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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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.)
47100 BAYSIDE PARKWAY, FREMONT, CALIFORNIA
94538
(Address of principal executive offices) (ZipCode)
Registrant's telephone number, including area code: (510) 623-4400
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK,
$0.10 PAR VALUE PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of voting common equity stock held by
non-affiliates of the registrant on April 8, 1999, based upon the closing price
of the Common Stock on the Nasdaq Unaffiliated Over the Counter Bulletin Board
(the "OTCBB") on such date was approximately $42,204,595.
The number of shares outstanding of the Registrant's Common Stock, par value
$.10 per share as of April 8, 1999 was 41,545,531.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days after the end of December 31, 1998, are incorporated
by reference into Part III hereof.
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PART I
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," INCORPORATED BY REFERENCE INTO
ITEM 7 OF THIS ANNUAL REPORT, 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.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
GateField Corporation designs, develops and markets high-density,
high-performance programmable logic solutions and related development software.
The company was originally a division of the Zycad Corporation, a leader in the
development, manufacturing and marketing of design verification tools and
services. Zycad was founded in 1981 and became a public corporation in 1984. The
GateField division of Zycad was formed in the third quarter of 1993 to research
and develop a new and innovative semiconductor logic product: a flash
technology-based, high-density field programmable gate array (FPGA) device.
During 1997, Zycad transitioned from a provider of high-performance verification
products to a provider of FPGA products based on the GateField division's
research and developer of an application specific integrated circuit ("ASIC")
technology called ProASIC-TM-.
Zycad introduced and first shipped its 0.72-micron products in 1997. This
transition required the sale of several of Zycad's assets, including: its stock
ownership in QSS Inc.; products and assets relating to its verification product
line, including its rights, title and interest in hardware and software
simulation products; and the assets related to the semiconductor test software
product line. In addition, Zycad sold its maintenance division for the
verification products to Zycad TSS, Inc.
In October 1997, a new management team was put in place and Zycad was
renamed "GateField Corporation". A month later, GateField announced a strategic
alliance with Siemens Aktiengesellschaft. In this alliance, Siemens licensed the
GateField ProASIC technology for use in nonstandard FPGA products and purchased
GateField's common stock and warrants for $3.25 million. In addition, Siemens
agreed to provide GateField with early access and foundry service for Siemens'
advanced embedded flash technology for GateField 0.25-micron products and below.
GateField and Siemens concluded a foundry agreement in June 1998.
In August 1998, the company entered into a strategic alliance with Actel
Corporation, under which Actel received exclusive, worldwide distribution rights
to GateField's 0.25 micron and below standard ProASIC products. Actel also
purchased the assets of GateField's Design Services product line as well as $3
million of the company's Series C Preferred Stock, which is currently
convertible into an aggregate of 2,000,000 shares of GateField common stock.
GateField's products--flash-based FPGAs trademarked as ProASIC--are
based on two proprietary and patented technologies: a flash-based switching
element and a fine-grained, gate array-like ProASIC architecture. The company
believes that the principal advantages of GateField's products over
alternative SRAM-based and antifuse devices are: smaller chip size for the
same geometries; reprogrammability and non-volatility; and the ability to use
a standard electronic design automation (EDA) ASIC design flow.
A RELATIVELY FASTER AND SMALLER CHIP. The flash-based switch
allows GateField to make circuits that provide higher
performance in a smaller size and, therefore, are generally
less costly than comparable designs using alternative switch
technologies. For comparable manufacturing device geometries
and for the same device complexity and capability, the
GateField die size is only one-fourth to one-third the size of
competing FPGAs.
REPROGRAMMABILITY AND NON-VOLATILITY. Unlike antifuse-based
devices, GateField's devices are field reprogrammable, which
means a designer can change the device program prior to shipment
or even change the program in the field to incorporate product
changes and enhancements. Unlike SRAM devices, GateField's
devices are non-volatile; that is, they do not lose their design
and have to be reprogrammed if the system loses power or is
turned off.
COMPATIBILITY WITH EXISTING EDA. The flash-based switch
facilitates the ProASIC architecture, which allows designers to
use their existing industry standard EDA high-level design tools
and to accurately simulate the programmed ProASIC device
performance.
GateField's products are designed to provide high integration, fast
time-to-market and fast time-to-volume for electronic equipment manufacturers
in the networking, telecommunications, computer, peripheral, industrial
control, instrumentation and
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consumer markets. GateField plans to sell and market its 0.25 micron and
below ProASIC products through its strategic alliance with Actel. Actel, the
third largest FPGA supplier in the world, will give GateField access to a
large and diverse customer and design software user base. Siemens has agreed
to manufacture GateField's 0.25-micron product in its production facility in
Dresden, Germany. GateField's current ProASIC 0.72-micron products are
fabricated by strategic partner Rohm Co. Ltd. in Kyoto, Japan. GateField is
currently completing initial testing of the 0.25-micron product. It began
sampling initial customers in the first quarter of 1999. Subject to
exclusive and non-exclusive license rights granted to Siemens, Actel and
Rohm, GateField continues to maintain rights to its intellectual property for
its ProASIC technology and products, which allow it to license this
technology for the emerging embedded reprogrammability market.
GateField's corporate office is located at 47100 Bayside Parkway,
Fremont, California 94538. The company's telephone number is (510) 249-5757,
and its Web site is http://www.gatefield.com.
INDUSTRY BACKGROUND
The large and rapidly growing logic market is served primarily by
low-density, standard, transistor-transistor logic circuits (TTLs) and
application specific integrated circuits (ASICs). TTLs are standard logic
circuits that can be purchased "off the shelf" and interconnected on a
printed circuit board. ASICs are customized or customizable circuits that
offer electronic system manufacturers the benefits of higher levels of
circuit integration, including improved system performance, reduced system
size and lower system cost.
ASICs include conventional gate arrays and field programmable gate array
devices (FPGAs). Conventional gate arrays are customized to perform their
desired logical functions at the time the device is manufactured. They are
manufactured with fixed, nonprogrammable logic and are subject to the risks
associated with long manufacturing cycles, inventory obsolescence and an
inherent inability to change the logic design.
FPGAs, on the other hand, are manufactured as standard devices
customized by the user at the designer's desktop or at the end of the
manufacturing line by the customer using the FPGA supplier's programming
systems. Design changes can typically be implemented in as little as a few
hours, as compared to several weeks for conventional gate arrays. FPGAs costs
can be attractive in low volumes because they eliminate the non-recurring
engineering costs and expenses and increased development time associated with
the redesign of conventional gate arrays. FPGAs are being used by a growing
number of electronic system manufacturers in response to increased demand for
product differentiation, time-to-market pressures and desired manufacturing
flexibility.
The wider use of more complex FPGAs has been limited by price and
performance factors. On current architectures, programming elements based on
static random access memory (SRAM) technology occupy relatively large amounts
of area within an integrated circuit, which tends to increase the overall
size and cost of each integrated circuit. In addition, on current
architectures, the size of SRAM programming elements limits the number of
interconnect points in an integrated circuit, which in turn, limits
flexibility and utilization.
Before FPGAs can be programmed, a designer must define the function,
verify the design and lay out the integrated circuit using EDA design
software. With increased integrated circuit complexity, designers are turning
to hardware description languages (HDLs), also known as high-level
description (HLD), for their electronic system and integrated circuit
designs. HDL methodology permits the designer to describe the integrated
circuit functions at an abstract level and to verify the performance of logic
functions at that level. The HDL can then be fed into logic synthesis
software that converts the abstract or high-level description into a
gate-level representation equivalent. After a gate-level representation of
the logic function has been created and verified, it must be translated or
"laid out" onto the generic logic elements of the FPGA. This is achieved by
placing the logic gates and routing their interconnections, a process
referred to as "place and route."
The transition to the use of HDL for ASIC designs and FPGAs, in
particular, presents an opportunity for GateField. The effectiveness of logic
synthesis and place and route tools varies considerably with different
programmable logic circuit architectures. Because the HDL EDA tools were
initially optimized for conventional gate arrays, and GateField's ProASIC
product architecture is similar to a conventional gate array, GateField's
devices provide higher gate utilization, more accurate device performance
simulations and more effective synthesis than is possible with other FPGAs.
Thanks to our ASIC-like architecture, systems and electrical device engineers
using their standard ASIC design methodology and tools can transfer a
successful design to the more economical GateField FPGA in a matter of hours
and save development time and production costs.
Electrical system manufacturers are requiring improved functionality,
performance, reliability and lower cost. These are often addressed through
the use of components that integrate ever-larger numbers of logic gates onto
a single integrated circuit. In addition, global competition is shortening
product life cycles and requiring more frequent product enhancements.
GateField's ProASIC standard FPGA products combine the high logic density,
ease of use and predictable performance typically associated with
conventional gate arrays with the time-to-market advantages of a non-volatile
and reprogrammable logic product.
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COMPANY STRATEGY
PROGRAMMABLE ASIC PRODUCTS. Global competition is forcing electronic
system manufacturers to bring increasingly complex products to market within
shorter and shorter development cycles while at the same time shrinking
product life cycles. This competitive environment creates a constant demand
for new logic devices with increased performance and functionality at lower
and lower costs.
To serve this need, FPGAs are becoming increasingly complex--and yet
also quick and easy to use. The primary advantage of FPGAs over competing
solutions is that they allow system designers to experiment, iterate and
optimize their designs in a relatively short amount of time and at a lower
cost. FPGAs can often be designed and verified in a few days as opposed to
several weeks or months for gate arrays. The time-to-market advantage is
significant: As soon as the customer has programmed the FPGA, the customer's
design is finalized and the customer can move immediately into production
with the FPGA.
The customer also has a lower all-inclusive per unit cost of production
for small to medium volume applications as compared to gate arrays. Total per
unit cost is inversely related to volume for a custom integrated circuit (IC)
because of the high fixed costs of non-recurring engineering, layout and mask
costs.
All the advantages of programmability are amplified by
reprogrammability. Reprogrammability allows an electronic systems
manufacturer to shorten its own product life cycles and reduce
inventory-carrying costs. It also allows inventory to be re-configured over
and over as enhancements in the manufacturer's system design evolve. This
further saves development time and costs over several generations of
products.
GateField's strategy is to use flash technology to provide standard
reprogrammable logic products that combine the high logic density and
non-volatility typically associated with conventional gate arrays with the
reprogrammability and the time-to-market advantages of FPGAs. Moreover,
GateField products offer a significant cost advantage because the die size
for equivalent complexity and performance is only one-fourth to one-third the
size of SRAM FPGAs using the same manufacturing geometries or design rules.
Management believes the performance, density and cost advantages of the
GateField FPGAs combined with their reprogrammability and non-volatility (all
of which scale with the ever-shrinking semiconductor manufacturing
technology) provide our customers--and our company--with what GateField
believes is a sustainable competitive advantage.
ASIC DEVICE ARCHITECTURE. The company's strategy is to provide products
that emphasize predictable system performance, device utilization, design
portability and reuse, and, ultimately, increased designer productivity.
GateField's patented ProASIC architecture allows its products to easily
integrate into industry standard ASIC design flows because of the
architecture's similarity to standard gate array technology. Consequently, we
believe our products provide an easy migration from a lower-volume and
higher-cost FPGA application to a higher-volume and lower-cost conventional
gate array or custom ASIC design.
GateField's ProASIC flash-based technology also eliminates the need for
the additional ICs required for FPGA configuration, freeing the system
designer from special design considerations related to board design and
system initialization procedures required for SRAM FPGAs. This further
reduces cost and increases designer productivity. GateField believes these
ProASIC product attributes will appeal to gate array and ASIC designers
within established electronic system companies who are already familiar with
high level design methodologies as well as an emerging group of programmable
logic designers who are starting to use higher density programmable logic
devices.
SOFTWARE TOOL. Our development software products use industry standards
and are designed to be integrated with industry standard EDA tools. GateField
believes the industry's acceptance of its ProASIC devices will be enhanced if
the customer can use GateField's software tools along with the customer's own
preferred design methodology and its chosen "best of breed" open EDA tools
and design methodology to design systems.
CONDUIT FOR INTELLECTUAL PROPERTY PROLIFERATION. The Company believes
that the ASIC design flow and combination of high capacity, reprogrammability
and non-volatility in GateField's ProASIC devices offer significant
advantages to intellectual property providers. Using our devices, they can
efficiently verify their intellectual property in silicon and securely
deliver their intellectual property to customers. Each ProASIC device holds
its own electronic signature and can be configured to effectively preclude
copying and reverse engineering. We believe these key features provide a
secure silicon medium for intellectual property delivery by intellectual
property suppliers, and GateField and Actel intend to include such companies
in their direct marketing efforts.
TECHNOLOGY LICENSING AND PRODUCTION RELATIONSHIPS. In addition to the
sale of its standard ProASIC products, GateField will seek to sell
nonexclusive licenses to its ProASIC technology to major semiconductor
companies as their preferred solution for embedded, reprogrammable,
system-level-integration (SLI) integrated circuits. GateField believes that
the small size, non-volatility and reprogrammability of its patented
flash-based switch and its patented ProASIC architecture support of the
standard ASIC design flow provide a competitive advantage for use of the
ProASIC technology for reprogrammable SLI ICs. We plan to position ProASIC
technology as the technology of choice to serve this reprogrammable IC market
need. GateField has licensed its technology to both Siemens and Rohm for
embedded reconfigurable ICs. See "License Agreements."
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TECHNOLOGY
PROCESS. GateField's current products use an established two-layer,
0.72-micron flash manufacturing process. These devices are manufactured for
GateField by Rohm in Kyoto, Japan. We are currently completing initial testing
of our 0.25-micron product. The joint Actel/GateField marketing team began
sampling initial customers with engineering product samples of its 0.25-micron
product in the first quarter of 1999. The company has entered into an agreement
with Siemens to manufacture the new 0.25-micron product.
ARCHITECTURE. The patented design of the ProASIC product architecture is
designed to allow GateField to achieve high density; meet performance goals;
obtain predictable gate utilization and performance; and support industry
standard ASIC design flows. The architecture consists of switches that program
the chip; the associated routing, clocking and power grids; and the underlying
logic cell that provides the programmable gates. The ProASIC architecture takes
advantage of the very small switch size (as compared to competitive SRAM or
antifuse approaches) as well as its reprogrammable and non-volatile features.
The company anticipates that improvements in the architecture will drive
performance enhancements with each subsequent product generation.
EMBEDDED MEMORY BLOCKS. In addition to the flash memory/switch combination,
which is used to configure the GateField device, embedded static memory blocks
are an important feature of GateField's standard ProASIC products. GateField's
current GF260F180 0.72-micron product and all of the planned 0.25-micron
products will have this feature. Depending upon the product, a number of memory
blocks, each containing 256 x 9 bits of memory, are available to support a
variety of possible memory configurations. Each block may be programmed as an
independent memory or may be combined, using dedicated memory routing resources,
to form larger, more complex memories and FIFO structures. In addition,
GateField's 0.25-micron product architecture allows memory paralleling to form
memories of up to 11 independent memory ports (10 read, 1 write port). This
approach is designed to provide GateField products with a flexible and efficient
high performance embedded static memory for both Dual Port and FIFO memory
requirements.
PRODUCTS
GateField currently offers a range of 0.72-micron, flash-based
programmable logic integrated circuits and associated development software
and hardware. These integrated circuit products are aimed at ASIC prototyping
applications and intellectual property delivery. The current ProASIC devices
are available in a wide variety of plastic and ceramic package types.
External configuration storage devices are not needed due to the
non-volatility of flash-based ProASIC devices. Devices can be programmed
either by plugging them into the company's ASICmaker-TM- programming console
or a system board through the In-System-Programming (ISP) interface.
GateField's development software tools facilitate the design process for its
integrated circuits. These existing products have allowed GateField to sell
product and software to support approximately 150 design wins with
approximately 100 customers. Almost all of these customers have utilized the
0.72-micron products for ASIC prototyping or IP delivery in low quantities.
In 1998, the company stopped actively promoting the sale of its 0.72-micron
product. The company intends to terminate sales of this product in the second
quarter of 1999. The company is currently completing initial testing of its
0.25-micron product and related software. The joint Actel/GateField
marketing team began sampling initial customers in the first quarter of 1999.
GateField has plans for a four-product family, which will range from 20,000
usable ASIC logic gates and 14,000 bits embedded SRAM to 100,000 usable logic
gates and 65,000 bits of embedded memory. These devices are scheduled to be
offered in multiple plastic quad flat packages and ball grid array packages.
Production software and device programmer is expected to be available in the
second quarter of 1999. Supporting software enabling customers to begin their
designs became available in the first quarter of 1999.
PRODUCT DEVELOPMENT
GateField believes that its success will depend in part on its ability to
continue to enhance its existing products, develop new products and lower the
price and improve the performance of its products in a timely manner.
GateField's product development activities are primarily directed toward the
design of new programmable ASIC solutions, the use of advanced semiconductor
manufacturing processes and the development of new software tools.
The company recently focused its research and product development
efforts on a new product family based on a 0.25-micron flash process and
enhanced place and route tools. Research and development expenses in 1998,
1997 and 1996 were $5.5 million, $7.9 million and $15.8 million, respectively.
To continue this level of research and development, the company will need to
attract and retain highly skilled engineering personnel. There can be no
assurance that the company will be successful in attracting and retaining such
personnel in the future.
GateField has in the past, and may in the future, experience delays in
new product development. There can be no assurance that the company will be
successful in developing and marketing the 0.25-micron product, or future
enhancements or new products that respond to technological change, evolving
industry standards and changing customer requirements; that the company will
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these future products or product
enhancements; or that its new products or product enhancements will
adequately meet the requirements of the marketplace and achieve any
significant degree of market acceptance.
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Failure of the company, for technological or other reasons, to develop
and introduce new products and product enhancements in a timely and
cost-effective manner would have a material adverse effect on the company's
business, financial condition and results of operations. In particular, the
company is currently completing initial testing of its 0.25-micron product,
which is being manufactured by Siemens. GateField's failure to timely and
cost-effectively develop and commercialize its 0.25-micron products would
have a material adverse effect on the company's business, financial condition
and results of operations.
Complex products, such as the company's 0.25-micron product, 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 product, 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.
MANUFACTURING
GateField's current ProASIC products are manufactured on a 0.72-micron
EE/Flash process by Rohm in Kyoto, Japan. The assembly of GateField's
current products is performed by ANAM Semiconductor, Inc. in Korea.
GateField performs wafer and finished goods testing in Fremont, California.
GateField's 0.25-micron products are expected to be manufactured by
Siemens Aktiengesellschaft in its new fabrication facility located in
Dresden, Germany. GateField has designed its technology and product to be
manufactured on Siemens' standard production C9FL Flash process. Siemens also
has agreed to perform wafer die testing. GateField entered into an agreement
with Siemens in June 1998 to perform these services.
The GateField/Siemens alliance gives GateField access to Siemens'
proprietary 0.25-micron flash technology for the 0.25-micron product. Test
silicon results have confirmed that GateField's patented flash memory
cell/switch combination and its high density programmable structures work in
Siemens' standard embedded flash process. There can be no assurance,
however, that such products can be manufactured in large volumes with
acceptable yields. Assembly and the final testing of finished goods is
expected to be performed by third party assembly and test subcontractors,
such as Anam.
GateField outsources the manufacture of its products to independent
contractors on a purchase order basis. The company also relies upon a limited
number of suppliers who can produce its products to its specifications and in
the quantities and quality it desires. This strategy minimizes capital and
management resources dedicated to manufacturing and is intended to take
advantage of the strengths of the company's strategic partners: manufacturing
knowledge and economies of scale in wafer fabrication, testing, assembly and
quality assurance.
MARKETING, SALES AND CUSTOMERS
GateField and Actel have a strategic alliance that gives Actel exclusive
sales and marketing rights to GateField's 0.25-micron product and below. In
addition, the alliance provides GateField with access to a direct sales and
field application engineering (FAE) team that is approximately ten times
larger than the sales and FAE force that GateField had prior to the alliance.
Being one of the largest FPGA suppliers in the world, Actel provides
GateField with access to a large customer and design software user base. In
connection with the Actel alliance, GateField terminated its entire sales and
FAE force. Consequently, the company is highly dependent on the marketing
efforts and success of Actel's sales force. If Actel were to fail to perform
under the Product Marketing Agreement or if the agreement were to be
terminated, GateField would be required to rebuild its sales force, which
would require a significant amount of time and resources, and the company's
business and financial condition would be adversely affected.
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.
In addition to marketing its next generation products through the
company's alliance with Actel, GateField seeks to license its technology for
embedded applications with an upfront fee license and an ongoing royalty.
GateField has entered into licensing agreements with Siemens and Rohm. The
company markets its technology for embedded applications directly to
potential licensees. See "License Agreements."
During 1998, Siemens accounted for 22% of consolidated revenues. During
1997 and 1996, one customer, Intel Corporation, accounted for 16% and 10% of
consolidated revenues, respectively.
COMPETITION
The semiconductor industry is intensely competitive and characterized by
rapid technological change, rapid rates of product obsolescence and price
erosion resulting from both product obsolescence and price competition. As a
new entry in the high-end programmable logic market, GateField competes
directly with a number of well-financed, profitable and fast-growing
companies that
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devote a significant portion of their resources to new product development and
existing product enhancements. These companies have substantially greater
financial, technical and marketing resources than GateField has.
GateField's current competitors include Xilinx, Inc., Altera Corporation,
Actel Corporation, Lucent Technologies Inc., Advanced Micro Devices Inc., Vantis
subsidiary, among others. The company expects that as the dollar volume of the
programmable logic market grows, this market will become increasingly attractive
to powerful, established companies as well as newcomers to the market.
The principal factors upon which the company competes in the programmable
logic marketplace include product performance and features, the integration
capacity and flexibility of the individual circuits, the capability of software
development tools, quality and reliability, pricing, technical service and
support and the ability to respond quickly to technical innovation. GateField
believes it can compete favorably with respect to these factors, although it may
be at a disadvantage in comparison to larger companies with broader product
lines and internal wafer fabrication capabilities.
LICENSE AGREEMENTS
In October 1997, GateField Corporation and Siemens Aktiengesellschaft
entered into a strategic alliance. Under the agreement, Siemens licensed
GateField's ProASIC technology to be embedded into Siemens' system level
integration products, and GateField gained access to Siemens' 0.25-micron flash
technology. In June 1998, GateField entered into a long-term agreement with
Siemens to manufacture and test ProASIC products.
GateField entered into a Technology License Agreement with Rohm Co. Ltd. in
March 1998. Under this agreement, Rohm licensed GateField's ProASIC technology
for use in nonembedded applications and in multichip packages having process
technologies down to 0.5 micron and having an approximate raw gate capacity of a
total of 10,240 gates. In addition, Rohm paid a one-time fee to obtain a master
license to GateField's ASICmaster-TM- software. In August 1998, this license was
expanded to provide Rohm with the nonexclusive right to utilize the ProASIC
technology for standard ProASIC products down to 0.35-micron process geometries
with no limitations on density. In addition, the expanded license allows Rohm to
use the ProASIC technology for future reconfigurable SLI ICs royalty-free down
to process geometries of 0.35 micron, but with royalties for less than
.35-micron products.
In August 1998, GateField and the Actel Corporation entered into a
Product Marketing Agreement. Under the terms of this agreement, Actel
received exclusive, worldwide distribution rights to GateField's standard
ProASIC FPGA products below .35 micron, including FPGA products that are
integrated with SRAM or Flash memory and all resulting next generation
reduced process geometry ProASIC FPGA products. For these rights, Actel paid
GateField an initial fee of $1 million and agreed to pay a $1 million fee
upon qualification of the initial 0.25-micron product.
GateField and Actel also entered into a license agreement which grants
Actel a fully paid, exclusive, nontransferable license to sell GateField's
standard ProASIC FPGA products below 0.35 micron and all resulting next
generation reduced process geometry ProASIC FPGA products. Actel agreed to
pay GateField a $1 million fee for the license.
Subject to the license of certain rights to Actel, Siemens and Rohm,
GateField continues to maintain ownership of its intellectual property
relating to its technology and products. This allows GateField to address the
emerging embedded reprogrammability market.
PROPRIETARY RIGHTS
GateField's ability to compete is dependent in part on its proprietary
rights and technology. The company relies on a combination of patent,
copyright and trademark laws; trade secrets; confidentiality procedures; and
contractual provisions to protect its proprietary rights. It generally enters
into confidentiality or license agreements with its employees, resellers,
distributors, customers and potential customers and limits access to its
software, hardware designs, documentation and other proprietary information.
There can be no assurance that the steps taken by GateField in this regard
will be adequate to prevent misappropriation of its technology.
GateField currently holds nine United States patents and has three
patent applications under consideration. The company has ten patents pending
in foreign countries. GateField believes that these patent rights are an
important factor in the protection of its proprietary information. There can
be no assurance that the company's patents will not be invalidated,
circumvented or challenged; that the rights granted thereunder will provide
competitive advantages to the company; or that any of the company's pending
or future patent applications, whether or not being currently challenged by
applicable governmental patent examiners, will be issued with the scope of
the claims sought by the company, if at all. Furthermore, there can be no
assurance that others will not develop technologies that are similar or
superior to GateField's technology or design around the patents owned by the
company.
GateField Corporation has common law trademark protection for the
following trademarks: "GateField," "ProASIC," "ProCore," "ProReady,"
"GF100K," "GF200F," "GF250F," "GF260F," "GF360F," "GF460F," "ASICmaker,"
"ASICmaster," "MEMORYmaster," "Sea-of-Tiles," "ProIP," "ProSLI," and
"FlashLink."
6
<PAGE>
ITEM 2. PROPERTIES
The Company leases approximately 61,000 square feet of office space in Fremont,
California, approximately 30,800 square feet of which is currently used for its
headquarters and test and engineering operations. The Company subleases the
remaining 30,231 square feet to Mattson Technology. The lease expires in August
1999. The Company is in the process of negotiating a new lease in the same
geographic area as its existing facility, estimates it will lease approximately
15,000 square feet, and believes this space can be obtained on commercially
reasonable terms.
As of December 1998, the company had a total of 37 full-time employees. The
company's employees are not represented by any collective bargaining agreement
with respect to their employment by the company, and the company has never
experienced an organized work stoppage.
The company's future success is heavily dependent upon its ability to hire and
retain qualified technical, marketing and management personnel. The competition
for such personnel is intense, particularly for engineering personnel with
related networking and integrated circuit design expertise and for technical
support personnel with networking engineering expertise. See "Risk Factors --
Dependence on Key Personnel."
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
7
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the OTCBB under the symbol "GATE." On
July 15, 1998, GateField Corporation's stock was delisted from the Nasdaq
National Market and began trading on the Nasdaq SmallCap Market. On September
17, 1998, the company's stock was delisted from the Nasdaq SmallCap Market for
failing to meet Nasdaq's on-going minimum bid price requirement. At that date,
the company's stock immediately began to trade on the OTC Bulletin Board.
The following table sets forth, for the periods indicated, the high and low bid
prices for the Common Stock as reported by the OTCBB, Nasdaq National Market or
Nasdaq SmallCap Market, as applicable. Such over the counter market quotations
reflect inter-dealer prices, without retail back-up, mark-down or commission and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
1998
First Quarter $ 2.25 $ 1.03
Second Quarter $ 2.13 $ 0.84
Third Quarter $ 1.31 $ 0.30
Fourth Quarter $ 1.13 $ 0.27
- --------------------------------------------------------------------------------
1997
First Quarter $ 3.13 $ 1.56
Second Quarter $ 1.72 $ 0.56
Third Quarter $ 1.59 $ 0.47
Fourth Quarter $ 3.00 $ 1.06
- --------------------------------------------------------------------------------
</TABLE>
At April 8, 1999, there were 1,226 stockholders of record.
The Company has never paid any cash dividends on its Common Stock. The
Company currently intends to retain any earnings for future growth and,
therefore, does not anticipate paying any cash dividends on its Common Stock in
the foreseeable future. Moreover, no dividends shall be paid on shares of
Common Stock until the holders of the Company's Series B and Series C
Convertible Preferred Stock then outstanding shall have received a distribution
as specified in the Company's Restated Certificate of Incorporation.
RECENT SALES OF UNREGISTERED SECURITIES
In August 1998, the Company issued 300,000 shares of Series C
Convertible Preferred Stock ("Series C Stock") to Actel for an aggregate
purchase price of $3,000,000. The Series C Stock was issued in reliance upon
the exemption from registration set forth in Section 4(2) of the Securities
Act of 1933, as amended (the "Securities Act"). Each share of outstanding
Series C Stock is convertible into 6.67 shares of Common Stock plus an amount
of shares at the conversion price equal to the amount of accrued and unpaid
dividends on the Series C Stock. In the event all shares of the Company's
Series B Preferred Stock ("Series B Stock") are redeemed, each share of
Series C Stock is subject to redemption at a price of $10.00 per share plus
the amount of declared but unpaid dividends.
In November 1997, the Company, Idanta Partners Ltd., Dunn Family Trust
and Perscilla Faily Trust (collectively, the "Idanta Entities") entered into
a two phase private placement transaction, pursuant to a Series B Preferred
Stock Purchase Agreement (the "Idanta Agreement"). In phase one of the
transaction, the Idanta Entities agreed to purchase 1,000,000 shares of the
Company's Series B Preferred Stock (the "Series B Stock") for an aggregate
purchase price of $4,582,500. Each share of Series B Stock is convertible
into 4.5825 shares of the Company's Common Stock plus the amount of accrued
and unpaid dividends on the Series B Stock at the conversion price. In
addition, Idanta agreed to purchase 4,582,500 shares of the Company's Common
Stock for an aggregate purchase price of $4,582,500, pending stockholder
approval of certain management proposals contained in the proxy
8
<PAGE>
statement filed in connection with the Company's 1997 Annual Meeting. In
December 1997, the stockholders approved all the management proposals.
Accordingly, in January 1998, in phase two of the transaction, Idanta purchased
an aggregate of 4,582,500 shares of the Company's Common Stock for an aggregate
purchase price of $4,582,500. Upon the occurrence of certain events specified
in the Company's Restated Certificate of Incorporation, each share of Series B
Stock is either (i) subject to redemption at the election of at least 51% of the
then outstanding shares of Series B Stock or (ii) convertible into the number
of shares of Common Stock equal to the number of shares obtained by dividing the
sum of 4.5825 plus accrued and unpaid dividends by 0.75. The Series B Stock and
the Common Stock were issued in reliance upon the exemption from registration
set forth in Section 4(2) of the Securities Act.
In October 1998, the Company was notified by Idanta of their desire to
redeem, in cash, an aggregate of 981,997 shares of the Company's Series B Stock
(the "Shares") at a redemption price equal to $4.5825 per share plus accrued
dividends thereon. Pursuant to the Idanta Agreement, Idanta became entitled to
redemption upon the delisting of the Company's Common Stock from the Nasdaq
SmallCap Market. In December 1998, the Company redeemed the Shares for an
aggregate price of $4,648,000. An aggregate of 18,003 shares of Series B
Preferred Stock remain outstanding.
In February 1997, the Company completed a $3,500,000 private placement with
investors whereby the Company issued 6% subordinated convertible debentures (the
"1997 Debentures") and warrants to purchase an aggregate of 500,000 shares of
Common Stock (the "Warrants"). The 1997 Debentures accrued interest at an
annual rate of 6%, beginning on the date of issue, with principal due and
payable three years from the date of issue, if and to the extent that the 1997
Debentures were not previously converted. The 1997 Debentures were convertible
at the option of the holder into the Company's Common Stock at a discount up to
20% from market price. The Warrants have a term of 60 months and have an
exercise price of $2.25 per share. The 1997 Debentures and Warrants were issued
in reliance upon the exemption from the registration set forth in Section 4(2)
of the Securities Act.
In May 1997, the 1997 Debentures were converted into 100,000 shares of the
Company's Series A Convertible Preferred Stock having an aggregate stated value
of $3,500,000. In addition, the Preferred Stock Purchase Warrants (the
"Preferred Warrants") were issued to the holders of the Debentures to purchase a
total of 42,858 shares of Series A Stock. The term of the Preferred Warrants
is 60 months with an exercise price of $35.00 per share (provided such warrants
could only be exercisable when the last reported sales price of the Common Stock
on the most recent trading day is equal to or greater than $1.50 per share). The
Preferred Warrants and the Series A Stock issued upon exercise were issued in
reliance upon the exemption from the registration set forth in Section 4(2) of
the Securities Act. Subsequently, 51,972 shares of the Series A Stock were
converted into 4,546,928 shares of the Company's Common Stock at prices ranging
from $0.367 to $0.606 per share. The shares of Common Stock issued upon the
conversion of the Series A Stock were issued in reliance upon the exemption from
the registration set forth in Section 3(a)(9) of the Securities Act. In August
1997, the Company redeemed all of the remaining outstanding shares of the Series
A Stock and the Preferred Warrants for an aggregate price of $1,827,000. Also in
August 1997, the outstanding Warrants for 500,000 shares of Common Stock were
exchanged for new warrants to purchase 350,000 shares of the Company's Common
Stock at an exercise price of $0.53125 per share. The warrants, issued upon
exchange of the old warrants, were issued in reliance upon the exemption from
the registration set forth in Section 4(2) of the Securities Act. In September
1997, Common Stock warrants to purchase an aggregate of 105,000 shares of Common
Stock were exercised for an aggregate price of $56,000. The shares of Common
Stock issued upon exercise of the warrants were issued in reliance upon the
exemption from the registration set forth in Section 3(a)(9) of the Securities
Act.
In May 1996, the Company sold a total of $10,000,000 of subordinated
convertible debentures (the "1996 Debentures") to institutional investors as
part of a private placement. The 1996 Debentures accrued interest at an annual
rate of 6%, beginning on the date of issue, with the principal due and payable
three years from the date of issue if and to the extent that the 1996 Debentures
were not previously converted. The 1996 Debentures were convertible at the
option of the holders into Common Stock at a price equal to 80% to 85% of the
average closing bid price for the Common Stock on the Nasdaq National Market for
the five trading days prior to the date of conversion. During 1996, an
aggregate of $4,356,000 ($4,300,000 of the original principal of the 1996
Debentures and $56,000 of accrued interest) were converted into 2,691,000 shares
of Common Stock. During 1997, an aggregate of $5,998,000 ($5,700,000 of the
original principal of the 1996 Debentures and $229,000 of accrued interest) were
converted into 7,418,000 shares of Common Stock. The shares of Common Stock
issued upon the conversion of the 1996 Debentures were issued in reliance upon
the exemption from the registration set forth in Section 3(a)(9) of the
Securities Act. In addition, the investors received warrants to purchase 59,500
shares of Common Stock at an exercise price of $10 per share. The term of the
warrants was 30 months. The warrants were issued in reliance upon the exemption
from the registration set forth in Section 4(2) of the Securities Act. At
December 31, 1998 there was no outstanding balance on the 1996 Debentures and a
total of 10,109,000 shares of Common Stock had been issued upon conversion of
the 1996 Debentures.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 (d) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues $ 7,700 (c) $ 15,503 (c) $ 33,577 $ 51,117 (a) $ 50,051 (a)
Gross profit $ 393 $ 4,600 $ 16,569 $ 33,624 $ 30,094
Operating income (loss) $(12,453) $(17,120) $(18,435) $ 2,550 $ (9,511)
Net income (loss) $ (8,268) $(16,432) $(21,376) $ 1,957 $ (9,748)(b)
Basic net income (loss) per share:
Profit (loss) before extraordinary
item $ (0.20) $ (0.72) $ (1.03) $ 0.09 $ (0.52)
Extraordinary item (0.03)
-------- -------- -------- -------- --------
Net income (loss) per share $ (0.20) $ (0.75) $ (1.03) $ 0.09 $ (0.52)
Diluted net income (loss) per share:
Profit (loss) before extraordinary
item $ (0.20) $ (0.72) $ (1.03) $ 0.09 $ (0.52)
Extraordinary item (0.03)
-------- -------- -------- -------- --------
Net income (loss) per share $ (0.20) $ (0.75) $ (1.03) $ 0.09 $ (0.52)
Basic weighted average shares
outstanding 41,251 30,303 20,655 19,393 18,598
Diluted weighted average shares
outstanding 41,251 30,303 20,655 21,233 18,598
- ------------------------------------------------------------------------------------------------------------------
YEAR END FINANCIAL DATA:
Working capital (deficit) $ (3,510) $ (47) $ (1,240) $ 6,741 $ 1,621
Total assets $ 6,853 $ 11,256 $ 29,527 $ 28,980 $ 29,825
Redeemable preferred stock $ 3,083 $ 4,594 - - -
Long-term debt $ 330 $ 58 $ 6,636 (d) $ 1,207 $ 1,874
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Revenues, net income and net income per share for 1995 included amounts
related to a technology distributed by GateField and owned by a U.K. Company.
Effective January 1, 1996, the two companies formed a joint venture.
Consequently, specific revenues and costs related to this product were no longer
consolidated in GateField's financial statements beginning in 1996.
(b) The net loss in 1994 included a charge for asset write-downs and staff
reductions of $6,800,000, primarily related to the Company's decision to
discontinue selling the Paradigm ViP-TM- (VHDL instruction processor) product.
(c) Revenues decreased in 1998 and 1997 due to the sale of certain assets of the
Company (see Note 4 of Notes to Consolidated Financial Statements).
(d) As restated, see Note 12 of Notes to Consolidated Financial Statements.
ITEM 7. 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.
10
<PAGE>
OVERVIEW
GateField Corporation designs, develops, manufactures and markets high
density, high performance programmable logic solutions and related development
software. The company's products are flash-based FPGAs trademarked as
programmable ASICs (ProASIC-TM-). The products were developed using two
proprietary and patented technologies: a flash-based switching element and a
fine-grained, gate array-like ProASIC architecture. The company believes the
principal advantages of GateField products over alternative SRAM-based and
antifuse devices are: smaller chip size for the same geometries,
reprogrammability and non-volatility and the ability to use a standard
electronic design automation (EDA) application specific integrated circuit
(ASIC) design flow.
GateField's products are designed to provide high integration, fast
time-to-market and fast time-to-volume for electronic equipment manufacturers in
the networking, telecommunications, computer, peripheral, industrial control,
instrumentation and consumer markets. Rohm Co. Ltd. fabricates GateField's
current 0.72-micron ProASIC product wafers. Siemens Aktiengesellschaft has
agreed to manufacture GateField's 0.25-micron product wafers in its production
facility in Dresden, Germany.
During the past two years, GateField Corporation has experienced
downsizing, reorganization and a change in its core business. With the sale of
its assets related to the verification products in 1997, the company completed
the transition of its core business from a provider of high performance
verification products to a provider of FPGA products. (See Note 4 of the "Notes
to Consolidated Financial Statements.") Accordingly, annual revenues have
steadily declined over the three-year period to $7.2 million in 1998 down from
$15.5 million in 1997 and $33.6 million in 1996. Operating expenses also
decreased to $12.9 million in 1998 from $21.8 million in 1997 and $35.0 million
in 1996 as the company reduced its staff each year to match forecasted sales.
The company began selling its 0.72-micron standard ProASIC product in late
1996. The product was not financially successful due to poor manufacturing
yields; however the product did prove the feasibility of the technology. In
1998, the company stopped actively promoting the sale of its 0.72-micron ProASIC
product and intends to terminate sales in the second quarter of 1999.
The company is now developing a family of 0.25-micron and below
programmable ASIC products and has no significant sales. GateField is currently
completing initial testing of the 0.25-micron product. It began sampling
initial customers in the first quarter of 1999.
In August 1998, the company entered into a strategic alliance with Actel
Corporation, under which Actel received exclusive, worldwide distribution rights
to GateField's 0.25 micron and below standard ProASIC products. Actel also
purchased the assets of GateField's Design Services product line as well as $3
million of the company's Series C Preferred Stock, which is convertible into
2,000,000 shares of GateField common stock. As a result of the alliance the
company essentially eliminated its sales and marketing department.
GateField maintains rights to the intellectual property underlying its
technology allowing it to address the emerging market for embedded
reprogrammability. The company will seek to license its technology for embedded
products in the future. GateField has entered into licensing agreements with
Siemens and Rohm, which provide them with manufacturing or distribution rights
to various GateField products; these agreements have resulted in approximately
$4.5 million in deferred revenue as of December 31, 1998. (See Description of
Business-License Agreements). These agreements do not include per unit royalty
fees.
In light of expected decline in sales, the company reviewed its
strategies, organization and expenses in the third quarter of 1998 and as a
result, significantly reduced personnel and other operational expenses.
Fourth quarter operating expenses in 1998 were approximately $2.1 million.
GateField plans to maintain these lower operating costs in the future due to
the sale of the design services business, cost-saving measures implemented in
all departments during the fourth quarter of 1998 and almost complete
elimination of sales and marketing personnel. Management's plan in 1999 is to
control operating expenses at approximately those levels achieved in the
fourth quarter of 1998, to begin sales of the .25-micron standard ProASIC
product, and to obtain additional financing. Because the Company has
terminated product lines and changed development direction and its operating
model, its historical financial performance cannot and should not be used to
indicate future financial performance.
Subsequent to the issuance of the company's 1997 consolidated financial
statements, the company determined that certain transactions recorded in
connection with the $10,000,000 and the $3,500,000 Subordinated Convertible
Debenture Notes and the Siemens License Agreement, were inappropriately
recorded. As a result the company's 1996 and 1997 financial statements have
been restated from amounts previously reported to appropriately reflect these
transactions (See Note 12 of the "Notes to Consolidated Financial
Statements."). References to 1997 results of operations herein have been
revised to reflect the affects of the restatement.
RESULTS OF OPERATIONS
REVENUES
Total product revenues declined to $2.6 million in 1998 down from $5.4
million in 1997 and $18.2 million in 1996. Sales of verification related
products were zero in 1998, $2.5 million in 1997 and $17.9 million in 1996.
Sales of ProASIC related products were $2.6 million in 1998, $2.9 million in
1997 and $304,000 in 1996. ProASIC product revenue includes license fees
11
<PAGE>
from Siemens and from Rohm of approximately $1.1 million in 1998. The
decline in verification related products to zero in 1998 was due to the sale
of verification products in 1997. The decline in ProASIC revenues in 1998
from 1997 was due to a highly competitive environment brought on by the
introduction of smaller, cheaper geometries by competitive technologies and
the decision by the company to halt active sales efforts for the 0.72-micron
product in the third quarter of 1998. As was previously mentioned, the
company sold the assets related to the verification products in 1997, and
therefore the related revenue ceased in 1997. The ProASIC product revenue
relates to the company's 0.72-micron products, which will be terminated in
the second quarter of 1999. Most of the company's revenues in 1999 will come
from the introduction of its 0.25-micron products. However, at this time the
company does not know when sales will begin, nor how many products will be
introduced and in what packages. It is impossible to anticipate the degree of
market acceptances 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.
Service revenues were $5.1 million, $10.1 million and $15.3 million in
1998, 1997 and 1996, respectively. Service revenues are comprised of two
components: maintenance contracts on the verification systems and design
services. Verification maintenance revenues were $2.3 million in 1998, $8.7
million in 1997 and $9.9 million in 1996. The decline in verification
maintenance revenues in 1998 from 1997 relates to the sale of the underlying
verification products and the termination of new sales of those products by
the purchaser. The company expects revenues from the verification services
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,
which was sold to Actel in August 1998, were $2.8 million in 1998, $3.8
million in 1997 and $5.4 million in 1996. As the design service unit was
sold in August 1998, the company does not expect any future revenue from
these products in 1999.
GROSS MARGIN
Gross margin in 1998, 1997 and 1996 was affected by many factors,
including but not limited to: license fees, pricing strategies, product mix,
yield variations and increased costs incurred in the introduction of new
products. Gross margin was approximately $393,000 in 1998, $4.6 million in
1997 and $16.6 million in 1996. Gross margin as a percentage of total
revenues was 5% in 1998, 30% in 1997 and 49% in 1996.
Gross margin (deficit) from product revenues was ($2.0) million, ($1.0)
million, and $9.8 million in 1998, 1997 and 1996, respectively. Gross margin
related to verification products was zero in 1998, ($1.8) million or 75.4% in
1997 and $9.6 million or 53.8% in 1996. The decline in gross margin in
verification related products to zero in 1998 was due to the sale of the
verification products in 1997. Gross margin related to these products ceased
in 1997. Gross margin (deficit) related to ProASIC products was $(2.0)
million in 1998, ($3.3) million in 1997 and $149,000 in 1996. Poor
manufacturing yields in 1998 on the 0.72-micron product wafers negatively
affected the margins of 0.72-micron products. In 1998, negative ProASIC
product margins were significantly affected by a $1.8 million inventory
write-down charge for 0.72-micron product inventories to reflect a decrease
in the net realizable value, which was partially offset by $1.2 million in
license revenue with minimal related costs. The decline in ProASIC gross
margins in 1998 versus 1997 were largely due to volume differences and the
inventory write-down charge. As the design and manufacturing processes are
different for the 0.72-micron and the 0.25-micron products, the yield and,
hence, the gross margins on the two products are totally unrelated, thus, the
company cannot predict its margins for 1999 with any degree of certainty.
Gross margin related to 0.72-micron products will cease in the second quarter
of 1999, and it is not expected to be a significant amount.
Gross margin from service revenues was $2.4 million in 1998, $5.6
million in 1997 and $6.8 million in 1996. Gross margin as a percentage of
service revenues was 48%, 56% and 44% for the three years respectively.
Margins related to maintenance contracts on the verification systems were
$2.2 million or 69.7% in 1998, $4.8 million or 77.5% in 1997 and $5.8 million
or 58.2% in 1996. The verification maintenance revenues and hence the related
gross margins, will continue to decline to zero in 1999. Margins related to
design services were $277,000 or 14% in 1998, $725,000 or 19% in 1997 and
$1.0 million or 17.2% in 1996. The design services business is on a contract
basis and margins can vary fairly significantly from customer to customer
depending on the nature of the service being rendered. Also, because revenue
from design services stopped in August 1998, the company does not expect any
gross margin contribution from this source in 1999. Gross margin from service
revenues, if any, are not expected to be significant in 1999.
SALES AND MARKETING
Sales and marketing expenses were $4.1 million or 53% of total revenues
in 1998, $9.7 million or 62% in 1997 and $14.3 million or 43% in 1996. In
1998, sales and marketing expenses decreased 58% or $5.6 million reflecting
the reduced staffing levels in the second half of 1997 and the elimination of
the sales department and most of the marketing department in the second half
of 1998. In 1997, sales and marketing expenses decreased 33%, or $4.7
million, compared to 1996. This was primarily due to reduced staffing levels
resulting from the disposition of product lines in 1997. However, sales and
marketing expenses increased in 1997 as a percentage of revenue as a result
of efforts to support the introduction of several new products in our
ProASIC-TM- product family.
As a result of GateField's efforts to market its 0.72-micron products in
1997 and early 1998, the company realized the process of introducing new
products to the semiconductor marketplace required significant sales and
marketing resources. The company elected to sell the exclusive worldwide
distribution rights to its 0.25 and below ProASIC products to the Actel
Corporation in August 1998 and to focus on product development. With this
strategic alliance in place, GateField expects only minimal marketing
expenses in 1999 to support strategic initiatives and product design efforts.
12
<PAGE>
RESEARCH AND DEVELOPMENT
GateField's research and development expenses were $5.5 million, $7.9
million and $15.8 million in 1998, 1997 and 1996, respectively. The 30% decrease
in 1998 over 1997 and the 50% decrease in 1997 over 1996 were principally due to
reduced staffing levels resulting from the sale of the verification businesses
in 1997 and 1998. GateField's current research and development efforts are now
focused on its ProASIC products; the company believes its current staffing
levels and, therefore, research and development expenses will remain relatively
constant for 1999.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $3.3 million, $4.2 million and
$4.9 million in 1998, 1997 and 1996, respectively. The decrease in general and
administrative expenses in 1998 as compared to 1997 and in 1997 as compared to
1996 was primarily related to decreased staffing levels, cost-cutting measures
and reduced overhead resulting from the reduction or termination of operations
in its Taiwan, United Kingdom, France and German offices. These reduced expenses
were partially offset by higher legal and financial consulting expenses
associated with the strategic relationships in 1997 and 1998. The company
believes that general and administrative expenses will remain relatively
constant in 1999.
OTHER INCOME AND EXPENSE
Net interest expense was $173,000 in 1998 compared to $1.4 million in 1997
and $3.2 million in 1996. The decrease in 1998 reflects the lack of
interest-bearing debt compared to earlier periods and interest income on
positive bank balances held throughout the year due to new issuance's of equity
at the end of 1997 and during 1998. The decrease in 1997 was primarily due to a
decrease in interest expense related to the subordinated convertible debentures
that were converted to common stock in 1997 offset by the amortization of
discount related to convertible debentures issued in 1997.
Other income was $4.4 million in 1998, $3.1 million in 1997 and $0.2
million in 1996. These amounts include a $4.5 million gain in 1998 from the sale
of the Design Service assets to Actel, a $2.7 million gain from the sale of the
verification and LightSpeed product families and the sale of the company's
interest in QSS in 1997. (See Note 4 of the "Notes to Consolidated Financial
Statements.")
NET LOSS
The net loss for 1998 was $8.3 million, which compares to a net loss of
$16.4 million in 1997 and a net loss of $21.4 million in 1996. Recognizing the
impact of lower sales in these years, the company took steps to decrease
operating expenses through a series of reorganizations, which helped to
progressively reduce the annual net loss. Fiscal years 1998 and 1997 were also
impacted by lower than expected sales from the 0.72-micron products and their
corresponding negative gross margins.
The $8.3 million net loss in 1998 was bolstered by a $4.5 million gain in
other income from the sale of the company's Design Services assets to Actel.
This compares to a $16.4 million net loss in 1997 which was also aided by a $2.7
million gain in other income from the sale of certain assets in that year and
offset by $500,000 in debt discount amortization and $1 million debt
extinquishment losses. (See Note 4 of the "Notes to Consolidated Financial
Statements.") The losses in 1998 and 1996 were additionally impacted by $2.2
million and $1.8 million, respectively, in one-time inventory write-down charges
to cost of sales. Additionally in 1996 there was $1.8 million of bad debt and
reorganization costs and $2.5 million of amortization expense related to
debenture discounts.
LIQUIDITY AND CAPITAL RESOURCES
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.
Net cash used in operations was $8.2 million in 1998 compared to $11.3
million in 1997 and $12.6 million in 1996. During 1998 and 1997, there was a
significant decline in the size of the business as the company transitioned to
an intellectual property company and sold off its other significant assets
related to product lines. This decrease in the size of the business resulted in
a decrease in the net loss, accounts receivable, accounts payable and accrued
liabilities. The decrease in 1998 was partially offset by the receipt of $4.5
million in license fees resulting in deferred revenue. Cash used in operations
in 1996 principally reflects the net loss generated by operations, net sales
under capital leases and a growth in inventories, partially offset by a growth
in accounts payable and accrued liabilities.
Net cash provided by investing activities was $5.2 million in 1998 compared
to $11.2 million in 1997 and compares to a net cash used by investing activities
of $3.5 million in 1996. The amounts generated in 1998 and 1997 were primarily
due to cash receipts from the disposition of product families. 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.
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Net cash generated by financing activities was $2.9 million in 1998, which
compares to $3.0 million in 1997 and $13.9 million in 1996. The increase in 1998
was due to the $4.6 million sale of common stock to a single investor in the
first quarter of 1998, the $3.0 million sale of Convertible Preferred Stock in
August 1998, offset by the $4.6 million redemption of the company's Series B
Convertible Preferred Stock in December 1998. (See Note 10 of the "Notes to
Consolidated Financial Statements.") The decrease in net cash provided by
financing activities in 1997 as compared to 1996 was primarily due to decreased
levels of debenture offerings in 1997 as well as reduced levels of bank debt and
financing obligations in 1997, partially offset by the sale of $4.6 million in
Convertible Preferred Stock. (See Note 10 of the "Notes to Consolidated
Financial Statements.") Cash generated by financing activities in 1996 was
primarily attributable to a $10.0 million subordinated convertible debenture
notes offering and $3.2 million in bank borrowings.
At December 31, 1998, the company had cash and cash equivalents of $3.8
million. The company had a working capital deficit of $3.5 million compared to
deficits of $47,000 at December 31, 1997 and $1.2 million at December 31, 1996.
During 1998, 1997 and 1996, GateField incurred net losses of
approximately $8.3 million, $16.4 million and $21.4 million, respectively.
The company expects to continue to generate such losses for at least the
remainder of 1999. Additionally, the company had a working capital deficit of
$3.5 million at December 31, 1998. As a result, the company estimates it
will have utilized all of its currently available capital resources on or
about April 30, 1999. Thus, the company will be unable to continue as a
going concern if sufficient funding is not available. Accordingly, the Board
of Directors has authorized management to pursue efforts to sell common stock
or preferred stock in order to raise additional capital to finance the
company's operations as well as to seek other sources of funds. The board has
authorized management to seek from $10 to $12.5 million in additional capital
to fund operations.
GateField 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. and
Actel Corporation, each a significant stockholder, of the company (which
together with their affiliates are called "investor stockholders"). These
investor stockholders have indicated their preliminary interest in providing
additional financing (called a "proposed financing"). The price per share of
Common Stock to be issued in such a proposed financing is expected to be
determined at about the time the offering is made and at this time is
undetermined, although it is anticipated that the Common Stock would be
issued at a substantial discount to the prevailing market price to reflect
the illiquidity of the shares. GateField is seeking one or more institutional
investors to participate in the proposed financing; however, it has not yet
identified such investors. If additional funds are raised through the
issuance of equity securities, the percentage ownership of current
stockholders will be reduced and such equity securities may have rights,
preferences or privileges senior to those of current stockholders. No
assurance can be given that additional financing will be available or that,
if available, it can be obtained on terms favorable to GateField and its
stockholders. If adequate funds are not available, the company would be
required to delay, limit or eliminate some or all of its proposed operations.
To meet the company's capital requirements pending the closing of the
proposed financing, GateField has held discussions with the investor
stockholders in which the investor stockholders have indicated on a
preliminary basis their willingness to extend loans to the company in the
aggregate principal amount of $4 million called "investor loans". The company
currently anticipates that capital in the aggregate principal amount of $6 to
$12 million will meet GateField's operating requirements through 1999. It is
anticipated that any loans from the investor stockholders would automatically
be convertible into shares of common stock at the closing of, and upon the
same terms and conditions as, the proposed financing, subject to reduction in
the event that the proposed offering is fully subscribed for. The investor
stockholders have indicated their preliminary interest in serving as stand-by
purchasers of a portion of any unsubscribed amount of the offering. Although
the investor stockholders have indicated their preliminary interest in
providing the investor loans, no assurance can be given that the investor
loans will be available or that if available will be obtained on terms
favorable to GateField and its stockholders. If the investor loans are not
provided and adequate funds from other sources are not available by April 30,
1999, the company will be required to terminate its operations.
On July 15, 1998, the GateField Corporation's stock was delisted from
the Nasdaq National Market and moved to the Nasdaq SmallCap Market. On
September 17, 1998, the company's stock was delisted from the Nasdaq SmallCap
Market for failing to meet Nasdaq's on-going minimum bid price requirement.
At that date, the company's stock immediately began to trade on the OTC
Bulletin Board.
YEAR 2000 ISSUES
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 dates after December 31, 1999. 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
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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 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.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 will be effective for
the company's fiscal year ending December 31, 2000. Management believes that
this statement will not have a significant impact on the company's financial
position, results of operations or cash flows.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Timothy Saxe 43 President, Chief Executive Officer and
Chief Operating Officer
Peter G. Feist 44 Senior Vice President, Marketing
James B. Boyd 46 Chief Accounting Officer and Controller
</TABLE>
TIMOTHY SAXE, a founder of the Company, has been President and Chief
Operating Officer of the Company since July 23, 1998 and Chief Executive
Officer of the Company since February 8, 1999. From October 1997 to July
1998 he was Vice President of Engineering and Research and Development of the
Company. From 1993 to 1997, Dr. Saxe was Vice President of Engineering of
the GateField division of Zycad.
PETER G. FEIST has served as Vice President, Business Development of the
Company since October 1996. From January 1995 to September 1996, he was
Regional Manager, Europe for Hyundai Electronics, Digital Media Division, a
semiconductor company. From April 1985 to December 1994, he was Director of
Marketing for LSI Logic GmbH, an ASIC company.
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<PAGE>
JAMES B. BOYD has served as Chief Accounting Officer and Controller of
the Company since April 1998. From February 1998 to April 1998, he was a
consultant with various companies for Re:Sources, an accounting agency.
Prior to that time, he was Chief Financial Officer of AirMedia, Inc. a
software developer and manufacturer of wireless mobile products. From March
1996 to August 1997, he was Controller of Netopia Communications, Inc., a
manufacturer of network communications equipment. From December 1992 to
March 1996, he was an independent consultant working for several technology
companies.
FACTORS AFFECTING FUTURE RESULTS
OPERATING LOSSES AND NEGATIVE WORKING CAPITAL
Currently, GateField has a negative working capital position. Also, the
company has not reported an operating profit since fiscal 1995. The company
reported operating losses of $12.5 million in 1998, $17.1 million in 1997 and
$18.4 million in 1996. In fact, the company does not expect to be profitable, if
at all, until 2000. There are several factors contributing to this: the company
continues to allocate its resources to the 0.25-micron product; the
semiconductor industry, in general, is experiencing overcapacity and decreasing
prices; and weak economic conditions in the Asia Pacific region and Japan
continue to impact the marketplace. GateField cannot predict how long it will
continue to experience significant or increasing operating and net loss or
whether or if it will become profitable.
NO ASSURANCE OF FUTURE FUNDING
GateField must continue to make significant investments in research and
development to remain competitive. Its future capital requirements will depend
on many factors, including, among others: product development expense levels,
investments in working capital, and the amount of income generated by
operations, including royalty income and income deriving from the Actel
relationship. To the extent that existing resources and future earnings are
insufficient to fund the company's operations, GateField may need to raise
additional funds through public or private debt or equity financings. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of current stockholders will be reduced and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the company's common stock.
The company has historically funded its operations primarily through
private equity and debt financings, sale and leaseback arrangements and bank
financing and credit lines. The company intends to continue to explore and, as
appropriate, enter into discussions with current stockholders and other parties
regarding possible future sources of capital (See "Liquidity and Capital
Resources"). Although both Actel and Idanta have indicated their preliminary
interest in providing additional funding, no assurance can be given that this
additional financing will be available or that, if available, it can be obtained
on terms favorable to GateField and its stockholders. Unless the company
obtains additional funding, the company will have utilized all its
currently-available resources on or about April 30, 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.
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-
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<PAGE>
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 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.
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<PAGE>
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 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.
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<PAGE>
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.
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.
19
<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 second
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 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.
20
<PAGE>
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 Annual Report on Form
10-K, 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 or incorporated by
reference in this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.
21
<PAGE>
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.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GATEFIELD CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998 1997
As restated
(In thousands, except share amounts) see Note 12
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 3,832 $ 4,189
Short-term investments - 98
Accounts receivable, less allowance for doubtful
accounts of $244 in 1998 and $528 in 1997 463 2,763
Inventories 117 735
Other current assets 556 524
-------- --------
Total current assets 4,968 8,309
Property and equipment, net 1,783 2,660
Other assets 102 287
-------- --------
Total assets $ 6,853 $ 11,256
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term obligations $ 393 $ 516
Accounts payable 1,372 3,741
Accrued expenses 1,941 3,118
Deferred revenues 4,772 981
-------- --------
Total current liabilities 8,478 8,356
Long-term obligations 330 58
Other long-term liabilities - 13
-------- --------
Total liabilities 8,808 8,427
Commitments and contingencies (Note 6)
Redeemable Preferred Stock
$0.10 par value; 2,000,000 shares authorized;
shares issued and outstanding: 318,000 in 1998
and 1,000,000 in 1997 - at redemption value 3,083 4,594
Stockholders' deficit
Common stock
$0.10 par value; 65,000,000 shares authorized;
shares issued and outstanding: 41,925,000 in
1998 and 36,222,000 in 1997 4,191 3,622
Additional paid-in capital 78,128 73,372
Accumulated deficit (86,620) (78,215)
Accumulated other comprehensive loss (737) (544)
-------- --------
Total stockholders' deficit (5,038) (1,765)
-------- --------
Total liabilities and stockholders' deficit $ 6,853 $ 11,256
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
GATEFIELD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands, except per share amounts) (As restated, see Note 12)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Product $ 2,624 $ 5,385 $ 18,232
Service 5,076 10,118 15,345
-------- -------- --------
Total revenues 7,700 15,503 33,577
-------- -------- --------
Cost of revenues
Product 4,648 6,421 8,439
Service 2,659 4,482 8,569
-------- -------- --------
Total cost of revenues 7,307 10,903 17,008
-------- -------- --------
Gross profit 393 4,600 16,569
-------- -------- --------
Operating expenses
Sales and marketing 4,112 9,664 14,325
Research and development 5,478 7,854 15,783
General and administrative 3,256 4,202 4,896
-------- -------- --------
Total operating expenses 12,846 21,720 35,004
-------- -------- --------
Operating loss (12,453) (17,120) (18,435)
-------- -------- --------
Other income (expense)
Interest expense, net (173) (1,379) (3,184)
Other income (expense), net 4,358 3,115 243
-------- -------- --------
Total other income (expense) 4,185 1,736 (2,941)
-------- -------- --------
Loss before extraordinary item (8,268) (15,384) (21,376)
Extraordinary item - loss on early
extinguishment of debt (Note 5) (1,048)
-------- -------- --------
Net loss (8,268) (16,432) (21,376)
Other comprehensive loss:
Current translation adjustments (193) (496) (29)
-------- -------- --------
Comprehensive loss $ (8,461) $(16,928) $(21,405)
-------- -------- --------
-------- -------- --------
Loss attributable to common stockholders $ (8,405) $(22,725) $(21,376)
-------- -------- --------
-------- -------- --------
Basic and diluted net loss per share:
Loss before extraordinary item $ (0.20) $ (0.72) $ (1.03)
Extraordinary item (0.03)
-------- -------- --------
Basic and diluted net loss per share $ (0.20) $ (0.75) $ (1.03)
-------- -------- --------
-------- -------- --------
Basic and diluted weighted average
shares outstanding 41,251 30,303 20,655
-------- -------- --------
-------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
<PAGE>
GATEFIELD CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
--------------------------------------------------------
<TABLE>
<CAPTION>
Additional Accumulated
Paid-In Other Accumulated
(IN THOUSANDS) Shares Amount Capital Comprehensive Loss Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances January 1, 1996 $ 19,752 $ 1,975 $ 47,837 ($19) ($34,114) $ 15,679
Exercise of common stock options 370 37 609 - - 646
Sale of common stock to employees 26 3 75 - - 78
Issuance of common stock
for purchase of Attest, net 387 39 2,101 - - 2,140
Discount on convertible
debentures, as restated, - - 2,500 - - 2,500
see Note 12
Issuance of common stock
for debentures, net - as 2,691 269 4,087 - - 4,356
restated, see Note 12
Current translation adjustment - - - (29) - (29)
Net loss - - - - (21,376) (21,376)
- ------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 - as 23,226 2,323 $57,209 (48) (55,490) 3,994
restated, see Note 12
Exercise of common stock options 278 28 225 - - 253
Compensation for accelerated
vesting of stock options - - 47 - - 47
Sale of common stock to employees 93 9 70 - - 79
Issuance of common stock
to nonemployees for services 55 5 65 - - 70
Issuance of common stock
for debentures, net - as 7,418 742 5,256 - - 5,998
restated, see Note 12
Discount on convertible
debentures - as - - 875 - - 875
restated, see Note 12
Accrued dividends on preferred
stock - as restated, see Note 12 - - 63 - (283) (220)
restated, see Note 12
Conversion of preferred stock to
common stock - as 4,547 454 1,351 - - 1,805
restated, see Note 12
Redemption of preferred stock - as - - - - (144) (144)
restated, see Note 12
Issuance of common stock
by exercise of warrants 105 11 45 - - 56
Subscribed common stock 500 50 711 - - 761
Accretion of preferred stock - - 5,866 - (5,866) -
Issuance of warrants - as - - 1,589 - - 1,589
restated, see Note 12
Current translation adjustment - - - (496) - (496)
Net loss - - - - (16,432) (16,432)
- ------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 - as 36,222 3,622 73,372 (544) (78,215) (1,765)
restated, see Note 12
Exercise of common stock options 743 74 314 - - 388
Sale of common stock to employees 245 24 126 - - 150
Issuance of common stock
to nonemployees for services 13 1 5 - - 6
Issuance of common stock 4,583 458 4,124 - - 4,582
Cash received for warrants - - 161 - - 161
Issuance of common stock
by exercise of warrants 120 12 26 - - 38
Accretion of preferred stock - - - - (137) (137)
Current translation adjustment - - - (193) - (193)
Net loss - - - - (8,268) (8,268)
- ------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 41,926 $ 4,191 $ 78,128 $ (737) $(86,620) $(5,038)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE>
GATEFIELD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(IN THOUSANDS) (AS RESTATED,
SEE NOTE 12)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (8,268) $(16,432) $(21,376)
Reconciliation to net cash used in operating activities
Depreciation and amortization 1,866 3,124 4,307
Noncash subordinated convertible debt interest and debt extinquishment loss -- 1,745 2,773
Loss on disposition of property and equipment 70 722 --
Gain on sale of assets, net (4,462) (2,741) --
Stock compensation expense 56 9 --
Sales under capital leases -- (606) (1,420)
Collections under capital leases -- 620 459
Changes in assets and liabilities
Accounts receivable 1,484 9,543 724
Inventories 618 143 (876)
Other assets 159 31 (90)
Accounts payable and accrued expenses (3,578) (5,951) 3,174
Deferred revenues 3,819 (1,549) (292)
-------- -------- --------
-------- -------- --------
Net cash used in operating activities (8,236) (11,342) (12,617)
-------- -------- --------
-------- -------- --------
Investing activities
Property and equipment purchases, net (332) (1,568) (1,773)
Proceeds from sale of assets 5,400 12,750 --
Proceeds from sale of short-term investments 98 -- --
Capitalized software -- -- (1,698)
-------- -------- --------
-------- -------- --------
Net cash provided by (used in) investing activities 5,166 11,182 (3,471)
-------- -------- --------
-------- -------- --------
Financing activities
Proceeds from issuance of convertible debenture notes, net -- 2,650 10,000
Proceeds from issuance of common stock 5,108 458 724
Proceeds from issuance of redeemable preferred stock 3,000 4,583 --
Redemption of preferred stock (4,648) (1,827) --
Proceeds from subscribed stock -- 761 --
Proceeds from warrants 161 1,589 --
Bank financing, net -- (3,203) 3,203
Borrowings under debt obligations -- 199 882
Repayments of debt obligations (676) (2,161) (930)
-------- -------- --------
-------- -------- --------
Net cash provided by financing activities 2,945 3,049 13,879
-------- -------- --------
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents (232) (403) 190
-------- -------- --------
-------- -------- --------
Net change in cash and cash equivalents (357) 2,486 (2,019)
Cash and cash equivalents, beginning of year 4,189 1,703 3,722
-------- -------- --------
-------- -------- --------
Cash and cash equivalents, end of year $ 3,832 $ 4,189 $ 1,703
-------- -------- --------
-------- -------- --------
Supplemental disclosure of cash flow information
Noncash activities
Common stock issued for convertible debentures $ -- $ 5,998 $ 4,356
Preferred stock issued for convertible debentures $ -- $ 3,553 $ --
Accretion of redeemable preferred stock (Note 10) $ -- $ 5,866 $ --
Accrued dividends on preferred stock $ 137 $ 283 $ --
Common stock issued for preferred stock $ -- $ 1,805 $ --
Common stock issued for the acquisition of all the
outstanding shares of Attest Software, Inc. $ -- $ -- $ 2,140
Promissory notes issued in exchange for reduction of
accounts payable $ -- $ -- $ 901
Equipment acquired under capital leases $ 825 $ 19 $ 490
Cash activities
Cash paid during the year for interest $ 429 $ 363 $ 471
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
26
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
GateField Corporation, formerly Zycad Corporation (the "Company"), based in
Fremont, California, designs, develops, manufactures and markets high density,
high performance programmable logic solutions and related development software.
During 1998, the Company disposed of its system engineering services and custom
solutions assets (see Note 4). During 1997, the Company disposed of its
verification and simulation assets (see Note 4).
On July 16, 1998 the Company's common stock was delisted from the Nasdaq
National Market (a distinct tier of the Nasdaq Stock Market) and moved to the
Nasdaq SmallCap Market. Effective September 17, 1998 the Company's stock was
delisted from The Nasdaq SmallCap Market for failure to meet the on-going
minimum bid price requirement. Since that time, the Company's stock has traded
on the OTC Bulletin Board.
The Company reviewed its strategies, organization and expenses in the
fourth quarter of 1998 and as a result of management actions, reduced its
monthly cash expenditures. Management's plan in 1999 is to reduce operating
expenses from 1998 levels, begin sales of .25-micron standard ProASIC products,
and to obtain additional financing. Because the Company is essentially a
restart, its historical financial performance cannot and should not be used to
indicate future financial performance.
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 1998, 1997 and 1996, the Company incurred net losses of
approximately $8,300,000, $16,400,000 and $21,400,000, respectively.
Additionally, the Company had stockholders deficits of approximately $5,038,000
and $1,765,000 at December 31, 1998 and 1997, respectively, and is highly
dependent on its ability to obtain sufficient additional financing in order to
fund the current and planned operating levels. These factors among others
raises 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.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the 1998
presentation. Such reclassification had no effect on previously reported
results of operations or financial position.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. The functional currency of
the Company's foreign subsidiaries is the local currency.
27
<PAGE>
ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Such estimates include allowances for uncollectable
receivables, inventory valuation reserves, warranty costs, sales returns and
a valuation allowance for deferred tax assets. Actual results could differ
from those estimates.
BUSINESS RISKS AND UNCERTAINTIES
The company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse effect
on the company's future financial position or results of operations: dependence
on independent wafer manufacturers and assembly subcontractors; changes in
certain strategic partners or customer relationships; competitive pressures in
the form of new products or price reductions on existing products; advances and
trends in new technologies; ability to capture design wins; cyclical economic
effects of the semiconductor industry; litigation or claims against the company
based on intellectual property, patent, product, regulatory or other factors and
the company's ability to attract and retain employees necessary to support its
growth.
CASH EQUIVALENTS
Cash and cash equivalents consist of cash on deposit with banks and money
market instruments with maturities of three months or less when acquired.
SHORT-TERM INVESTMENTS
Short-term investments consist of Certificates of Deposit, stated at cost
plus accrued interest, which approximates market.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. The Company invests in high credit quality short-term
money market instruments and certificates of deposit and limits the amount of
credit exposure to any one entity. The majority of the Company's trade
accounts receivables are derived from sales to manufacturers in the
semiconductor, computer, military and aerospace industries. The Company performs
ongoing credit evaluations of its customers' financial condition and limits the
amount of credit extended when deemed necessary, but generally requires no
collateral. The Company maintains reserves for estimated potential credit
losses.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment acquired under
capital lease obligations is stated at the lower of fair value or the present
value of future minimum lease payments at the inception of the lease.
Depreciation and amortization is provided over the shorter of the estimated
useful lives of the assets or the life of the lease, using the straight-line
method.
INCOME TAXES
28
<PAGE>
The Company follows Statement of Financial Accounting Standards No. 109
(SFAS No. 109), "Accounting for Income Taxes," which requires an asset and
liability approach to account for income taxes and requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax basis of assets and liabilities and net operating loss and tax credit
carryforwards. Valuation allowances are provided when necessary to reduce net
deferred tax assets to an amount that is more likely then not to be realized.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board No. 25
(APB No. 25), "Accounting for Stock Issued to Employees".
REVENUE RECOGNITION
The Company recognizes product revenues at the time of shipment, but may
delay revenue recognition until products are installed or accepted, depending on
the particular product and contract terms. Design and verification service
revenues are recognized as the services are performed. Revenues from the sale of
maintenance contracts are recognized over the term of the respective contract.
In 1998, the Company adopted Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," which requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. Revenue for software licenses is
recognized upon delivery provided that collection is probable. Software support
and maintenance revenue are deferred and amortized over the maintenance period
on a straight-line basis. Adoption of this statement did not have a material
impact on the Company's financial position, results of operations and cash
flows.
License Fees, included in Product Revenues, are recognized when the Company
has completed development, delivered the technology and there are no further
significant obligations.
NET INCOME (LOSS) PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income or loss attributable to common stockholders by the weighted
average of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock (convertible preferred stock, warrants to purchase common stock and
common stock options using the treasury stock method) were exercised or
converted into common stock. The following potential weighted average common
shares in the diluted EPS computation are excluded in net loss periods as their
effect would be antidilutive.
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Conversion of preferred stock 5,142 1,718 -
Warrants 3,981 1,356 142
Stock options 2,685 2,686 3,102
</TABLE>
In the computation of loss per share, loss attributable to common
stockholders includes the accretion and dividends on Preferred Stock totaling
$6,293,000 in 1997 and the accrual of dividends on Preferred Stock of $137,000
in 1998.
COMPREHENSIVE LOSS
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS"), No. 130, "Reporting Comprehensive Income," which requires an
enterprise to report, by major components and as a single total, the change in
net
29
<PAGE>
assets during the period from nonowner sources. Statements of comprehensive
loss for 1998, 1997 and 1996 have been included with the statements of
operations.
GEOGRAPHIC AND OPERATING SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
The Company has two reportable segments under SFAS No. 131 (Note 9).
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS will be effective for the
Company's fiscal year ending December 31, 2000. Management believes that this
statement will not have a significant impact on the Company's financial
position, results of operations or cash flows.
NOTE 2: STRATEGIC ALLIANCES
PRODUCT MARKETING AGREEMENT
In August 1998, the Company and Actel Corporation ("Actel") entered into a
Product Marketing Agreement (the "Marketing Agreement"). Under the terms of the
Marketing Agreement, Actel received exclusive, worldwide distribution rights to
the Company's standard ProASIC FPGA products utilizing less than .35 micron
geometries, including FPGA products that are integrated with SRAM or Flash
memory and all resulting next generation reduced process geometry ProASIC FPGA
products. For these rights, Actel agreed to pay the Company an initial fee of
$1.0 million and a $1.0 million fee upon qualification of the initial .25 micron
product. Revenue recognition of the $1.0 million initial fee received has been
deferred until delivery to Actel of products below .35 micron.
ACTEL LICENSE AGREEMENT
In August 1998, the Company and Actel entered into a license agreement
pursuant to which the Company granted to Actel a fully paid, non-exclusive,
non-transferable license to sell and upon certain events, make, have made,
import and use the Company's standard ProASIC FPGA products below .35 micron and
all resulting next generation reduced process geometry ProASIC FPGA products
(the "Actel License Agreement"). Actel agreed to pay the Company a $1.0 million
fee for such license. Revenue recognition of the $1.0 million license fee
received has been deferred until delivery of products below .35 micron.
ROHM LICENSE AGREEMENT
In July 1998, the Company and Rohm Co., Ltd. ("Rohm") entered into a
license agreement (the "Rohm License Agreement"). Pursuant to the Rohm License
Agreement, the Company granted to Rohm for a license fee of $2.5 million: (i) a
worldwide, nonexclusive and royalty-free license of the Company's ProASIC
Technology for Standard ProASIC and embedded products down to 0.35 micron with
no limitation on density; and (ii) a license for 0.25 micron and below embedded
products with a per unit royalty. Revenue recognition of the $2.5 million
license fee received has been deferred until delivery of .35 micron products.
SIEMENS LICENSE AGREEMENT
In November 1997, the Company and Siemens AG ("Siemens") entered into a
license agreement (the "Siemens License Agreement"). Pursuant to the Siemens
License Agreement, the Company sold to Siemens for an unlimited, worldwide,
non-exclusive right and license to use the technology, software, engineering
services, and equipment related to ProASIC products; 500,000 shares of common
stock and warrants to purchase 9.9% of the Company's outstanding common
30
<PAGE>
stock for a fee of $3,250,000. In 1997, the Company received $1,500,000, of
which $761,000 was allocated to the shares of Common Stock (see Note 10) and
$739,000 was allocated to Warrants net of a warrant receivable of $161,000 (see
Note 10). In 1998, the Company received $1,750,000, of which $750,000 was
recorded as Service Revenue for consulting services, and $839,000 was recorded
as Product Revenue for license fees, and $161,000 was recorded as a receipt of
cash for warrants issued in 1997.
NOTE 3: PURCHASED TECHNOLOGY
In June 1996, the Company acquired Attest Software, Inc. (Attest), located
in Santa Clara, California, in exchange for approximately 387,000 shares of the
Company's Common Stock, valued at approximately $2,140,000, for all the
outstanding Common Stock of Attest. This transaction was accounted for as a
purchase; accordingly, the operations of Attest have been included in the
consolidated results of the Company since the day of acquisition. The operating
results of Attest prior to the acquisition were not significant. As part of this
transaction, the technology purchased, used for fault simulation and automatic
test pattern generation tools, was valued at $2,055,000 which is being amortized
over seven years. Accumulated amortization was $165,000 at December 31, 1996. In
August 1997, the Company sold these assets related to the TDX product line.
(See Note 4.
NOTE 4: SALE OF ASSETS
DESIGN SERVICES
In August 1998, the Company sold certain of the assets relating to its
Design Services products, providing prototyping design services and
verification services for electronic systems, integrated circuits and other
electronic components, located in Mt. Arlington, New Jersey to Actel. The
purchase price for such assets was (i) $5.4 million plus (ii) contingent
payments to be paid over a three-year period on a quarterly basis based on
Design Services achieving certain profitability levels which payments shall
not exceed $1.0 million in the aggregate. The Design Services represented
approximately 17% of 1998 revenues. See table below for details of the
transaction.
VERIFICATION PRODUCT
In August 1997, the Company sold its assets relating to its
verification products, excluding the maintenance and support business, for a
total of $4,450,000. As defined in the purchase agreement, all of the rights,
title and interest to the intangible assets of the XP and PXP hardware fault
simulation product business were sold for $2,200,000. In a separate agreement,
all of the assets of the Attest division were sold for $2,250,000. The
verification products represented approximately 16% of 1997 revenues. See table
below for details of the transaction.
In October 1997, as a result of the Company selling its rights, title, and
interest in the assets of the XP and PXP hardware fault simulation product, the
Company transferred its related maintenance contracts to Zycad TSS Corporation
("Zycad TSS") in October 1997 for future royalties. Zycad TSS is a company
formed by former employees of the Company to perform maintenance services. The
agreement with Zycad TSS entitles the Company to receive 30% of all domestic
XP/PXP maintenance revenue in the first two years and 10% in the third year. In
addition, the Company is generally entitled to receive 40% of Japanese revenues
for the first five years up to a $1.8 million and then 10% thereafter.
LIGHTSPEED PRODUCT
In April 1997, the Company sold its software and hardware simulation
technology relating to its LightSpeed product family for $5,000,000. Revenues
in 1997 were nominal. See table below for details of the transaction.
QUALITY SYSTEMS SOFTWARE, INC.
In January 1996, the Company and Quality Systems Software, Ltd. (QSS Ltd.),
an U.K. company and third party owner of DOORS technology, established a
joint venture, QSS Inc., to continue the Company's distribution operations of
the DOORS technology and other products in the North American market. In
January 1997, QSS Inc. was restructured such that QSS Ltd. became a subsidiary
of QSS Inc. in which the Company owned a 22% interest. In May 1997, the Company
sold its interest in QSS Inc. for $3,500,000. See table below for details of
the transaction.
31
<PAGE>
The gain (loss) on sale are in other income (expense) and details of these
transactions are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1998 1997
-------- ---------------------------------------
DESIGN
SERVICES VERIFICATION LIGHTSPEED QSS
-------- ------------ ---------- ---
<S> <C> <C> <C> <C>
Sales Price $ 5,400 $ 4,450 $ 5,000 $ 3,500
Net Assets disposed (687) (5,130) (3,201) (179)
Liabilities incurred (251) (245) (1,454) -
-------- -------- -------- --------
Gain (loss) on sale $ 4,462 $ (925) $ 345 $ 3,321
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
NOTE 5: LONG-TERM DEBT
Debt obligations consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Capital leases (see Note 6) $ 723 $ 354
Term loans - 220
---------- ---------
723 574
Current portion (393) (516)
---------- ---------
Long term debt $ 330 $ 58
---------- ---------
---------- ---------
</TABLE>
TERM LOANS
In 1995 and 1996, the Company entered into long-term loan agreements that
bear interest rates of 10.66% to 15.33% and mature over 36 months. These loans
are secured by specific capital assets. In 1996 and 1997, the Company obtained
promissory notes from key vendors that bear interest rates from 12% to 18%. At
December 31, 1997 all amounts were classified as current positions of long-term
obligations.
SUBORDINATED CONVERTIBLE DEBENTURE NOTES
In May 1996, the Company sold a total of $10,000,000 of
subordinated convertible debenture notes (the "Notes") to institutional
investors as part of a private placement. The Notes accrue interest at an annual
rate of 6%, beginning on the date of issue, with the principal due and payable
three years from the date of issue if and to the extent that the Notes are not
previously converted. The Notes were convertible at the option of the
noteholders (subject to the maximum share limitations set forth below) into
Common Stock at a price equal to 80% to 85% of the average closing bid price for
the Common Stock on the Nasdaq National Market for the five trading days prior
to the date of conversion.
32
<PAGE>
In 1996, as required as part of the Notes agreement the Company issued
2 1/2 year warrants to purchase 59,500 shares of Common Stock at an exercise
price of $10 per share. The warrants were redeemable by the Company for $0.01
for each 10,000-share warrant if the Company's stock price is above $12. No
value was assigned to the warrants as the value was deemed to be nominal.
During 1997, an aggregate of $5,998,000 ($5,700,000 of the original principal
of the Notes and $298,000 of accrued interest) were converted into 7,418,000
shares of Common Stock. During 1996, an aggregate of $4,356,000 ($4,300,000
of the original principal of the Notes and $56,000 of accrued interest) were
converted into 2,691,000 shares of Common Stock.
The conversion of the Notes at 80% to 85% of the average closing bid
price of the Company's Common Stock results in the Notes being issued at a 15%
to 20% discount (the Conversion Discount). The Conversion Discount of $2,500,000
was recognized during 1996 by the Company as non-cash interest expense from the
date of issuance through the date the security was most favorably convertible to
the noteholders, with a corresponding increase to the additional paid-in
capital. In addition, the stated 6% annual interest is being recognized ratably
over the term of the Notes.
In February 1997, the Company completed a $3,500,000 private placement
with investors whereby the Company issued 6% Subordinated Convertible Debentures
(the Debentures) with warrants to purchase 500,000 shares of Common Stock at
$2.25 per share. The warrants are valued at $850,000 and recorded as a discount
to the debentures. The Debentures accrue interest at an annual rate of 6%,
beginning on the date of issue, with principal due and payable three years from
the date of issue, if and to the extent that the Debentures are not previously
converted. The Debentures are convertible at the option of the holder into the
Company's Common Stock at a discount up to 20% from market price (the
Conversion Discount) resulting in debenture discount of $875,000. In May 1997,
the Debentures were converted into 100,000 shares of the Company's Series A
Convertible Preferred Stock ("Series A Stock") having an aggregate stated
value of $3,500,000. In addition, Preferred Stock Purchase Warrants (the
"Preferred Warrants") were issued to the holders of the Debentures to purchase a
total of 42,858 shares of the Series A Stock. The conversion of the debentures
to Series A Stock resulted in a debt extinguishment loss of $1,048,000. During
the year ended December 31, 1997, a total of $456,000 was recorded as interest
expense relating to the Debentures and $272,000 was recorded as accrued
dividends on the Series A Stock. The interest expense and dividend
principally include a charge for the Conversion Discount and default discounts.
During 1997, 51,972 shares of the Series A Preferred Stock were converted to
4,546,928 shares of the Company's Common Stock. In August 1997, the Company
redeemed all of the remaining outstanding shares of the Company's Series A Stock
and the Preferred Warrants for $1,827,000 and all of the outstanding common
stock warrants were exchanged for 350,000 warrants for the Company's Common
Stock at an exercise price of $0.53 per share. A preferred dividend of $144,000
was recognized for the excess of the redemption price over the carrying amount
of the preferred stock. During 1997, 105,000 of the warrants were exercised for
$56,000.
33
<PAGE>
NOTE 6: LEASES AND COMMITMENTS
The Company leases its facilities and other equipment under operating
lease agreements, which expire at various dates through 2002. The Company also
leases certain manufacturing equipment under capital leases that expire in
2001. Approximate future minimum lease payments under these leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating Sub-Lease
Year Leases Leases Income
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 $ 456 $ 468 $ 371
2000 274 - -
2001 84 - -
2002 - - -
Thereafter - - -
- --------------------------------------------------------------------------------
814 $ 468 $ 371
------- -------
------- -------
Less amount representing
imputed interest 91
-------
723
Less current portion 393
-------
$ 330
-------
-------
</TABLE>
Accumulated depreciation of equipment under capital leases totaled $747,000
and $620,000 at December 31, 1998 and 1997, respectively. Depreciation expense
on equipment under capital leases was $127,000 in 1998, $203,000 in 1997 and
$264,000 in 1996.
The Company leases office facilities under operating leases, which expire
in June and August 1999. Rent expense of $948,000, $1,582,000 and $1,732,000
was incurred in 1998, 1997, and 1996, respectively. A portion of the Company's
facilities have been sublet and sublease income received was $491,000, $76,000
and $0 during 1998, 1997 and 1996, respectively.
34
<PAGE>
NOTE 7: SELECTED BALANCE SHEET INFORMATION
Selected Balance Sheet information is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
--------------------------
<S> <C> <C>
Accounts receivable
Accounts receivable $ 707 $ 3,170
Current portion lease receivables - 121
Less allowance for doubtful accounts (244) (528)
--------- ----------
$ 463 $ 2,763
--------- ----------
--------- ----------
Inventories
Raw materials and supplies - $ 306
Finished goods 117 429
--------- ----------
$ 117(a) $ 735
--------- ----------
--------- ----------
Property and equipment
Engineering, manufacturing, and
general office equipment $ 3,761 $ 4,260
Leasehold improvements 1,064 1,539
Equipment under capital lease 1,752 1,085
--------- ----------
6,577 6,884
Accumulated depreciation and amortization (4,794) (4,224)
--------- ----------
$ 1,783 $ 2,660
--------- ----------
--------- ----------
Accrued expenses
Salaries and commissions $ 521 $ 1,023
Other accrued expenses 1,420 2,095
--------- ----------
$ 1,941 $ 3,118
--------- ----------
--------- ----------
</TABLE>
(a) During 1998, the Company wrote-down the carrying value of its .72-micron
inventories by $1,800,000 due to a lack of demand for the product.
35
<PAGE>
NOTE 8: INCOME TAXES
The Company was not required to pay income taxes in 1998, 1997 or 1996 due to
its net operating loss carryforwards.
Significant components of the Company's deferred tax asset are
as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards $ 24,457 $ 21,362
Tax credit carryforwards 3,529 3,422
Capitalized research and development costs 433 893
Depreciation 853 1,391
Accruals and reserves not currently deductible 3,318 1,108
------------------------
Total gross deferred tax assets 32,590 28,176
Valuation allowance (32,590) (28,176)
------------------------
Total deferred tax assets $ - $ -
------------------------
------------------------
</TABLE>
The net change in the total valuation allowance for the year ended December
31, 1998 was a net increase of $4,414,000. The increase in the valuation
allowance was primarily a result of increased net operating loss and tax credit
carryforwards and increased accruals and reserves not currently deductible and
capitalized research and development costs generated in 1998 which the Company
provided a full valuation allowance against based on the Company's evaluation of
the likelihood of realization of future tax benefits resulting from the deferred
tax assets.
Net pretax foreign losses were ($405,000), ($93,000) and ($620,000) in
1998, 1997 and 1996, respectively. The Company has net operating loss
carryforwards of approximately $65,000,000 for federal tax purposes and
$11,000,000 for state tax purposes that will begin to expire in 2005 and 2001,
respectively. The Company's tax credit carryforwards of $2,867,000 and
$1,001,000 are available to reduce future federal and California income taxes,
respectively. These credits will expire beginning in 1999. The Company also has
foreign net operating loss carryforwards of approximately $5,000,000 that may be
used to offset future foreign taxable income.
The Tax Reform Act of 1986 and California Conformity Act of 1987 impose
substantial restrictions on the utilization of net operating losses and tax
credit carryforwards in the event of an "ownership change" as defined by the
Internal Revenue Code. If there should be such a change, the Company's ability
to utilize the stated carryforwards could be significantly limited.
36
<PAGE>
NOTE 9: GEOGRAPHIC SEGMENT AND OPERATING INFORMATION
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker. Using this definition the Company operates in
two reportable segments: product and services and follows the requirements of
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information."
In 1996 through 1998 these segments reflect the Company's transition from the
design, development and marketing of special purpose systems for the EDA market
to the design, development, and marketing of high density, high performance
programmable logic solutions and related development software. Included in the
product segment are all hardware, software and license revenue and costs related
o the Company's proprietary technology. Included in the service segment are
fees and costs associated with the maintenance of hardware systems related
software and consulting services related to the design of programmable logic
solutions. The Company evaluated performance and allocates resources based on
the gross margin of the reportable segments and does not identify assets to any
segment.
NET REVENUES BY REPORTABLE SEGMENT (IN THOUSANDS):
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Product
Revenues $ 2,624 $ 5,385 $ 18,232
Cost of Revenue 4,648 6,421 8,439
------------ ------------ ------------
Gross Margin $ (2,024) $ (1,036) $ 9,793
------------ ------------ ------------
------------ ------------ ------------
Services
Revenues $ 5,076 $ 10,118 $ 15,345
Cost of Revenues 2,659 4,482 8,569
------------ ------------ ------------
Gross Margin $ 2,417 $ 5,636 $ 6,776
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NET REVENUES TO UNAFFILIATED CUSTOMERS BY GEOGRAPHIC REGION (IN THOUSANDS):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
United States $ 5,613 $ 9,565 $ 25,396
Japan 1,947 4,382 5,874
Other 140 1,556 2,307
--------- --------- ---------
$ 7,700 $ 15,503 $ 33,577
--------- --------- ---------
--------- --------- ---------
</TABLE>
The amounts reported for Japan and other reflect amounts sold by foreign
subsidiaries. Included in the United States revenue amounts are sales directly
to Japan and other Asian countries amounting to $217,000 in 1998, $1,648,000 in
1997 and $2,116,000 in 1996. Outside the United States, the Company operated
three subsidiaries in Europe, one subsidiary in Japan and also supports a branch
office in Taiwan. All these subsidiaries have been or are in the process of
being shut down and dissolved. For the years ended December 31, 1998, 1997 and
1996, export sales (including sales by foreign subsidiaries),
37
<PAGE>
principally to Europe and Japan, comprised approximately 38%, 38% and 31% of
consolidated revenues, respectively. During 1998, Siemens accounted for 22% of
consolidated revenues. During 1997 and 1996, one customer, Intel Corporation,
accounted for 16% and 10% of consolidated revenues, respectively.
LONG-LIVED ASSETS BEFORE DEPRECIATION BY GEOGRAPHIC LOCATION ARE AS FOLLOWS (IN
THOUSANDS):
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Long-lived assets
United States $ 5,949 $ 5,847
Japan 94 269
Other 635 1,055
---------- ---------
$ 6,678 $ 7,171
---------- ---------
---------- ---------
</TABLE>
NOTE 10: STOCKHOLDERS' EQUITY
REDEEMABLE PREFERRED STOCK
On November 10, 1997, the Board of Directors authorized the designation
of 1,000,000 shares of preferred stock, par value $0.10 per share, as Series B
Preferred Stock ("Series B Preferred Stock"). In November 1997, the
Company issued 1,000,000 shares of Series B Preferred Stock for $4.6 million.
Each share is convertible into 4.5825 shares of Common Stock at the discretion
of the holder and accrues a dividend of $0.137475 per share per annum. The
holders of outstanding shares of Series B Preferred Stock are entitled to vote
as a separate class with respect to certain actions (as defined by the preferred
stock agreement) by the Company. The Company has granted demand registration
rights for the common stock to be issued pursuant to the conversion.
In addition, the Certificate of Designation of the Series B Convertible
Preferred Stock requires the Company to maintain a listing on a public market
(as defined in the agreement). In the event of default, the holders of the
Series B Preferred Stock can redeem the preferred stock at a redemption price of
$4.5825 in cash per share plus accrued and unpaid dividends thereon or be
convertible, at the option of the holder, into 6.11 shares of Common Stock.
Effective September 17, 1998 the Company's stock was delisted from The Nasdaq
SmallCap Market. In October 1998 certain holders of its Series B Preferred
Stock requested redemption and on December 16, 1998 the Company redeemed an
aggregate of 981,997 shares of its Series B Preferred Stock at a price equal to
$4.5825 per share plus accrued and unpaid dividends for an aggregate cash
redemption price of approximately $4.6 million. A total of 18,003 shares of the
Series B Preferred Stock remain outstanding as of December 31, 1998.
On August 14, 1998, the Company issued 300,000 shares of the Company's
Series C Convertible Preferred Stock ("Series C Preferred Stock"), par value
$0.10, for an aggregate purchase price of $3,000,000 to Actel Corporation
("Actel"). The Series C Preferred Stock are initially convertible into
2,000,000 shares of the Company's common stock, are entitled to certain
liquidation rights and are redeemable in the event that all of the Company's
remaining outstanding shares of Series B Preferred Stock are redeemed.
38
<PAGE>
COMMON STOCK
The Company's Certificate of Incorporation was duly amended by a proposal
by the Board of Directors on November 10, 1997 and by vote of the stockholders
at the Annual Meeting of Stockholders on December 15, 1997, to increase
the Company's Common Stock from 40,000,000 shares to 65,000,000 shares of
Common Stock authorized at $0.10 par value. At December 31, 1998 there were
41,425,738 shares of the Company's Common Stock outstanding including 500,000
unissued shares of subscribed stock.
In October 1997, the Company entered into a $3,250,000 Strategic
Partnership Agreement with Siemens, which principal terms included the delivery
of technology, software, equipment, engineering services, a warrant to purchase
Common Stock, and 500,000 shares of Common Stock. The Company has valued the
Common Stock at $761,000 and the warrant to purchase common stock at $900,000
(see Warrants). At December 31, 1997, $739,000 cash related to the warrants had
been received and the remaining $161,000 was received during 1998. At December
31, 1998, subscribed stock represents cash received for this Common Stock, which
has not been issued as of that date.
STOCK COMPENSATION PLANS
The 1993 Stock Option Plan (the "1993 Plan"), as amended, provides for
3,000,000 shares of Common Stock to be issued under the 1993 Plan.
The 1996 Stock Option Plan (the "1996 Plan"), as amended, provides for
2,000,000 shares of Common Stock to be issued under the 1996 Plan.
Under the Company's stock option Plans, incentive stock options granted
must have a per share exercise price of not less than the fair market value per
share at the date of grant. Non-qualified stock options may be granted at such
price as may be determined by the Board of Directors. Dependent upon the Plan,
options generally vest at specific intervals over a three to four year period
and expire eight to ten years after the grant date. In the event of termination,
the Company has the right to cancel any vested options not exercised within 90
days of termination.
During 1995, stockholders approved a Non-Employee Directors' stock
option plan (the "Director Option Plan") whereby 200,000 shares of Common Stock
have been reserved for issuance. Under the Company's Director Option Plan,
each non-employee director initially elected to the Board of Directors in the
future will be granted an option, upon his or her initial election as a
director, to purchase 15,000 shares of Common Stock. Each non-employee director
is also entitled to receive an option for 7,500 shares on the date of each
Annual Meeting of Stockholders. All options granted under the Director Option
Plan have or will have an exercise price equal to the fair market value of
the Common Stock on the date of grant and expire ten years from the date of
grant (subject to earlier termination in the event the optionee ceases to
serve as a director of the Company). Under the Director Option Plan, options
from an Initial Grant vest in full two years after the date of grant. Options
from an Annual Grant vest one year after the date of grant. The Company
granted 37,500 and 37,500 options to purchase Common Stock at $0.83 to $1.50 and
$1.50 per share to Directors in 1998 and 1997, respectively.
In July 1997, the Board of Directors authorized the exchange of
outstanding stock options held by all employees for new options with an exercise
price of $0.47 per share, the fair market value of the Common Stock on such
date. In return, participating employees who chose to exchange their options
agreed to accept stock options which will vest on a quarterly basis upon
achievement of certain management goals to be established quarterly for each
such employee, or in any event, in July 1999, should the employee still be
employed by the Company. Options covering a total of 1,744,099 shares were
exchanged under this program. The effect of such exchange reduced the weighted
average exercise price of the outstanding options from $1.79 to $.80 per share.
In October 1996, the Company agreed to exchange outstanding options
to purchase the Company's Common Stock held by all employees for an equal number
of options with an exercise price of $1.63, the then-current fair market value
of the Company's Common Stock. In return, participating employees who chose
to exchange their options agreed to accept stock options which will vest on
a quarterly basis upon achievement of certain management goals to be
established quarterly for each such employee, or in any event, in October 2000,
should the employee still be employed by the Company. Options covering a total
of 1,040,100 shares were exchanged under this program. The effect of such
exchange reduced the weighted
39
<PAGE>
average exercise price of the outstanding options from $3.24 to $1.90 per share.
The effects of these exchanges in 1997 and 1996 have been included in the
accompanying table as options granted and cancelled.
40
<PAGE>
Options under the employee stock option plans have been granted, exercised and
cancelled as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------
Weighted-
Shares average
Available exercise
for Grant Shares price
------------- ----------- -----------
<S> <C> <C> <C>
Balance,
January 1, 1996 1,100,014 2,873,904 $ 3.25
Additional shares
authorized 750,000 -- 0.00
Granted (2,311,120) 2,311,120 2.35
Exercised -- (369,877) 1.53
Cancelled 1,517,026 (1,517,026) 5.29
------------- ----------- -----------
Balance,
December 31, 1996 1,055,920 3,298,121 1.88
Granted (3,743,196) 3,743,196 0.42
Exercised -- (278,002) 1.37
Cancelled 3,360,346 (3,360,346) 1.66
------------- ----------- -----------
Balance,
December 31, 1997 673,070 3,402,969 0.68
Additional shares
authorized 1,250,000 -- 0.00
Retire 1984 Plan (586,316) -- --
Granted (1,722,832) 1,722,832 0.63
Exercised -- (742,539) 0.53
Cancelled 1,015,809 (1,015,309) 1.17
------------- ----------- -----------
Balance,
December 31, 1998 629,731 3,367,953 $ 0.54
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
The weighted average per share fair value of the stock options granted in
1998, 1997 and 1996 was $0.63, $0.42 and $1.53, respectively. At December 31,
1998, 1997 and 1996, outstanding options under the employees stock option plans
were exercisable for 1,415,333, 1,423,209 and 1,065,835 shares, respectively and
exercisable at weighted-average exercise prices of $.49, $.68 and $1.88,
respectively. All outstanding options are nonqualified options.
41
<PAGE>
The following tables summarize information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -----------------------------
Weighted-avg
Number Remaining Weighted-avg Number Weighted-avg
Exercise Price Outstanding Contractual Exercise Exercisable Exercise
From To at 12/31/98 Life Price at 12/31/98 Price
- ---------- ---------- ------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.47 $ 0.47 1,711,621 7.08 $ 0.47 1,393,055 $ 0.47
0.53 0.53 1,524,082 9.96 0.53 0 -
0.81 1.25 28,250 9.39 0.97 6,221 1.21
1.50 2.06 104,000 9.10 1.57 16,057 1.67
------- -------- --------- --------- -------
$ 0.47 $ 2.06 3,367,953 8.46 $ 0.54 1,415,333 $ 0.49
------- -------- --------- --------- -------
------- -------- --------- --------- -------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Through the Company's Employee Stock Purchase Plan, eligible employees
of the Company may purchase Common Stock at the fair market value of the stock
at the beginning or end of each offering period (calendar quarters), whichever
is lower. Each participant may contribute from 3% to 10% of total compensation,
up to a limit of $25,000 annually. Additionally, each participant is
prohibited from owning more than 5% of the Company's Common Stock. The Plan was
created in May 1987 with an initial 100,000 shares of Common Stock. In May 1992
an additional 200,000 shares were authorized, in December 1995, another 200,000
shares were authorized and in May 1998 an additional 200,000 shares of Common
Stock were made available for purchase under this plan, of which 519,848 shares
were issued at December 31, 1998. During 1998, 201,182 shares were purchased for
prices ranging from $0.30 to $1.31 with an average price of $0.50 per share. At
December 31, 1998, 180,152 shares were reserved for future issuance under the
Purchase Plan. The fair value of the 1998 awards was not considered
significant.
ADDITIONAL STOCK PLAN INFORMATION
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, which establishes financial accounting and reporting standards for
stock-based employee compensation plans. This statement defines a fair value
based method of accounting for an employee stock option of similar equity
instrument. Under this method, compensation costs are measured at the grant date
based on the value of the award and are recognized over the service period,
which is the vesting period. The Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB No.
25 and its related interpretations. Had compensation cost for the Company's
various stock option plans been determined consistent with SFAS No. 123, the
Company's net loss and diluted net loss attributable to common stockholders per
share would have been changed to the pro forma amounts indicated below (in
thousands, except net loss attributable to common stockholders per share
amounts):
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net loss attributable As reported $ (8,405) $ (22,725) $ (21,376)
to common stockholders Pro forma (9,116) (23,562) (22,280)
Diluted net loss As reported (0.20) (0.75) (1.03)
per share Pro forma (0.22) (0.78) (1.08)
</TABLE>
42
<PAGE>
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996 respectively; expected
volatility of 157% for 1998, 145% for 1997 and 90% for 1996, risk-free interest
rates of 4.60%, 5.91%, and 6.07% for 1998, 1997, and 1996 respectively, and
expected lives from the grant date of 6.5 years for 1998, and 3.5 years for both
of 1997 and 1996.
WARRANTS
At December 31, 1998, total warrants outstanding were 3,826,256. Purchase
price of the securities subject to these warrants range from $.47 to $1.44 and
they expire at various dates through November 2005.
In November 1997, the Company entered into a Stock Purchase Agreement ("the
Agreement") in connection with the Series B Preferred Stock financing. Pursuant
to this Agreement, the Company issued warrants to purchase 997,751 shares of
common stock at $1.00 per share. In January 1998, the warrants expired in
accordance with the Agreement upon approval by the stockholders of an increase
in the Company's authorized common stock and the closing of the common stock
financing contemplated by the Agreement.
In October 1997, the Company entered into a licensing agreement under which
the Company granted a stock warrant to purchase 9.9% of its outstanding shares
of Common Stock to a strategic partner at an exercise price equal to 80% of the
Market Price of the Company's Common Stock on the trading day immediately prior
to the date of exercise, subject to a minimum exercise price of $1.00 per share.
Market Price is defined as the last trade price for common stock as reported on
the Nasdaq. In the event that the strategic partners' interest is decreased to
less than 9.9% by future equity offerings, they will have the right to increase
the stock warrant under the same conditions as the equity offering to maintain
its 9.9% interest in the Company. The term of this warrant is for five years and
is exercisable as follows: the first 1/3 shares after 6 months, an additional
1/3 shares after 12 months, and the final 1/3 after 18 months. The fair value
of the warrants was $900,000 at grant, which have been included in additional
paid-in capital, net of a warrant receivable of $161,000.
In July 1997, the Board of Directors approved the exchange of Common
Stock warrants and nonqualifying stock options held by certain directors for
new Common Stock warrants to purchase 202,595 shares of Common Stock at an
exercise price of $0.47 per shares, the fair market value of the common stock on
that date of exchange. The effect of such exchange reduced the weighted
average exercise price of the warrants and nonqualifying options from $1.97 to
$0.47 per share. In November 1997, a director was issued warrants to purchase
7,500 shares of Common Stock at an exercise price of $1.44 per share. In
February 1998, certain directors exercised their warrants for 137,595 shares of
Common Stock.
In February 1997, the company issued 500,000 warrants at $2.25 per share in
conjunction with the $3,500,000 convertible debentures. The value of the
warrants was $850,000 and was recorded as a discount to the debentures. In
August 1997, the 500,000 warrants were exchanged for 350,000 warrants at $0.53
per share. During 1997, 105,000 warrants were exercised for $56,000.
During 1996, 59,500 warrants were issued relating to the
subordinated convertible debenture note. No warrants were exercised and all
warrants were subsequently cancelled in 1998.
NOTE 11
EMPLOYEE BENEFIT PLANS
Through the Company's elective 401(k) savings plan, eligible U.S.
employees of the Company may contribute up to 17.6% of their pre-tax earnings,
subject to current IRS restrictions. Under the plan, the Company may make
discretionary matching contributions up to $1,500 or 25% of an employee's
contributions. The participants vest in the Company's contribution over five
years. Company contributions to this plan were $73,000 in 1998, $161,000 in 1997
and $200,000 in 1996.
43
<PAGE>
NOTE 12: RESTATEMENT
Subsequent to the issuance of the Company's 1997 consolidated financial
statements, the Company determined that certain transactions recorded in
connection with the $10,000,000 and the $3,500,000 Subordinated Convertible
Debenture Notes and the Siemens License Agreement, were inappropriately
recorded. As a result the Company's 1996 and 1997 financial statements have
been restated from amounts previously reported to appropriately reflect these
transactions.
$3,500,000 SUBORDINATED CONVERTIBLE DEBENTURE NOTES
In connection with the February 1997 issuance of the $3,500.000, 6%
Subordinated Convertible Debentures (the "Debentures"), the company
determined that portions of the proceeds should have been reflected as a
beneficial conversion feature of $875,000 and as detachable warrants issued
in connection with the Debentures of $850,000. The beneficial conversion
feature and the value of the warrants are then accreted to interest expense
over the period the debt becomes convertible and the term of the debentures,
eight and thirty-six months, respectively,
Additionally, upon conversion of the Debentures in May 1997 to Series A
Convertible Preferred Stock, (the "Series A Stock"), a debt extinguishment
loss of $1,048,000 should have been recognized as an extraordinary item for
the difference between the net carrying amount of the debentures of
$2,178,000 and the value of the Series A Stock issued of $3,226,000. The
value of the Series A Stock issued includes a beneficial conversion feature
of $728,000 recognized at issuance, and reflects accretable beneficial
conversion discount of $274,000. The beneficial conversion discount is
accretable to Accumulated Deficit over the period in which the Series A Stock
becomes convertible.
In August 1997, 51,972 shares of the Series A Stock, valued at $1,805,000,
were converted to 4,546,928 shares of common stock and the remaining shares were
redeemed for $1,827,000. A preferred dividend of $144,000 was recognized for
the excess of the redemption price over the carrying amount of the Series A
Stock.
$10,000,000 SUBORDINATED CONVERTIBLE DEBENTURE NOTES
In connection with the May 1996 issuance of the $10,000,000, 6%
subordinated Convertible Debenture Notes (the "Notes"), the Company determined
that the $2,500,000 beneficial conversion discount should have been recorded as
an increase to additional paid-in capital, rather than an increase to the
original principle amount of the Notes.
Additionally, due to the recording of the beneficial conversion discount as
an increase to APICs the conversion of the Notes in 1996 and 1997 should have
reflected aggregate conversions of $4,356,000 ($4,300,000 of the original
principal of the Notes and $56,000 of accrued interest) and $5,998,000
($5,700,000 of the original principal of the Notes and $298,000 of accrued
interest), respectively.
SIEMENS LICENSE AGREEMENT
In connection with the November 1997 license agreement with Siemens, the
Company determined that warrants issued to purchase 9.9% of the Company's
outstanding stock, under the license agreement, had been undervalued and, as a
result, license revenues were overstated. The value of the warrants has been
increased from $450,000 to $900,000 and license revenue has been proportionately
decreased.
A summary of the significant effects of the restatement is as follows (in
thousands except per share amounts):
44
<PAGE>
<TABLE>
<CAPTION>
1997 1996
As Previously As Previously
Reported As Restated Reported As Restated
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
AT DECEMBER 31
Additional paid-in capital $ 72,642 $ 73,618 $ 55,784 $ 57,209
Accumulated deficit (77,485) (78,215)
Total stockholders' deficit 2,569 3,994
FOR THE YEAR ENDED DECEMBER
Product Revenues 5,674 5,385
Gross Profit 4,889 4,600
Operating Loss (16,831) (17,120)
Interest expense, net (1,360) (1,371)
Net loss before extraordinary item (15,076) (15,384)
Debt extinguishment loss - (1,048)
Net loss (15,076) (16,432)
Comprehensive loss (15,572) (16,928)
Net loss attributable to common stockholders (21,995) (22,725)
Basic and diluted net loss per share
Loss before extraordinary item (0.73) (0.72)
Extraordinary item - (0.03)
---------- --------
Net loss (0.73) (0.75)
---------- --------
---------- --------
</TABLE>
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of GateField Corporation:
We have audited the accompanying consolidated balance sheets of GateField
Corporation and its subsidiaries at December 31, 1998 and 1997, and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the GateField Corporation and its
subsidiaries at of December 31, 1998 and 1997, and the results of their
operations and comprehensive loss and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations, working
capital deficit, and stockholders' deficiency raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 12, the accompanying 1997 and 1996 consolidated financial
statements have been restated.
DELOITTE & TOUCHE, LLP
San Jose, California
February 19, 1999
46
<PAGE>
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of GateField Corporation:
We have audited the consolidated financial statements of GateField Corporation
and subsidiaries as of December 31, 1998, and for the year then ended, and have
issued our report thereon dated February 19, 1999. Our audit also included the
financial statement schedule listed in the Index at Item 14(a). This schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Deloitte & Touche LLP
San Jose, California
February 19, 1999
47
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1998, 1997 and 1996
(amounts in thousands)
GATEFIELD CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning charged to cost End of
Descriptions of Period and expense Deductions Period
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deducted from assets:
Allowance for doubtful accounts
(accounts receivable):
Years ended December 31,
1998 $ 528 $ 225 $ (509)(1) $ 244
-------- -------- ------------ --------
-------- -------- ------------ --------
1997 $ 1,337 $ 169 $ (978)(1) $ 528
-------- -------- ------------ --------
-------- -------- ------------ --------
1996 $ 296 $ 1,386 $ (345)(1) $ 1,337
-------- -------- ------------ --------
-------- -------- ------------ --------
</TABLE>
(1) Write-off of accounts and notes determined to be uncollectable.
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item is not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning directors of the
Company is incorporated herein by reference from the section entitled
"Election of Directors" included in the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders for the fiscal year ended December 31,
1998, which will be filed with the Securities and Exchange Commission within
120 days of the Company's fiscal year end (the "1998 Proxy Statement"). The
information required by this Item concerning executive officers of the
Company is included in Part I of this Annual Report on Form 10-K under the
section captioned "Executive Officers of the Registrant". The information
required by this Item concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, is incorporated herein by
reference from the section entitled "Section 16(a) Beneficial Ownership
Reporting Compliance" included in the 1998 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
from the sections entitled "Election of Directors" "Compensation of Directors",
"Compensation Committee Interlocks and Insider Participation", "Executive
Compensation", "Employment and Severance Agreements" included in the 1998 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
from the section entitled "Beneficial Ownership of Voting Stock" included in the
1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
from the sections entitled "Certain Relationships and Related Transactions",
"Election of Directors" "Compensation of Directors", "Compensation Committee
Interlocks and Insider Participation" and "Executive Compensation", "Employment
and Severance Agreements" included in the 1998 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial information is incorporated by reference into
Part II hereof from the Annual Report
1. Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1998 and 1997
(restated)
Consolidated Statements of Operations and Comprehensive Loss
for the three years ended December 31, 1998
49
<PAGE>
Consolidated Statements of Stockholders' Equity (Deficit)
for the three years ended December 31, 1998
Consolidated Statements of Cash Flows for the three years
ended December 31, 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Report of Independent Auditors on Financial Statement
Schedule
Schedule II: Valuation and Qualifying Accounts
All other schedules have been omitted because they are not
applicable, not required, or the information required is
included in the financial statements or notes thereto.
3. Exhibits:
The exhibits are listed in the accompanying Index to
Exhibits immediately following the signature page.
(b) Reports on Form 8-K
None
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GATEFIELD CORPORATION
Date: April 15, 1999
James B. Boyd
Principal Accounting Officer and
Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below as of April 15, 1999 by the following persons on behalf of
the registrant and in the capacities indicated.
/s/Timothy Saxe President, Chief Executive Officer, Chief
- --------------- Operating Officer and Director
Timothy Saxe (Principal Executive Officer)
/s/James B. Boyd Principal Accounting Officer and Principal
- ---------------- Financial Officer
James B. Boyd (Principal Accounting Officer and Principal
Financial Officer)
/s/ Michael J. Kucha Chairman of the Board of Directors
- --------------------
Michael J. Kucha
/s/ Horst G. Sandfort Director
- ---------------------
Horst G. Sandfort
51
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
2.1 Asset Purchase Agreement dated August 14, 1998, regarding the purchase
of GateField Corporation's Design Services Business by Actel
Corporation (incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed on August 14, 1998).
3.1 Restated Certificate of Incorporation dated August 28, 1998
(incorporated by reference to Exhibit 4.3 to the Company's Current
Report on Form 8-KA dated August 31, 1998).
3.2 Certificate of Correction of Restated Certificate of Incorporation of
GateField Corporation dated October 20, 1998 (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998).
3.3 Certificate of Designations of Preferred Stock of GateField
Corporation to be Designated Series B Convertible Preferred Stock of
the Company (incorporated by reference to Exhibit 3.3 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).
3.4 Certificate of Designations of Preferred Stock of GateField
Corporation to be Designated Series C Convertible Preferred Stock of
the Company (incorporated by reference to Exhibit 3.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
3.5 Bylaws of the Company, as amended (incorporated by reference to
Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
4.1 See Exhibit 3.1 referenced above.
4.2 See Exhibit 3.2 referenced above.
4.3 See Exhibit 3.3 referenced above.
4.4 See Exhibit 3.4 referenced above.
4.5 See Exhibit 10.24 referenced below.
4.6 See Exhibit 10.25 referenced below.
10.1** 1993 Stock Option Plan (incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-8 (File No. 333-42363)
filed on December 16, 1997).
10.2** 1996 Stock Option Plan (incorporated by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-8 (File No. 333-42363)
filed on July 31, 1998).
10.3** 1995 Stock Option Directors Plan for Non-Employee Directors
incorporated by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (File No. 333-42363) filed on December 16,
1997).
10.4** Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.4
to the Company's Registration Statement on Form S-8 (File No.
333-42363) filed on July 31, 1998).
10.5** 1999 Stock Option Plan (incorporated by reference to the Company's
1998 Proxy Statement.
52
<PAGE>
10.6** 1999 Employee Stock Purchase Plan (incorporated by reference to the
Company's 1998 Proxy Statement.
10.7** Employment, Confidential Information and Invention and Assignment
Agreement, between the Company and Douglas E. Klint, as amended on
June 5, 1997 (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997).
10.8** Employment, Confidential Information and Invention and Assignment
Agreement, between the Company Stephen A. Flory, as amended on June 5,
1997 (incorporated by reference to Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).
10.9 Warrant Certificate for the purchase of 50,000 shares of Common Stock,
dated July 28, 1997, issued to James R. Fiebiger (incorporated by
reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.10 Warrant Certificate for the purchase of 7,500 shares of Common Stock,
dated November 25, 1997, issued to Benjamin Huberman (incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.11 Common Stock Purchase Warrant, dated August 21, 1997 issued to Halifax
Fund L.P. (incorporated by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).
10.12 Common Stock Purchase Warrant, dated August 21, 1997, issued to
Capital Ventures International (incorporated by reference to Exhibit
10.11 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.13 Form of Registration Rights Agreement, dated February 13, 1997 between
the Company and each of Halifax Fund L.P. and Capital Ventures
International (incorporated by reference to Exhibit 4.19 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997).
10.14 Stock Purchase Agreement, dated November 10, 1997, between the
Company, Idanta Partners Ltd., Dunn Family Trust and Perscilla Faily
Trust (incorporated by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).
10.15 Registration Rights Agreement, dated November 10, 1997, between the
Company, Idanta Partners Ltd., Dunn Family Trust and Perscilla Faily
Trust (incorporated by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).
10.16 Credit Loan and Security Agreement, entered into at January 6, 1997,
between the Company and Coast Business Credit, a division of Southern
Pacific Thrift and Loan Association (incorporated by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.17 Lease, dated March 6, 1992, between the Company and Renco Equities IV,
relating to the premises at 47100 Bayside Parkway, Fremont, California
(incorporated by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.18 Sub-Lease Agreement, dated October 27, 1997, between the Company and
Mattson Technology, relating to the premises at 47100 Bayside Parkway,
Fremont, California (incorporated by reference to Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997).
10.19 SICAN/GateField Technology Agreement, dated September 23, 1993,
between SICAN G.m.b.H. and the Company (incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
53
<PAGE>
10.20 License Agreement, dated October 22, 1997, between the Company and
Siemens Aktiengesellschaft (incorporated by reference to Exhibit 10.29
to the Company's Current Report on Form 8-K dated November 14, 1997).
10.21 Asset Purchase Agreement, dated April 14, 1997, between the Company
and IKOS Systems, Inc., regarding the purchase of the Company's
LightSpeed product family by IKOS Systems, Inc. (incorporated by
reference to Exhibit 10.26 to the Company's Current Report on Form
8-K dated April 15, 1997).
10.22 Asset Purchase Agreement, dated August 18, 1997, between the Company
and IKOS Systems, Inc., regarding the purchase of the Company's XP and
PXP hardware fault simulation product business by IKOS Systems, Inc.
(incorporated by reference to Exhibit 10.27 to the Company's Current
Report on 8-K, dated September 5, 1997).
10.23 Asset Purchase Agreement, dated August 20, 1997, between the Company
and Test Systems Strategies, Inc., regarding the purchase of the
Company's TDX software fault simulation and test business
(incorporated by reference to Exhibit 10.28 to the Company's Current
Report on Form 8-K dated September 5, 1997).
10.24 Purchase Agreement, dated October 31, 1997, between the Company, Zycad
Japan (GateField) KK and Zycad TSS Inc., regarding the purchase of the
maintenance business (incorporated by reference to Exhibit 10.24 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1997).
10.25 Series C Preferred Stock Purchase Agreement dated August 14, 1998
between GateField Corporation and Actel Corporation (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K A
dated August 31, 1998).
10.26 Registration Rights Agreement dated August 14, 1998 between GateField
Corporation and Actel Corporation (incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K A dated August
31, 1998).
10.27** Severance Agreement and General Release of All Claims, dated September
30, 1997, between the Company and Phillips W. Smith (incorporated by
reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.28 Product Marketing Agreement, dated August 14, 1998, between the
Company and Actel Corporation (incorporated by reference to Exhibit
10.24 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998).
10.29 License Agreement, dated August 14, 1998, between the Company and
Actel Corporation (incorporated by reference to Exhibit 10.25 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.30 License Agreement dated July 31, 1998 between GateField Corporation
and Rohm Co., Ltd. (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on August 14, 1998).
10.31 Agreement for Wafer Production and Testing between GateField
Corporation and Siemens Aktiengesellschaft (incorporated by reference
to Exhibit 99.3 to the Company's Current Report on Form 8-KA dated
August 31, 1998).
10.32** Severance Agreement and General Release of All Claims, dated August
18, 1998, between the Company and Stephen A. Flory.
13.1 Incorporated by reference from Exhibits to Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
54
<PAGE>
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors, Deloitte & Touche LLP.
27.1 Financial Data Schedule.
- -----------------------------
** Management contract or compensation plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
55
<PAGE>
EXHIBIT 10.32
SEVERANCE AGREEMENT
AND GENERAL RELEASE OF ALL CLAIMS
The intent of this Agreement and Release is to mutually, amicably
and finally resolve and compromise all issues and claims surrounding the
employment of STEPHEN FLORY, (the "Employee") by GATEFIELD CORPORATION, (the
"Company") and the termination thereof. The execution of this Agreement shall
not in any way be considered an admission of any liability on the part of the
Company.
1. The Company has notified Employee that his position is being
eliminated as part of a reduction in force and that his employment with the
Company is being terminated effective August 18, 1998. In exchange for the
Release described below, the Company agrees to pay Employee the severance
package as described in Section 2 below. This amount includes money which is
not due to him now, or in the future, and which is valuable consideration for
the promises and undertakings set forth herein.
2. The Severance Package consists of the following:
SEVERANCE PAY:
The Company will continue to pay Employee his monthly base salary
payable on the 15th and last day of each month for a period of up to twelve (12)
months from August 19, 1998 through August 18, 1999 during which time Employee
shall be deemed an inactive employee. In the event Employee becomes re-employed,
these payments would cease at that time. Base salary does not include FSA, car
plan payments, or bonuses. The period of time that Employee is receiving
Severance Pay shall be deemed the Severance Period.
VACATION PAY:
The Company will pay Employee the equivalent of two (2) weeks vacation
pay payable on August 31, 1998.
GROUP INSURANCE:
Employee's group coverage for medical, dental, life, AD&D, LTD and
Supplemental Life will remain in effect through such period of time as Employee
is paid Severance Pay as stated above. At that time, Employee may elect COBRA
coverage.
COMPUTER:
Employee will be provided with the Company computer he has used during
his employment with the Company except for any peripheral computer accessories
and equipment, e.g. the scanner, which will stay with the Company. Employee
agrees to copy all business files and records that are stored on this computer
onto a Company computer or drive.
OTHER BENEFITS:
<PAGE>
401 (k) PLAN:
Employee's participation in the Company's 401 (k) Plan will cease upon
termination of Severance Pay as stated above. The Company will not be liable for
matching contributions after August 18, 1998. Employee will receive a lump sum
distribution for the amount of Employee's vested account balance within
approximately 90 days after ceasing participation in the Plan. If Employee's
vested account balance is greater than $3,500, Employee may elect to leave his
money in the Plan.
STOCK OPTION PLAN:
Employee is vested in the Company's stock option plan as follows:
<TABLE>
<S> <C>
- Q4 1997 Vested options - 58,825
- Q1 1998 Vested options - 18,218
- Q2 1998 Vested options - 19,290
- Q3 1998 Vested options - 21,433
TOTAL VESTED OPTIONS - 117,766
</TABLE>
Employee has until 90 days after the date of termination of the
Severance Pay as stated above to exercise these vested stock options. There
shall be no further vesting of stock options. The Q4 1997 stock option bonus
plan shall apply to the Q4 1997 vested options when such options are exercised.
STOCK PURCHASE PLAN:
Employee may either remain in the Plan for the duration of the third
quarter 1998 or elect to withdraw from the Plan and receive a refund. If
Employee remains in the Plan, Employee's certificate and any remaining balance
will be mailed to him in November 1998.
MISCELLANEOUS:
Employee shall be entitled to keep a voice mail extension and an email
account during the Severance Period. Employee shall be entitled to use part time
administrative support from Cindy Brinkmann for handling any communication that
comes to Employee in care of the Company. In addition, Employee may continue to
use the Company's Club Sport membership during the Severance Period or for so
long as the Company keeps such membership, whichever occurs first.
3. Employee agrees that the terms and conditions of this Agreement are
strictly confidential and shall not be disclosed to any other persons except his
counsel, immediate family, financial advisor or as required by applicable law.
4. In consideration for the payment and undertakings described above
Employee, his representatives, successors, and assigns, do hereby completely
release and forever discharge, the Company, its parent, affiliated and
subsidiary corporations, and its shareholders, officers and all other
representatives, agents, directors, employees, successors and assigns, from all
claims, rights, demands, actions, obligations, and causes of action of any and
every kind, nature and character, know or unknown, which Employee may now have,
or has ever had, against them arising from or in any way
<PAGE>
connected with the employment relationship between the parties, any actions
during the relationship, or the termination thereof, including but not limited
to all "wrongful discharge" claims; and all claims relating to any contracts of
employment, express or implied; any tort of nature; any federal, state, or
municipal statute or ordinance; any claims under the California Fair Employment
and Housing Act, Title VII of the Civil Rights Act of 1964, the Age
Discrimination in Employment Act of 1967, 42 U.S.C. Section 1981 and any other
laws and regulations relating to employment discrimination any and all claims
for attorney's fees and costs.
5. Employee has read Section 1542 of the Civil Code of the State of
California, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Employee understands that Section 1542 gives him the right not to
release existing claims of which he is not now aware, unless he voluntarily
chooses to waive this right. Having been so apprised, he nevertheless hereby
voluntarily elects to, and does, waive the rights described in Section 1542, and
elects to assume all risks for claims that now exist in his favor, KNOWN or
UNKNOWN, from the subject of this Agreement.
6. This Agreement shall act as an assignment to the Company of any
capital stock held by Employee in a foreign subsidiary of the Company.
7. This Agreement constitutes the entire understanding of the parties
on the subjects covered. Employee expressly warrants that he has read and fully
understands this Agreement; that he has had the opportunity to consult with
legal counsel of his own choosing and to have the terms of the Agreement fully
explained to him; that he is not executing this Release in reliance on any
promises, representations or inducements other than those contained herein; and
that he is executing this Release voluntarily, free of any duress or coercion.
GATEFIELD CORPORATION
Dated: August 17, 1998 By: /s/ James R. Fiebiger, CEO
Dated: August 18, 1998 By: /s/ Stephen Flory, Employee
<PAGE>
Set forth below are the subsidiaries of the Registrant:
GateField G.m.b.H.
Bahnhofstrasse 19a
85737 Ismaning
Germany
GateField Japan KK
Toshin 24 Shin-Yokohama Bldg. B-8F
2-3-8, Shin Yokohama, Kohoku-ku
Yokohama, 222 Japan
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements No.
333-42363 and No. 333-60417 of GateField Corporation on Form S-8, and No.
333-08089 and No. 333-27283 on Form S-3 of our reports dated February 19, 1999,
appearing in this Annual Report on Form 10-K of GateField Corporation for the
year ended December 31, 1998.
Deloitte & Touche LLP
San Jose, California
April 15, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,832
<SECURITIES> 0
<RECEIVABLES> 463
<ALLOWANCES> 244
<INVENTORY> 117
<CURRENT-ASSETS> 4,968
<PP&E> 1,783
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,853
<CURRENT-LIABILITIES> 8,478
<BONDS> 0
0
3,083
<COMMON> 4,191
<OTHER-SE> 77,391
<TOTAL-LIABILITY-AND-EQUITY> 6,853
<SALES> 2,624
<TOTAL-REVENUES> 7,700
<CGS> 4,648
<TOTAL-COSTS> 7,307
<OTHER-EXPENSES> 8,488
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 173
<INCOME-PRETAX> (8,268)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,268)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,268)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
