<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission file number 0-13244
GATEFIELD CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 41-1404495
(State of incorporation) (I.R.S. Employer Identification No.)
47100 BAYSIDE PARKWAY FREMONT, CALIFORNIA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 623-4400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes X No .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Title of Each Class Outstanding at May 7, 1999
------------------- --------------------------
Common stock, par value $0.10 per share 41,669,197
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GATEFIELD CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and March 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and March 31, 1998 5
Notes to Condensed Consolidated Financial Statements,
March 31, 1999 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATEFIELD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,204 $ 3,832
Accounts receivable, less allowance for doubtful
accounts of $359 in 1999 and $244 in 1998 38 463
Inventories 98 117
Other current assets 330 556
----------- -----------
Total current assets 1,670 4,968
Property and equipment, net 1,536 1,783
Other assets 28 102
----------- -----------
Total assets $ 3,234 $ 6,853
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 347 $ 393
Accounts payable 656 1,372
Accrued expenses 1,483 1,941
Deferred revenues 4,625 4,772
----------- -----------
Total current liabilities 7,111 8,478
Long-term obligations 269 330
----------- -----------
Total liabilities 7,380 8,808
Redeemable Preferred Stock:
$0.10 par value; 2,000,000 shares authorized; shares issued
and outstanding: 318,000 in 1999 and 318,000 in 1998 3,084 3,083
Stockholders' deficit
Common stock:
$0.10 par value; 65,000,000 shares authorized; shares issued
and outstanding: 42,025,000 in 1999 and 41,925,000 in 1998 4,202 4,191
Additional paid-in capital 78,183 78,128
Accumulated other comprehensive loss (753) (737)
Accumulated deficit (88,862) (86,620)
----------- -----------
Total stockholders' equity (7,230) (5,038)
----------- -----------
Total liabilities and stockholders' equity $ 3,234 $ 6,853
----------- -----------
----------- -----------
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
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GATEFIELD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Product $ 142 $ 640
Service 311 1,209
-------- --------
Total revenues 453 1,849
-------- --------
Cost of revenues:
Product 237 1,050
Service 138 760
-------- --------
Total cost of revenues 375 1,810
-------- --------
Gross profit 78 39
-------- --------
Operating expenses:
Sales and marketing 188 915
Research and development 1,347 1,298
General and administrative 740 765
-------- --------
Total operating expenses 2,275 2,978
-------- --------
Operating loss (2,197) (2,939)
Other income (expense)
Interest expenses, net (12) (91)
Other income (expense), net (32) 67
-------- --------
Total other income (expense) (44) (24)
Net loss (2,241) (2,963)
Other comprehensive loss
Currency translation adjustments (16) (89)
-------- --------
Comprehensive loss $ (2,257) $ (3,052)
-------- --------
-------- --------
Loss attributable to common stockholders (2,242) (2,997)
-------- --------
-------- --------
Basic and diluted net loss per share $ (0.05) $ (0.07)
-------- --------
-------- --------
Basic and diluted weighted average shares outstanding 41,951 41,325
-------- --------
-------- --------
</TABLE>
See Accompanying Notes To Condensed Consolidated Financial Statements.
4
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GATEFIELD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
(IN THOUSANDS) 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net loss $(2,241) $(2,963)
Reconciliation to net cash used in operating activities:
Depreciation and amortization 247 289
Changes in assets and liabilities:
Accounts receivable 425 (77)
Inventories 19 (41)
Other assets 193 (41)
Accounts payable and accrued expenses (1,174) (395)
Deferred revenues (147) 236
------- -------
Net cash used in operating activities (2,678) (2,992)
------- -------
Investing activities:
Property and equipment purchases, net - (77)
------- -------
Net cash used in investing activities - (77)
------- -------
Financing activities:
Proceeds from issuance of common stock 66 4,864
Repayments of debt obligations - (91)
------- -------
Net cash provided by financing activities 66 4,773
------- -------
Effect of exchange rate changes on cash and cash equivalents (16) (82)
------- -------
Net change in cash and cash equivalents (2,628) 1,622
Cash and cash equivalents, beginning of period 3,832 4,189
------- -------
Cash and cash equivalents, end of period $ 1,204 $ 5,811
------- -------
------- -------
Supplemental disclosure of cash flow information:
Noncash activities -
Accrued dividends on preferred stock $ - $ 34
Cash activities -
Cash paid during the year for interest $ 38 $ 103
</TABLE>
See Accompanying Notes To Condensed Consolidated Financial Statements.
5
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GATEFIELD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
financial statements, during the quarters ended March 31, 1999 and 1998,
GateField Corporation, (the "Company") incurred net losses of approximately
$2,241,000 and $2,963,000, respectively. Additionally, the Company had
stockholders deficits of approximately $7,230,000 at March 31, 1999 and
$5,038,000 at December 31, 1998, and is highly dependent on obtaining
additional financing in order to fund the current and planned operating
levels. These factors among others raise substantial doubt about the ability
of the Company to continue as a going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to obtain additional
financing to complete its new product development and begin commercial sales,
and ultimately obtain sufficient customer demand to attain profitable
operations. Management intends to reduce operating expenses, begin sales of
new products currently in development and obtain additional financing to
cover its additional cash flow requirements until it reaches a break-even
level of operations. No assurance can be given that the Company will be
successful in these efforts.
Interim results of operations are not necessarily indicative of the
results to be expected for the full year. The Company's interim fiscal
quarter ended on March 31, 1999 and 1998, respectively. The condensed
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto for the year ended December 31,
1998, included in the Company's Form 10-K.
2. INVENTORIES
<TABLE>
<CAPTION>
March 31, December 31,
(IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ - $ -
Finished goods 98 117
---- ----
$ 98 $117
---- ----
---- ----
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION IN THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT
ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS
REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES
REGARDING THE FUTURE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE
HEREOF, AND THE
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COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "FACTORS AFFECTING FUTURE RESULTS"
AS WELL AS THOSE DISCUSSED IN THIS SECTION AND ELSEWHERE IN THIS REPORT, AND
THE RISKS DISCUSSED IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION
FILINGS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUES
Total revenues for the quarters ended March 31, 1999 and 1998 were
$453,000 and $1,849,000, respectively, a decrease of 76%. Total ProASIC
product revenues for the first quarter of 1999 declined to $142,000 from
$640,000 in the first quarter of 1998. ProASIC product revenues include
license fees from Rohm of approximately $300,000 in the quarter ended March
31, 1998. The decline in ProASIC revenues was due to the company's decision
to halt active sales efforts for the 0.72-micron product in the third quarter
of 1998. The company anticipates termination of the 0.72-micron product sales
in the second quarter of 1999. Most of the company's revenues in the balance
of 1999, if any, will come from the company's anticipated introduction of its
0.25-micron products. At this time, the company believes 0.25-micron product
sales will begin in the second quarter of 1999. However, it does not know how
many products will be introduced in 1999 or in what packages. Furthermore, it
is impossible to anticipate the degree of market acceptance of this new
technology, or whether it will be accepted at all. Therefore, the revenues
associated with the new 0.25-micron product cannot be predicted with any
degree of accuracy. The company's failure to introduce its 0.25-micron
products on a timely basis and to achieve market acceptance of such products
would have a material adverse effect on the company's business, financial
condition and result of operations.
Service revenues for the quarters ended March 31, 1999 and 1998 were
$311,000 and $1,209,000, respectively. Service revenues are comprised of two
components: (i) maintenance contracts on the company's verification systems
and (ii) design services. Verification maintenance revenues were $299,000 in
the first quarter of 1999 and $817,000 in the first quarter of 1998. The
decline in verification maintenance revenues is the result of the sale of the
verification assets in 1997. Verification maintenance revenue earned in the
first quarters of 1999 and 1998 represent the company's portion of a profit
sharing agreement with the purchaser of the verification products assets. The
company expects revenues from this source to continue to decline at an
accelerated rate and eventually to cease in 1999. Service fees related to the
company's design service product line were $392,000 in the quarter ended
March 31, 1998. Those assets were sold to Actel Corporation ("Actel") in
August 1998, and, thus, these products will not generate any revenue in 1999.
GROSS PROFIT
Gross profit for the quarters ended March 31, 1999 and 1998 was
$78,000, and $39,000, respectively. Gross profit as a percentage of total
revenues was 17% in the first quarter of 1999 and 2% in the first quarter of
1998. Gross profit is affected by many factors, including but not limited to:
license fees, pricing strategies, product mix, yield variations, inventory
obsolescence, and increased costs incurred in the introduction of new
products.
Gross profit deficit from ProASIC product revenues for the quarter
ended March 31, 1999 was ($95,000) and ($410,000) for the quarter ended March
31, 1998. Poor manufacturing yields on the 0.72-micron product wafers caused
the negative margins for both periods. As the design and manufacturing
processes are different for the 0.72-micron and the 0.25-micron products, the
yields and, hence, the gross profits on the two products are unrelated.
Furthermore, the .25 micron product has not been manufactured in commercial
quantities. Therefore, the company cannot predict its margins for 1999 with
any degree of certainty. Gross profit related to 0.72-micron products is not
expected to be significant and will cease altogether in the second quarter of
1999.
Gross profit from service revenues was $173,000 in the quarter ended
March 31, 1998, and $449,000 in the quarter ended March 31, 1998. Gross
profit related to maintenance contracts on the verification systems was
$173,000 in the quarter ended March 31, 1998, and $443,000 in the quarter
ended March 31, 1998. The verification maintenance revenues
7
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and, hence, the related gross profits will decline to zero in 1999. Margins
related to design services were $6,000 or 2% in 1998. Because revenue from
design services stopped in August 1998, the company does not expect any gross
margin contribution from this source in 1999. In summary, gross profit from
service revenues, if any, is not expected to be significant over the balance
of 1999.
SALES AND MARKETING
Sales and marketing expenses were $188,000 for the quarter ended
March 31, 1999 and $915,000 for the quarter ended March 31, 1998. The
decrease represents the termination of the company's sales and marketing
force in connection with the sale of the company's worldwide distribution
rights to its 0.25 and below ProASIC products to Actel in August 1998.
Expenses incurred in the first quarter of 1999 related to its efforts to
support strategic initiatives and product designs. The company expects
quarterly sales and marketing expenses to remain relatively flat for the
remainder of the year.
RESEARCH AND DEVELOPMENT
Research and development expenses for the quarter ended March 31,
1999 were $1,347,000 as compared to $1,298,000 for the quarter ended March
31, 1998. The increase in quarterly expenses is due to mask costs for the
0.25-micron product development. The company expects quarterly research and
development expenses to remain relatively flat for the remainder of the year.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended March
31, 1999 and 1998 were $740,000 and $765,000, respectively. The company
expects these expenses to remain relatively flat for the remainder of the
year. However, G&A could experience significant increases in future quarters
due to legal and accounting expenses incurred in connection with future
financings.
OTHER INCOME AND EXPENSES
Other expenses for the quarter ended March 31, 1999 were $44,000 as
compared to other expenses of $24,000 for the quarter ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the company had cash and cash equivalents of
approximately $1.2 million and a working capital deficit of $5.4 million.
During the first quarter ended March 31, 1999, and the year ended December
31, 1998, GateField incurred net losses of approximately $2.2 million and
$8.3 million, respectively. The company expects to continue to generate such
losses for at least the remainder of 1999. As a result, the company estimates
it will have utilized all of its currently available capital resources on or
about May 31, 1999. Thus, the company will be unable to continue as a going
concern if sufficient funding is not immediately available.
The Company has contacted a number of potential providers of
additional capital, including investment banking firms, financial investors,
customers, potential customers, strategic partners and potential strategic
partners. In this regard, management has held discussions with Idanta
Partners, Ltd. ("Idanta") and Actel Corporation ("Actel"), each a significant
stockholder of the company in which both Idanta and Actel have indicated
their preliminary interest in providing additional financing. Presently
management is engaged in discussion with Actel in which Actel has indicated
on a preliminary basis its willingness to extend loans to the Company,
pursuant to a convertible promissory note (the "Note"), in the aggregate
principal amount of up to $8 million (the "Note Financing"). It is
anticipated that all or some portion of such Note would be convertible into
shares of the Company's equity securities. It is also anticipated that the
Common Stock issuable upon conversion of such equity securities would be at a
discount to the prevailing market price to reflect the illiquidity of the
shares, the Company's financial condition and other factors. The issuance of
additional shares of Common Stock in the Note Financing is expected to be
dilutive to the current stockholders, particularly in view of the fact that
such securities will likely be issued at a discount to the prevailing market
price of the Company's Common Stock.
Although Actel and Idanta have indicated their preliminary interest
in funding the Company, there can be no assurance that either the Note
Financing or any other proposed financings will be consummated prior to May
31, 1999, the date on which the Company will have utilized all of its
currently available cash, on terms acceptable to the Company and its
stockholders if at all. The terms of the Note Financing have not been
finalized and will be subject to compliance with all applicable securities
laws. If the Company is unable to obtain additional financing on a timely
basis, the Company will be required to terminate its operations.
The Company currently anticipates that capital in the aggregate
principal amount of $6 million to $12 million would meet the Company's
capital requirements through 1999. However, the Company's capital
requirements may be greater than anticipated. Therefore, there can be no
assurance that such amounts will be sufficient to meet the Company's capital
requirements through 1999.
GateField has historically used private offerings of convertible
debt and convertible preferred stock, public and private offerings of common
stock, sale and leaseback arrangements and bank financing and credit lines to
finance its business.
Cash used in operations was $2.7 million in the first quarter of
1999 compared to $3.0 million for the first quarter of 1998. Net cash used by
investing activities during the three-month period ended March 31, 1998 was
$77,000 for equipment acquisitions. GateField expects to invest a minimum of
$300,000 and possibly as much as $800,000 in mask sets for its new
0.25-micron product in 1999 but does not anticipate any other significant
capital asset acquisitions during the upcoming year.
Net cash provided by financing activities was $66,000 in the first
quarter of 1999 and represents employee purchases of stock under certain
option plans. That amount compares to $4.9 million for the same three month
period in 1998 which represents the sale of the Company's common stock to
Idanta Partners Ltd. in the amount of $4.6 million and $300,000 to other
option and warrant holders, respectively.
8
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YEAR 2000 ISSUES
The following constitutes "Year 2000 Disclosure" under the Year 2000
Information and Readiness Disclosure Act of 1998.
GateField Corporation is aware that many existing information
technology (IT) systems, such as computer systems and software products, as
well as non-IT systems that include embedded technology, were not designed to
correctly process date and time information after December 31, 1999.
Accordingly, computer programs and software may need to be modified prior to
the year 2000 in order to remain functional. Failure to complete necessary
modifications could cause a disruption or failure of such program and system.
The company is currently assessing the impact of such "Year 2000"
issues on its internal IT and non-IT systems, as well as on its customers,
suppliers and service providers. The company has formed a "Year 2000 Team" to
identify, access and resolve Year 2000 compliance issues. The Year 2000 Team
is testing and evaluating GateField's products and the company's IT systems;
the team recently completed an inventory of all material Year 2000 issues.
To date, GateField has not identified any significant areas of
noncompliance with respect to its products or IT and non-IT systems. It
expects that the assessment and all remedial action for all of its products,
IT systems and non-IT systems will be completed by the end of calendar year
1999. GateField intends to take the necessary steps to make its systems Year
2000 compliant. These steps may require the company to modify, upgrade or
replace some of its internal financial and operational systems. The cost of
bringing all internal systems, equipment and operations into Year 2000
compliance has not yet been determined. While these efforts may involve
additional costs, GateField believes, based upon currently available
information, that these costs will not have a material adverse effect on the
business, financial condition or results of operations of the
company--although no assurances can be given.
The company also has begun discussions with significant customers,
suppliers and service providers to determine their plans to address Year 2000
issues. Although GateField anticipates cooperation in these efforts, it may
be difficult for the company to obtain assurances of Year 2000 readiness from
such third parties. If any customers, suppliers or service providers fail to
appropriately address their year 2000 issues, such failure could have a
material adverse effect on GateField's business, financial condition and
results of operation. The Year 2000 Team intends to develop contingency
9
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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. The discussion above regarding estimated completion dates, costs,
risks and other forward-looking statements regarding Year 2000 is based on
the company's best estimates given information that is currently available
and is subject to change, as the company continues to progress with its Year
2000 initiatives, it may discover that actual results will differ materially
from these estimates.
FACTORS AFFECTING FUTURE RESULTS
IMMEDIATE NEED FOR ADDITIONAL FUNDING
At March 31, 1999, the Company had cash and cash equivalents of
approximately $1.2 million and a working capital deficit of $5.4 million.
During the first quarter ended March 31, 1999, and the year ended December
31, 1998, the Company incurred net losses of approximately $2.2 million and
$8.3 million, respectively. The Company expects to continue to generate such
losses for at least the remainder of 1999 and early 2000. As a result, the
company expects that it will have utilized all of its currently available
assets on or about May 31, 1999. If sufficient funding is not immediately
available, the Company will be unable to continue as a going concern.
NO ASSURANCE OF FUTURE FUNDING
The Company is in need of immediate additional financing in order to
be able to continue as a going concern. Although Actel and Idanta have
indicated their preliminary interest in funding the Company in the aggregate
principal amount of up to $ 8.0 million, there can be no assurance that such
financing will be consummated before the Company has utilized all of its
currently available capital resources on terms acceptable to the company and
its stockholders, if at all. If the Company is unable to obtain additional
financing, the Company will be required to terminate its operations.
The Company anticipates that capital in the aggregate principal
amount of $6 million to $12 million would meet the Company's capital
requirements through 1999. However, the Company's capital requirements may be
greater than anticipated. Therefore, there can be no assurance that such
amounts would be sufficient to meet the Company's capital requirements
through 1999.
DEPENDENCE ON THE SUCCESSFUL DEVELOPMENT OF 0.25-MICRON PRODUCTS
GateField's success is highly dependent upon the timely completion
and introduction of new products at competitive price and performance levels,
especially the timely introduction of its next generation of 0.25-micron
products. GateField is currently completing initial testing of its
0.25-micron products and related software. The joint Actel / GateField
marketing team began sampling initial customers in the first quarter of 1999.
Production software and a device programmer are scheduled to be available in
the second quarter of 1999. No assurance can be given that the company's
design and introduction schedules for such products will be met. Moreover,
there can be no assurances that, even if such products are introduced into
the market on a timely basis, they will be successfully developed or that
they will achieve market acceptance. To the extent that the company's
development and commercialization efforts with respect to the 0.25-micron
products is unsuccessful or if these products do not achieve market
acceptance, the company's business, financial condition and results of
operations would be materially adversely affected.
10
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The company's 0.25-micron products are highly complex and may
contain undetected or unresolved defects when first introduced or as new
versions are released. There can be no assurance that, despite testing by the
company, defects will not be found in new products, including the company's
0.25-micron products, or new versions of such products following commercial
release. This could result in loss of market share, delay in or loss of
market acceptance or product recall. Any such occurrence could have a
material adverse effect upon the company's business, financial condition and
results of operations.
DEPENDENCE ON INDEPENDENT WAFER MANUFACTURERS
GateField does not manufacture any of the wafers used in the
production of its products, including its 0.72-micron ProASIC products. This
dependence on independent wafer manufacturers puts GateField at risk should
its suppliers be unable or unwilling to produce GateField's products.
Currently, GateField's 0.72-micron ProASIC products are manufactured
by Rohm in Japan. In addition, GateField has an agreement with Siemens to
manufacture the company's new 0.25-micron products at Siemens' wafer
fabrication facility located in Germany, once initial testing of the
GateField 0.25-micron products is completed. As the company's products
migrate to 0.25-micron geometries, GateField will become increasingly
dependent on Siemens for the manufacture of its products. This dependence on
a single foundry subjects the company to risks associated with an
interruption of supply from a single source. Furthermore, Siemens is spinning
off its semiconductor business, so there can be no assurance that the wafer
manufacturing portion of such operations will be willing and capable of
continuing to support the manufacture of GateField's products.
GateField plans to initially produce its 0.25-micron products in
relatively low volumes. Still, it will be competing with Siemens' internal
requirements for production capacity and the attention of Siemens' process
engineers. The company's reliance on Siemens to fabricate its 0.25-micron
products involves significant risks, such as technical difficulties or damage
to production facilities that could limit production and reduce yields, lack
of control over capacity allocation and lack of control over delivery
schedules. Also, these risks are increased by the fact that GateField does
not have second source suppliers for any of its wafer products.
GateField has in the past experienced delays in obtaining wafers
from its foundries, and there can be no assurance that the company will not
experience similar or more severe delays in the future. Although GateField
has supply agreements with both Rohm and Siemens, a shortage of raw materials
or production capacity could lead either of them to allocate available
capacity to customers other than GateField. Or in the case of Siemens,
internal uses could delay manufacture of GateField products and interrupt
GateField's capability to meet its product delivery obligations. Any
inability or unwillingness of GateField's independent wafer manufacturers to
provide adequate quantities of finished wafers to satisfy GateField's needs
in a timely manner would delay production and product shipments and could
have a material adverse effect on GateField's business, financial condition
and results of operations. These risks are particularly pronounced with
respect to the company's reliance on Siemens as the only manufacturer of the
company's 0.25-micron products.
If GateField's independent wafer manufacturers were unable or
unwilling to manufacture GateField's products as required, the company would
have to identify and qualify additional foundries. The development and
qualification process typically takes one year or longer. No assurance can be
given that any additional qualified wafer foundries would become available or
be able to satisfy GateField's requirements on a timely basis. In particular,
the company has invested significant amounts of time and resources in working
with Siemens to develop and improve the manufacturing processes relating to
GateField's 0.25-micron product family. Although Siemens has also invested
significant resources into its relationship with GateField, if Siemens were
unable or unwilling to manufacture such products as anticipated by GateField,
GateField would be unable to introduce such products to market on a timely
basis, which would have a material adverse effect on the company's business,
financial condition and results on operations.
RELIANCE ON ACTEL RELATIONSHIP
In August 1998, GateField entered into a strategic relationship with
Actel Corporation. In a product marketing 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
11
<PAGE>
not anticipate creating a new sales force in the foreseeable future.
Consequently, GateField is highly dependent on Actel's sales efforts and the
success of its sales force in marketing GateField's 0.25-micron products.
Actel will continue to market its own products, including products
that are competitive with GateField's products. Accordingly, there is a risk
that Actel may give higher priority to the Actel products, thus reducing its
efforts to sell GateField's products. In addition, GateField's agreement with
Actel is terminable by Actel under a variety of circumstances, including
GateField's material breach of the product marketing agreement. As GateField
would require significant amounts of time and resources to rebuild its sales
force, reduction in sales efforts by Actel or a termination of its agreement
with GateField would have a material adverse effect on GateField's business,
financial condition and results of operations. Furthermore, if Actel's sales
and marketing efforts do not achieve anticipated growth rates, GateField
would be forced to reduce the amount of product that is manufactured. As a
result, the company's profit margins on future sales of higher cost products
would be reduced because GateField would be unable to take full advantage of
Siemens' manufacturing cost reductions.
The Product Marketing Agreement with Actel contains certain
GateField milestones relating to the development schedule and manufacturing
costs of the .25 micron product family. The agreement also contains Actel
milestones with respect to the marketing and sale of the .25 products
(including certain revenue targets). GateField currently anticipates that it
will fail to meet certain of its milestones relating to the cost of
manufacturing one of the .25 products. If GateField fails to achieve such
cost milestones, Actel may be relieved of its milestone obligations under the
Product Marketing Agreement and may have the right to assume control over
GateField's operations relating to the manufacture of such product. Such loss
of control could divert resources from other GateField development efforts
and disrupt the company's development efforts with respect to the .25 product
family. Also, the termination of Actel's milestone obligations would lessen
the value of the Product Marketing Agreement to GateField. Such consequences
of GateField's failure to achieve its milestones could have a material
adverse effect on GateField's business, financial condition and results of
operations.
COMPETITION
The semiconductor industry is intensely competitive and is
characterized by rapid rates of technological change, product obsolescence,
and price erosion. GateField's existing competitors include suppliers of
conventional gate arrays, complex programmable logic devices (CPLDs) and
FPGAs. The company's two principal competitors are Xilinx, a supplier of
FPGAs based on SRAM technology, and Altera, a supplier principally of CPLDs.
GateField also faces competition in the future from major domestic and
international semiconductor suppliers and suppliers of logic products based
on new or emerging technologies. Given the intensity of the competition and
the research and development being done, no assurance can be given that
GateField's technology--or patents--will remain competitive.
Important competitive factors in GateField's market are: price,
performance, number of usable gates, ease of use and functionality of
development system software, installed base of development systems,
adaptability of products to specific applications, length of development
cycle (including reductions to finer micron design rules), number of I/Os,
reliability, adequate wafer fabrication capacity and sources of raw
materials, protection of products by effective utilization of intellectual
property laws and technical service and support. Failure of GateField to
compete successfully in any of these or other areas could have a material
adverse effect on its business, financial condition and results of operations.
Furthermore, if there was a downturn in the market for CPLDs and
FPGAs, GateField believes companies that have broader product lines and
longer standing customer relationships may be in a stronger competitive
position than GateField. Many of the company's current and potential
competitors offer broader product lines and have significantly greater
financial, technical, manufacturing and marketing resources than GateField
has.
DEPENDENCE ON KEY PERSONNEL
GateField's success is dependent in large part on the continued
service of its key management, engineering, marketing and support employees.
Competition for qualified personnel, particularly skilled IC engineers, is
intense in the semiconductor industry. The loss of GateField's current key
employees, or the inability of the company to attract other qualified
personnel, could have a material adverse effect on GateField. The company
does not have employment agreements
12
<PAGE>
with any of its key employees, but it does have standard non-disclosure
agreements with all technical and management employees and it does have
indemnity agreements with Dr. Timothy Saxe, its chief executive officer,
president and chief operating officer, and Peter G. Feist, its senior vice
president of marketing, and James B. Boyd, its chief accounting officer.
PRICE EROSION
The semiconductor industry is characterized by intense competition.
Historically, average selling prices in the semiconductor industry in
general, and for GateField's products in particular, have declined
significantly over the life of each product. Moreover, GateField is highly
dependent on Actel for the marketing of the company's next generation of
ProASIC products. While GateField expects that the average selling prices of
its products will be reduced over time as the company achieves manufacturing
cost reductions, GateField may from time to time be required by competitive
pressures to reduce the prices of its products more quickly than such cost
reductions can be achieved. In addition, GateField occasionally approves
price reductions on specific sales to meet competition. If these reductions
are not offset by reductions in manufacturing costs or by a shift in the mix
of products sold toward higher-margin products, declines in the average
selling prices of GateField's products will reduce gross margins and could
have a material adverse effect on the company's business, financial condition
and results of operations.
MANUFACTURING YIELDS
GateField depends upon its independent wafer manufacturers to
produce wafers with acceptable yields and to deliver them to GateField in a
timely manner. Currently, substantially all of the company's revenues are
derived from products based on GateField's proprietary ProASIC technology.
Successful implementation of ProASIC technology requires a high degree of
coordination between GateField and its independent wafer manufacturers. In
particular, with respect to the manufacture of GateField's 0.25-micron
products, Siemens will require significant lead-time to reach volume
production on new processes. Accordingly, no assurance can be given that
volume production or acceptable yields with respect to GateField's new
0.25-micron product family will be achieved on a timely basis or at all.
The manufacture of high-performance ProASIC products is a complex
process that requires a high degree of technical skill, state-of-the-art
equipment and effective cooperation between the wafer supplier and the
circuit designer to produce acceptable yields. Minute impurities, errors in
any step of the fabrication process, defects in the masks used to print
circuits on a wafer and other factors can cause a substantial percentage of
wafers to be rejected or numerous die on each wafer to be nonfunctional. As
is common in the semiconductor industry, GateField has from time to time
experienced in the past, and expects that it will experience in the future,
production yield problems and delivery delays. Any prolonged inability to
obtain adequate yields or deliveries of the 0.25-micron products would
adversely affect GateField's business, financial condition and results of
operations.
SEMICONDUCTOR INDUSTRY RISKS
The semiconductor industry has historically been cyclical and
periodically subject to significant economic downturns, which are
characterized by rapid technological change, product obsolescence, diminished
product demand, accelerated price erosion and overcapacity. Currently, the
semiconductor industry is in the midst of such a downturn. These downturns
often occur in connection with, or in anticipation of, maturing product
cycles (of both the semiconductor companies and their "end customers") and
declines in general economic conditions. Some of these downturns have lasted
for more than a year. Also, during such periods, customers of semiconductor
manufacturers benefiting from shorter lead times may delay some purchases of
semiconductors into future periods.
The current semiconductor industry downturn began in the fourth
quarter of 1995. The economic recessions in Japan and in other countries in
the Asia Pacific region have made the current downturn in the semiconductor
industry worse. The economies in these regions are contracting, and demand
for semiconductors and silicon wafers in these regions 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
13
<PAGE>
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.
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
14
<PAGE>
Although GateField has obtained patents covering aspects of its
ProASIC and related technologies, no assurance can be given that GateField's
patents will be determined to be valid or that any assertions of infringement
or invalidity by other parties (or claims for indemnity from customers
resulting from any infringement claims) will not be successful. Although the
Company is not currently a party to any material litigation, the
semiconductor industry is characterized by frequent claims regarding patent
and other intellectual property rights. As is typical in the semiconductor
industry, the Company from time to time receives communications from third
parties asserting patents on certain of the Company's technologies. In the
event any third party were to make a valid claim against the Company, the
Company could be required to discontinue the use of certain processes or
cease the use, import and sale of infringing products, to pay substantial
damages and to develop non-infringing technologies or to acquire licenses to
the alleged infringed technology. The Company's business, financial condition
and results of operations could be materially and adversely affected by such
developments. Litigation, which could result in substantial cost to and
diversion of resources of the Company, may also be necessary to enforce
patents or other intellectual property rights of the Company or to defend the
Company against claimed infringement of the rights of others. The failure to
obtain necessary licenses or the occurrence of litigation relating to patent
infringement or other intellectual property matters could have a material
adverse effect on the Company's business, financial condition and results of
operations.
PROTECTION OF INTELLECTUAL PROPERTY
GateField has historically devoted significant resources to research
and development. It believes that the intellectual property derived from
research and development is a valuable asset that has been and will continue
to be important to the success of the company's business. GateField relies
primarily on a combination of nondisclosure agreements, other contractual
provisions, and patent and copyright laws to protect its proprietary rights.
No assurance can be given that the steps taken by GateField will be adequate
to protect its proprietary rights. In addition, the laws of certain
territories in which GateField's products are or may be developed,
manufactured or sold, including Asia and Europe, may not protect the
company's products and intellectual property rights to the same extent as the
laws of the United States. Failure of GateField to enforce its patents or
copyrights or to protect its trade secrets could have a material adverse
effect on the company's business, financial condition and results of
operations.
RELIANCE ON INTERNATIONAL SALES
In the past, GateField has operated sales offices in England,
Germany and Japan. Sales from these offices were in the local currency and,
therefore, exposed the company to currency exchange fluctuations. Sales to
customers located outside the United States accounted for approximately 30%
in 1998, 48% in 1997 and 31% in 1996. Of these sales, sales to customers
located in the Asia Pacific region and Japan accounted for approximately 25%,
28% and 18% of net revenues for 1998, 1997 and 1996, respectively.
GateField is in the process of closing down the operations of all of
its foreign offices and expects such closures to occur by the end of the
third quarter of 1999. Prior to such time, the company will experience the
risks associated with having a high concentration of international sales.
Although GateField is closing its foreign sales offices, it expects
that revenues derived from international sales will continue to represent a
significant portion of the company's total revenues because of its marketing
relationship with Actel. Further, such direct foreign sales are denominated
in U.S. dollars. Therefore, GateField's products become less price
competitive in countries with currencies that are declining in value against
the dollar. International sales are subject to a variety of risks, including
longer payment cycles, greater difficulty in accounts receivable collection,
currency restrictions, tariffs, trade barriers, taxes, export license
requirements and the impact of recessionary environments in economies outside
the United States.
15
<PAGE>
In evaluating new product decisions, GateField must anticipate well
in advance both the future demand and the technology that will be available
to supply such demand. Failure to anticipate customer demand, delays in
developing new products with anticipated technological advances and failure
to coordinate the design and development of silicon and associated software
products each could have a material adverse effect on GateField's business,
financial condition and results of operation.
In addition, there are greater technological and operational risks
associated with new products. Several factors could have a material adverse
effect on GateField's business, financial condition and results of
operations: the inability of Siemens to produce GateField's 0.25-micron
products; delays in commencing or maintaining volume shipments of new
products; the discovery of product, process, software or programming
failures; and any related product returns. No assurance can be given that any
other new products will gain market acceptance or that GateField will respond
effectively to new technological changes or new product announcements by
others. Any failure of GateField or its strategic partners to successfully
define, develop, market, manufacture, assemble or test competitive new
products could have a material adverse effect on its business, financial
condition and results of operations.
DEPENDENCE ON INTERNATIONAL OPERATIONS
GateField buys all of its wafers from foreign foundries and has most
of its commercial products assembled, packaged and tested by subcontractors
located outside the United States. These activities are subject to the
uncertainties associated with international business operations, including
trade barriers and other restrictions, changes in trade policies, foreign
governmental regulations, currency exchange fluctuations, reduced protection
for intellectual property, war and other military activities, terrorism,
changes in political or economic conditions and other disruptions or delays
in production or shipments, any of which could have a material adverse effect
on the company's business, financial condition and results of operations.
"BLANK CHECK" PREFERRED STOCK
GateField's Certificate of Incorporation authorizes the issuance of
up to 2,000,000 shares of "blank check" preferred stock (of which 1,682,000
shares remain available for issuance), with such designations, rights and
preferences as may be determined from time to time by the GateField Board of
Directors. Accordingly, the board is empowered, without approval by holders
of the company's common stock, to issue preferred stock with dividend,
liquidation, redemption, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the
common stock. Issuance of the preferred stock could be used as a method of
discouraging, delaying or preventing a change in control of GateField. In
addition, such issuance could adversely affect the market price of
GateField's common stock. In order to raise capital, the company may issue
additional shares of its preferred stock in the future.
FORWARD-LOOKING STATEMENTS
All forward-looking statements contained in this Quarterly Report on
Form 10-Q, including all forward-looking statements contained in any document
incorporated herein by reference, are made pursuant to the safe harbor
provisions of the Public Securities Litigation Reform Act of 1995. Words such
as "anticipates," "believes," "estimates," "expects," intends," "plans,"
"seeks" and variations of such words and similar expressions are intended to
identify the forward-looking statements. The forward-looking statements
include projections relating to trends in markets, revenues, average selling
prices, gross margin, wafer yields, research and development expenditures,
selling, general and administrative expenditures and the Year 2000 compliance
issue.
All forward-looking statements are based on current expectations and
projections about the semiconductor industry and programmable logic market,
and assumptions made by GateField's management that reflect its best judgment
based on other factors currently known by management, but they are not
guarantees of future performance. Accordingly, actual events and results may
differ materially from those expressed or forecast in the forward-looking
statements due to the risk factors identified herein or for other reasons.
GateField undertakes no obligation to update any forward-looking statement
contained in this Quarterly Report on Form 10-Q or incorporated by reference
in the Company's Annual Report on Form 10-K.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GATEFIELD CORPORATION
Date: May 17, 1999
/s/ Timothy Saxe
-------------------------------------
Timothy Saxe
President and Chief Executive Officer
/s/ James B. Boyd
-------------------------------------
James B. Boyd
Chief Accounting Officer & Corporate
Controller
18
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