieve such cost milestones, Actel may be relieved of its
milestone obligations under the Product Marketing Agreement and may have the
right to assume control over GateField's operations relating to the manufacture
of such product. Such loss of control could divert resources from other
GateField development efforts and disrupt the company's development efforts with
respect to the .25 product family. Also, the termination of Actel's milestone
obligations would lessen the value of the Product Marketing Agreement to
GateField. Such consequences of GateField's failure to achieve its milestones
could have a material adverse effect on GateField's business, financial
condition and results of operations.
COMPETITION
The semiconductor industry is intensely competitive and is
characterized by rapid rates of technological change, product obsolescence,
and price erosion. 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. Given the intensity of the competition and
the research and development being done, no assurance can be given that
GateField's technology--or patents--will remain competitive.
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.
Furthermore, if there was a downturn in the market for CPLDs and FPGAs,
GateField believes companies that have broader product lines and longer standing
customer relationships may be in a stronger competitive position than GateField.
Many of the company's current and potential competitors offer broader product
lines and have significantly greater financial, technical, manufacturing and
marketing resources than GateField has.
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 IC engineers, is intense in the
semiconductor industry. The loss of GateField's current key employees, or the
inability of the company to attract other
13
<PAGE>
qualified personnel, could have a material adverse effect on GateField. The
company does not have employment agreements with any of its key employees,
but it does have standard non-disclosure agreements with all technical and
management employees and it does have indemnity agreements with Dr. Timothy
Saxe, its chief executive officer, president and chief operating officer, and
Peter G. Feist, its senior vice president of marketing, and James B. Boyd,
its chief accounting officer.
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 company's business,
financial condition and results of operations.
MANUFACTURING YIELDS
GateField depends upon its independent wafer manufacturers to produce
wafers with acceptable yields and to deliver them to GateField in a timely
manner. Currently, substantially all of the company's revenues are derived from
products based on GateField's proprietary ProASIC technology. Successful
implementation of ProASIC technology requires a high degree of coordination
between GateField and its independent wafer manufacturers. In particular, with
respect to the manufacture of GateField's 0.25-micron products, Siemens 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.
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. As is common in the
semiconductor industry, 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 affect 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
14
<PAGE>
has decreased significantly.
GateField has experienced in the past, and may experience again in the
future, substantial period-to-period fluctuations in business and results of
operations. This can adversely affect the market price of the company's common
stock. The main factors affecting these fluctuations is the performance of the
semiconductor industry, overall economic conditions, or other factors, including
legislation and regulations governing the import or export of semiconductor
products.
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.
SUPPLY PROBLEMS
In a typical semiconductor manufacturing process, silicon wafers
produced by a foundry are sorted and cut into individual die, which are then
assembled into individual packages and tested for performance. The manufacture,
assembly and testing of semiconductor products are highly complex and subject to
a wide variety of risks, including contaminants in materials, contaminants in
the environment and performance failures by personnel and equipment. Any of
these conditions could have a material adverse effect on GateField's business,
financial condition and results of operations.
It is common in the semiconductor industry for independent wafer
suppliers to experience lower than anticipated yields of usable die. For
example, GateField experienced a yield problem at one of its independent wafer
manufacturers in fiscal years 1997 and 1998 that was severe enough to have a
material adverse effect on GateField's operating results. To the extent yields
of usable die decrease, the average cost to GateField of each usable die
increases, which reduces gross margin.
Wafer yields can decline without warning and may take substantial time
to analyze and correct, particularly for a company such as GateField that does
not operate its own manufacturing facility, but instead relies upon a single
independent wafer manufacturer. Yield problems may also increase the
time-to-market for GateField's products and create inventory shortages and
dissatisfied customers. As the company's products migrate to 0.25-micron
geometries, GateField anticipates that yields for such products will initially
be low. If such yields do not improve over time, the company's business,
financial condition and results of operations would be adversely affected.
15
<PAGE>
Although GateField has overcome such difficulties in the past, no
assurance can be given that it will be able to do so with respect to its
0.25-micron product family. Nor can any assurance be given that GateField will
not experience wafer supply problems in the future, or that any such problem
would not have a material adverse effect on GateField's business, financial
condition and results of operations. See "Dependence on Independent Wafer
Manufacturer."
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.
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. Prior to such time, the company will experience the risks
associated with having a high concentration of international sales.
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
16
<PAGE>
the United States.
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. All of these factors make the timely
introduction of new products a critical objective of the company. 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 well in
advance both the future demand and the technology that will be available to
supply such demand. Failure to anticipate customer demand, delays in developing
new products with anticipated technological advances and failure to coordinate
the design and development of silicon and associated software products each
could have a material adverse effect on GateField's business, financial
condition and results of operation.
In addition, there are greater technological and operational risks
associated with new products. Several factors could have a material adverse
effect on GateField's business, financial condition and results of operations:
the inability of Siemens to produce GateField's 0.25-micron products; delays in
commencing or maintaining volume shipments of new products; the discovery of
product, process, software or programming failures; and any related product
returns. 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.
DEPENDENCE ON INTERNATIONAL OPERATIONS
GateField buys all of its wafers from foreign foundries and has most of
its commercial products assembled, packaged and tested by subcontractors located
outside the United States. These activities are subject to the uncertainties
associated with international business operations, including trade barriers and
other restrictions, changes in trade policies, foreign governmental regulations,
currency exchange fluctuations, reduced protection for intellectual property,
war and other military activities, terrorism, changes in political or economic
conditions and other disruptions or delays in production or shipments, any of
which could have a material adverse effect on the company's business, financial
condition and results of operations.
"BLANK CHECK" PREFERRED STOCK
GateField's Certificate of Incorporation authorizes the issuance of up
to 2,000,000 shares of "blank check" preferred stock (of which 1,682,000 shares
remain available for issuance), with such designations, rights and preferences
as may be determined from time to time by the GateField Board of Directors.
Accordingly, the board is empowered, without approval by holders of the
company's common stock, to issue preferred stock with dividend, liquidation,
redemption, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of the common stock. Issuance of the
preferred stock could be used as a method of discouraging, delaying or
preventing a change in control of GateField. In addition, such issuance could
adversely affect the market price of GateField's common stock. In order to raise
capital, the company may issue additional shares of its preferred stock in the
future.
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
17
<PAGE>
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,
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.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES & USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
19
<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
20
