<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 JUNE 30, 2000 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission file number 0-13244
GATEFIELD CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 41-1404495
(State of incorporation) (I.R.S. Employer Identification No.)
47436 FREMONT BLVD. FREMONT, CALIFORNIA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 623-4400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
TITLE OF EACH CLASS OUTSTANDING AT AUGUST 7, 2000
------------------- -----------------------------
Common stock, par value $0.10 per share 6,177,163
<PAGE>
GATEFIELD CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations and Comprehensive
Loss for the Three Months Ended June 30, 2000 and June 30, 1999 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2000 and June 30, 1999 5
Notes to Condensed Consolidated Financial Statements, June 30, 2000 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATEFIELD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 879 $ 5,418
Accounts receivable, less allowance for doubtful
accounts of $6 in 2000 and $359 in 1999 27 33
Inventories - -
Other current assets 143 205
----------- ------------
Total current assets 1,049 5,656
Property and equipment, net 1,285 1,423
Other assets 71 6
----------- ------------
Total assets $ 2,405 $ 7,085
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 202 $ 244
Accounts payable 595 1,586
Accrued expenses 647 825
Deferred revenues 2,959 3,562
----------- ------------
Total current liabilities 4,403 6,217
Long-term obligations 1,000 8,079
----------- ------------
Total liabilities 5,403 14,296
Redeemable Preferred Stock:
$0.10 par value; 2,000,000 shares authorized; shares issued
and outstanding: 0 in 2000 and 318,000 in 1999 - 3,086
Stockholders' deficit:
Common Stock:
$0.10 par value; 65,000,000 shares authorized; shares issued
and outstanding; 6,157,173 in 2000 and 4,693,000 in 1999 616 469
Additional paid-in capital 97,339 86,307
Accumulated other comprehensive loss (469) (489)
Accumulated deficit (100,484) (96,584)
----------- ------------
Total stockholders' deficit (2,998) (10,297)
----------- ------------
Total liabilities and stockholders' deficit $ 2,405 $ 7,085
=========== ============
</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 Six Months Ended
June 30, June 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product $ 312 $ 482 $ 625 $ 624
Service 180 490
------- ------- ------- -------
Total revenues 312 662 625 1,114
------- ------- ------- -------
Cost of revenues:
Product 75 332 153 569
Service -- -- -- 138
------- ------- ------- -------
Total cost of revenues 75 332 153 707
------- ------- ------- -------
Gross profit 237 330 472 407
------- ------- ------- -------
Operating expenses:
Sales and marketing 67 197 219 385
Research and development 1,812 1,079 3,417 2,426
General and administrative 904 693 667 1,433
------- ------- ------- -------
Total operating expenses 2,783 1,969 4,303 4,244
------- ------- ------- -------
Operating loss (2,546) (1,639) (3,831) (3,837)
------- ------- ------- -------
Other income (expense):
Interest expense, net (34) (1,209) (81) (1,221)
Other income (expense), net 19 1 12 (31)
------- ------- ------- -------
Total other income (expense) (15) (1,208) (69) (1,252)
Net loss $(2,561) $(2,847) $(3,900) $(5,089)
Other comprehensive loss:
Currency translation adjustments $ 3 $ 18 $ (20) $ 36
======= ======= ======= =======
Comprehensive loss $(2,558) $(2,829) $(3,920) $(5,053)
======= ======= ======= =======
Loss attributable to common stockholders $(2,561) $(2,848) $(3,901) $(5,090)
======= ======= ======= =======
Basic and diluted net loss per share $ (0.48) $ (0.68) $ (0.78) $ (1.21)
======= ======= ======= =======
Basic and diluted weighted average shares outstanding 5,298 4,207 5,001 4,215
======= ======= ======= =======
</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>
Six Months Ended June 30,
(IN THOUSANDS) 2000 1999
---------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net loss $(3,900) $(5,089)
Reconciliation to net cash used in operating activities:
Depreciation and amortization 288 480
Noncash subordinated convertible debt interest -- 1,231
Changes in assets and liabilities:
Accounts receivable 6 213
Inventories -- 108
Other assets (3) (544)
Accounts payable and accrued expenses (1,128) (1,185)
Deferred revenues (603) (478)
------- -------
Net cash used in operating activities (5,340) (5,264)
------- -------
Investing activities:
Property and equipment purchases, net (139) --
------- -------
Net cash used in investing activities (139) --
------- -------
Financing activities:
Proceeds from issuance of convertible note -- 8,000
Principal payments on long term debt & capital lease
obligations (80) (228)
Proceeds from issuance of common stock 1,000 161
------- -------
Net cash provided by financing activities 920 7,933
Effect of exchange rate changes on cash and cash equivalents 20 (78)
------- -------
Net change in cash and cash equivalents (4,539) 2,591
Cash and cash equivalents, beginning of period 5,418 3,832
------- -------
Cash and cash equivalents, end of period $ 879 $ 6,423
======= =======
Supplemental disclosure of cash flow information:
Noncash activities:
Accrued dividends on preferred stock $ 1 $ 1
Cash activities:
Cash paid during the year for interest $ 18 $ 25
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
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GATEFIELD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the financial
statements, during the quarters ended June 30, 2000 and 1999, GateField
Corporation, ("GateField" or the "Company") incurred net losses of approximately
$2,561,000 and $2,847,000, respectively. Additionally, the Company had
stockholders' deficits of approximately $2,998,000 at June 30, 2000 and
$10,297,000 at December 31, 1999, 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. No assurance can be
given that the Company will be successful in these efforts.
Interim results of operations are not necessarily indicative of the
results to be expected for the full year. The Company's interim fiscal quarter
ended on June 30, 2000 and 1999, respectively. In the opinion of the Company,
all adjustments (consisting only of normal, recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
June 30, 2000, and for all periods presented, have been made. These condensed
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's December 31, 1999 Annual Report on
Form 10-K.
2. MERGER AGREEMENT
On May 24, 2000 GateField and Actel Corporation ("Actel") signed an
Agreement and Plan of Merger, which was amended and restated on May 31, 2000
(the "Merger Agreement"). In the proposed merger, GateField will merge into a
wholly-owned subsidiary of Actel and each GateField stockholder will receive
cash consideration of $5.25 per share of outstanding common stock held by
such stockholder (the "Merger"). The Merger is subject to approval by
GateField stockholders at a special meeting that the Company anticipates will
be held in September 2000. Under the Merger Agreement Actel converted its
$8.0 million Convertible Promissory Note and Actel and Idanta Partners, Inc.
converted their GateField preferred stock into GateField common stock. Both
parties agreed to vote their shares of common stock for approval of the
Merger and the Merger Agreement. In the event of a termination of the Merger
Agreement by either GateField or Actel, the terminating party must either
loan or sell the non-terminating party a $3.0 million convertible promissory
note at an effective conversion rate of $5.25 per share of common stock, at
an interest rate equal to 100% of the applicable federal rate. A preliminary
proxy statement describing the Merger and setting forth the date of the
special meeting is under review by the Securities and Exchange Commission
(the "Commission") and will be mailed to stockholders as soon as the
Commission has completed its review.
3. CONVERTIBLE PROMISSORY NOTES
In May 2000, the Company issued a convertible promissory note in the
aggregate principal amount of $1.0 million (the May 2000 Note). The May 2000
Note accrues interest at 6.25% per annum, has a five-year term and is secured by
a
6
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lien against all the assets of the Company. The May 2000 Note is convertible
into 35,000 shares of the Company's Series C-2 convertible preferred stock. The
Series C-2 convertible preferred stock is in turn convertible into 190,476
shares of the Company's common stock, at the equivalent price of $5.25 per share
of common stock. The May 2000 Note is convertible at the option of the
noteholder.
In August 2000, the Company issued a convertible promissory note in the
aggregate principal amount of $2.75 million (the August Note). The August Note
accrues interest at 6.25% per annum, has a five-year term and is secured by a
lien against all the assets of the Company. The August Note is convertible into
96,250 shares of the Company's Series C-2 convertible preferred stock. The
Series C-2 convertible preferred stock is in turn convertible into 523,809
shares of the Company's common stock, at the equivalent price of $5.25 per share
of common stock. The May 2000 Note is convertible at the option of the
noteholder.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION IN THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT
PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING THE COMPANY'S
EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "FACTORS AFFECTING FUTURE RESULTS" AS WELL AS THOSE DISCUSSED IN
THIS SECTION AND ELSEWHERE IN THIS REPORT, AND THE RISKS DISCUSSED IN THE
COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
Total revenues for the quarters ended June 30, 2000 and 1999 were
$312,000 and $662,000, respectively, a decrease of 53%. Total ProASIC product
revenues for the second quarter of 2000 decreased to $312,000 from $482,000
in the second quarter of 1999. ProASIC product revenues in 2000 consisted
entirely of deferred revenue from license fees from Rohm Co. Ltd that were
collected in fiscal 1998. ProASIC revenue in the second quarter of 1999
consisted of $312,000 in deferred revenue from license fees and $170,000 in
hardware sales of its 0.72-micron product that was terminated in 1999.
Revenues in the year 2000, if any, will come from the Company's anticipated
introduction of its 0.25-micron products. The Company began sampling its
0.25-micron product to initial customers in the first quarter of 1999 and
began shipping engineering samples in limited volumes in the fourth quarter
of 1999. The Company does not expect to begin shipment of pre-production
quality parts for this family until the third quarter of 2000 and does not
expect sales to reach a volume that could generate operating cash flow
break-even in fiscal year 2000. While the Company expects to have the
capacity to produce pre-production parts in volume in the third quarter of
2000 there can be no assurance that sales will indeed begin at that time, if
at all. Nor can there be any assurance how many products will be introduced
in 2000 or in what packages or volumes those products will ship or that units
sold will be at prices that generate a positive gross margin. In addition, it
is impossible to anticipate the degree of market acceptance of this new
technology, or whether it will be accepted at all. Therefore neither revenues
nor margins associated with the new 0.25-micron product can 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 its business, financial
condition and result of operations.
Service revenues for the quarters ended June 30, 2000 and 1999 were
$nil and $180,000, respectively. Service revenues in 1999 represent the
Company's portion of a profit sharing agreement with the purchaser of the
verification assets that were sold in 1997. The Company does not expect revenues
from services in fiscal 2000.
Total revenue for the six months ended June 30, 2000 decreased to
$625,000 from $1,114,000 for the same period last year. Product revenue for
the six months ended June 30, 2000 and 1999 was $625,000 and $624,000
respectively and for both periods, is derived solely from the amortization of
deferred revenue. Service revenue was zero for the six months ended June 30,
2000; compared to $490,000 for the same period last year. The decline service
revenue represents termination of the profit sharing arrangement with the
purchaser of those assets.
7
<PAGE>
GROSS PROFIT
Gross profit for the quarters ended June 30, 2000 and 1999 was
$237,000, and $330,000, respectively. Gross profit as a percentage of total
revenues was 76% in the second quarter of 2000 and 50% in the second quarter of
1999.
Gross profit from ProASIC product revenues for the quarter ended June
30, 2000 was $237,000, as compared to a gross profit of $150,000 at June 30,
1999. The increase in margin reflects slightly lower overhead costs required to
maintain the company's manufacturing capabilities until product sales begin. The
0.25-micron product has not yet been manufactured in commercial quantities and
commercial sales have not yet begun, therefore the gross profit from ProASIC
products for the quarter does not in any way represent expected margins on this
product family. Accordingly, the Company cannot predict its margins for the year
2000 with any degree of certainty.
Gross profit from service revenues was $180,000 in the quarter ended
June 30, 1999 and relates to maintenance contracts on the verification
systems. The verification maintenance revenues and, hence, the related gross
profits ceased in 1999 and, therefore, the Company does not expect any gross
margin contribution from this source in fiscal 2000.
Gross profit for the six-month period ended June 30, 2000 was
$472,000 compared to $407,000 for the same period last year. The gross profit
from product revenues was $472,000 or 76% of revenues, as compared to a gross
profit of $55,000 for the same period last year. The costs incurred for the
six-month period ended June 30, 2000 represents the overhead costs of
maintaining the manufacturing function applied against the amortization of
deferred revenue during the period. During the same period last year the
company had higher overhead costs resulting in the lower margins. Gross
profit from service revenues was zero for the six months ended June 30, 2000
compared to $352,000, or 72%, for the same period last year.
SALES AND MARKETING
Sales and marketing expenses were $67,000 for the quarter ended June
30, 2000 and $197,000 for the quarter ended June 30, 1999. Expenses incurred in
the second quarters of 2000 and 1999 related to the Company's efforts to support
strategic initiatives and product designs and the 66% decline represents reduced
headcount and expenses associated with new designs in 1999.
RESEARCH AND DEVELOPMENT
Research and development expenses for the quarter ended June 30, 2000
were $1,812,000 as compared to $1,079,000 for the quarter ended June 30, 1999.
The increase in quarterly expenses is due to an increase in the number of
engineering lots produced in order to resolve process related issues encountered
in commercializing the manufacturing process for the 0.25-micron product. The
Company expects quarterly research and development expenses to increase slightly
over the remaining half of the year due to a continuation of the Company's
efforts to stabilize and improve the current 0.25-micron product manufacturing
process, the development of new products and the migration to smaller
geometries.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended June 30,
2000 and 1999 were $904,000 and $693,000, respectively. The increase in the
second quarter of 2000 is due to increased legal, investment banking and
accounting fees as well as directors and officers insurance expenses incurred in
connection with the Merger. G&A expenses could experience significant increases
in future quarters due to additional legal and accounting expenses related to
the Merger.
OTHER INCOME AND EXPENSES
Other expenses for the quarter ended June 30, 2000 were $15,000 as
compared to other expenses of $1,208,000 for the quarter ended June 30, 1999.
The reduction in other expenses for the current quarter reflect lower interest
expense due to the conversion of a $8.0 million convertible promissory note into
common stock in May 2000, as more fully described in Note 2 above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had cash and cash equivalents of
approximately $879,000 and a working capital deficit of $3.4 million. During the
quarters ended June 30, 2000, and 1999, GateField incurred net losses of
approximately $2.6 million and $2.8 million, respectively. The Company expects
to continue to generate such losses for at least the remainder of 2000. In
August 2000, the Company entered into a $2.75 million convertible promissory
note that the
8
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Company expects will cover its cash flow requirements through September 30,
2000. However, the Company estimates it will have exhausted all of its
currently available capital resources on or about September 30, 2000.
Thus the Company will be unable to continue as a going concern if
sufficient funding is not arranged before September 30, 2000.
Cash used in operations was $5.3 million in the first six months of
2000 compared to the same amount of $5.3 million for the first six months of
1999. Net cash used by investing activities during the six-month period ended
June 30, 2000 was $139,000 for acquisition of equipment. GateField expects it
would need to invest a minimum of $700,000 and possibly as much as $1.5 million
in mask sets for its new 0.25-micron and smaller geometries product in 2000, but
does not anticipate any other significant capital asset acquisitions.
Net cash provided by financing activities was $920,000 for the six
months ended June 30, 2000, which represents the net proceeds of a $1.0
million convertible promissory note issued in May 2000 partially offset by
the payment of long term obligations. Net cash provided by financing
activities in the first six months of 1999 was $7.9 million and represents
the net proceeds of an $8.0 million convertible promissory note issued in May
1999.
The Company currently anticipates that capital in the aggregate
principal amount of $3.0 million to $6.0 million would meet the Company's
capital requirements through 2000 and an additional $6.0 million to $10.0
million would be needed through 2001. However, the Company's capital
requirements may be greater than anticipated. There can be no assurance that
such amounts, if available to the Company, will be sufficient to meet the
Company's capital requirements.
FACTORS AFFECTING FUTURE RESULTS
IMMEDIATE NEED FOR ADDITIONAL FUNDING
At June 30, 2000, the Company had cash and cash equivalents of
approximately $879,000 and a working capital deficit of $3.4 million. During the
six-month periods ended June 30, 2000 and 1999, the Company incurred net losses
of approximately $3.9 million and $5.1 million, respectively. The Company has
not reported an operating profit since fiscal 1995. In addition, a substantial
number of parts will have to be sold on a quarterly basis before the Company can
achieve quarterly profitability. Several factors, including gross margins,
market acceptance and competitive factors, make it impossible to predict with
any degree of assurance when or whether the Company will attain profitability.
Accordingly, GateField cannot predict how long it will continue to experience
significant or increasing operating and net losses, or whether or if it will
become profitable. The Company expects to continue to generate such losses for
at least the remainder of 2000. The Company expects that it will have utilized
all of its currently available assets on or about September 30, 2000. If
sufficient funding is not then available, the Company will be unable to continue
as a going concern.
NO ASSURANCE OF FUTURE FUNDING
GateField must continue to make significant investments in research
and development to bring its technology to market and to remain competitive.
Our 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 the
Merger does not occur and existing resources and future earnings are
insufficient to fund the Company's operations, GateField will 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 could be significantly 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. If the Merger is not successful or adequate funds
are not available, the Company would be required to delay, limit or eliminate
some or all of its proposed operations and indeed may be required to cease
operations and seek bankruptcy protection. (See "Liquidity and Capital
Resources"). Unless the Merger is consummated or the Company obtains additional
funding, the Company will have utilized all its currently available resources on
or about September 30, 2000.
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The Company currently anticipates that capital in the aggregate
principal amount of $3.0 million to $6.0 million would meet the Company's
capital requirements through 2000 and an additional amount of $6.0 million to
$10.0 million would be needed through 2001. However, the Company's capital
requirements may be greater than anticipated. There can be no assurance that
such amounts, even if available to the Company, will be sufficient to meet the
Company's capital requirements.
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 of 0.25-micron generation products.
GateField is currently completing 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 and began limited shipments of
engineering samples to select customers in the fourth quarter of 1999. The
Company currently believes it has a design capable of yielding pre-production
parts however it has experienced significant lot-to-lot variation and has to
date been unable to qualify its parts for production status and begin volume
shipments to customers. No assurance can be given that the Company's design
and manufacturing process issues can be resolved nor can the Company ensure
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, that they will achieve market acceptance. To the extent that
the Company's development and commercialization efforts with respect to the
0.25-micron products are unsuccessful or if these products do not achieve
market acceptance, the Company's business, financial condition and results of
operations would be materially adversely affected.
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 0.25-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, Infineon manufactures GateField's 0.25-micron ProASIC
products at their wafer fabrication facility located in Dresden, Germany. This
dependence on a single foundry subjects the Company to risks associated with an
interruption of supply from a single source.
GateField plans to initially produce its 0.25-micron products in
relatively low volumes. Still, it will be competing with Infineon's internal
requirements for production capacity and the attention of Infineon's process
engineers. The company's reliance on Infineon 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 is working to bring up
a second source but there can be no assurance that its efforts will be
successful or that other factors will not interrupt supply.
GateField has in the past experienced delays in obtaining wafers from
its foundries, and there can be no assurance that the Company will not
experience similar or more severe delays in the future. Although GateField has
supply agreements with Infineon, a shortage of raw materials or production
capacity could lead Infineon to allocate available capacity to customers other
than GateField or 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
10
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condition and results of operations. These risks are particularly
pronounced with respect to the Company's current reliance on Infineon 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 Infineon to develop and improve the manufacturing processes relating to
GateField's 0.25-micron product family. If Infineon were unable or unwilling
to manufacture such products as anticipated by GateField, GateField would be
unable to introduce such products to market on a timely basis, which would
have a material adverse effect on the Company's business, financial condition
and results on operations.
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.
In the event the Merger does not occur, 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. In
addition, 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 Infineon's manufacturing cost reductions.
The product marketing agreement with Actel contains certain GateField
milestones relating to the development schedule and manufacturing costs of the
0.25-micron product family. The agreement also contains Actel milestones with
respect to the marketing and sale of the 0.25-micron products (including certain
revenue targets). If GateField fails to achieve such cost milestones, it must
notify Actel and seek their consent to its corrective action. GateField has so
notified Actel and the two companies are jointly working on corrective measures.
Should Actel decide it is not in their best interest to support these corrective
actions it may take GateField longer to resolve the delays. Loss of cooperation
and support from Actel could divert resources from other GateField development
efforts and disrupt the Company's development efforts with respect to the
0.25-micron product family. The delays in meeting GateField's milestones relieve
Actel from its milestones as set forth in the Product Marketing Agreement. 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
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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 James B. Boyd, its chief
financial 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, Infineon will
require significant lead-time to reach volume production on new processes.
Accordingly, no assurance can be given that volume production or acceptable
yields with respect to GateField's new 0.25-micron product family will be
achieved on a timely basis or at all.
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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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. 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.
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
Field Application Engineer ("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 or eliminates gross
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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. In 1999 and 2000 GateField experienced process
problems at Infineon that caused the introduction of its 0.25-micron product
family to be significantly delayed. Once production of commercially
acceptable product begins 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
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
GateField expects that revenues indirectly derived from international
sales will represent a significant portion of the Company's total revenues
received through its marketing relationship with Actel. Further, such 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.
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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 0.25-micron ProASIC products.
In evaluating new product decisions, GateField must anticipate well in
advance both the future demand and the technology that will be available to
supply such demand. Failure to anticipate customer demand, delays in developing
new products with anticipated technological advances and failure to coordinate
the design and development of silicon and associated software products each
could have a material adverse effect on GateField's business, financial
condition and results of operation.
In addition, there are greater technological and operational risks
associated with new products. Several factors could have a material adverse
effect on GateField's business, financial condition and results of operations:
the inability of Infineon 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 (1,261,997)
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The GateField Corporation is exposed to a variety of risks, including
changes in interest rates affecting the return on its investments and foreign
currency fluctuations. The Company has established policies and procedures to
manage its exposure to fluctuations in interest rates and foreign currency
exchanged.
INTEREST RATE RISK. 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
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December 31, 1999, the fair value of the portfolio would not decline by a
material amount. GateField does not use derivative financial instruments to
mitigate risks. However, it does have an investment policy that would allow
it to invest in short-term investments such as money market instruments and
corporate debt securities. The Company's policy does attempt to reduce such
risks by typically limiting the maturity date of such securities to no more
than eighteen months with a maximum average maturity to its whole portfolio
of such investments at six months, placing its investments with high credit
quality issuers and limiting the amount of credit exposure with any one
issuer.
FOREIGN CURRENCY EXCHANGE RATE RISK. GateField's exposure to market
risk due to fluctuations in foreign currency exchange rates relates primarily to
the intercompany balances with its UK, German and Japanese subsidiaries. The
Company closed these subsidiaries in 1999 and only has some insignificant cash
balances remaining in these countries. 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 the pound, mark, yen or other currencies. The
Company would not experience a material foreign exchange loss based on a
hypothetical 10% adverse change in the price of the pound, 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1* Amended and Restated Agreement and Plan of Merger, dated May 31, 2000
10.2 Convertible Promissory Note--$1.0 million, dated May 25, 2000
10.3 Security Agreement, dated May 25, 2000
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
-----------
* Exhibit 10.1 is incorporated herein by reference to the Company's amended
and revised Schedule 14A, filed on August 17, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 21, 2000 GATEFIELD CORPORATION
/s/ Timothy Saxe
-------------------------------------
Timothy Saxe
President and Chief Executive Officer
/s/ James B. Boyd
-------------------------------------
James B. Boyd
Chief Financial Officer
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