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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 SEPTEMBER 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 NOVEMBER 02, 2000
------------------- --------------------------------
Common stock, par value $0.10 per share 6,177,163
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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 September 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations and Comprehensive
Loss for the Three and Nine Months Ended September 30, 2000 and
September 30, 1999 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and September 30, 1999 5
Notes to Condensed Consolidated Financial Statements,
September 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 16
PART II. OTHER INFORMATION
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 18
</TABLE>
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GATEFIELD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2000 (unaudited) 1999 (audited)
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 338 $ 5,418
Accounts receivable, less allowance for doubtful
accounts of $6 in 2000 and $536 in 1999 - 33
Other current assets 186 205
--------- ---------
Total current assets 524 5,656
Property and equipment, net 1,267 1,423
Other assets 100 6
--------- ---------
Total assets $ 1,891 $ 7,085
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 128 $ 1,586
Accrued expenses 1,151 825
Deferred revenues 2,651 3,562
Current portion of long-term obligations 141 244
--------- ---------
Total current liabilities 4,071 6,217
Long-term obligations 3,750 8,079
--------- ---------
Total liabilities 7,821 14,296
Redeemable Preferred Stock-at redemption value:
$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: 6,177,000 in 2000 and 4,693,000 in 1999 618 469
Additional paid-in capital 97,400 86,307
Accumulated other comprehensive loss (469) (489)
Accumulated deficit (103,479) (96,584)
--------- ---------
Total stockholders' deficit (5,930) (10,297)
--------- ---------
Total liabilities and stockholders' deficit $ 1,891 $ 7,085
========= =========
</TABLE>
See Accompanying Notes To Condensed Consolidated Financial Statements
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GATEFIELD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product $ 312 $ 377 $ 937 $ 1,001
Service - 33 - 523
------- ------ ------- ------
Total revenues 312 410 937 1,524
------- ------ ------- ------
Cost of revenues:
Product 87 395 240 964
Service - 10 - 149
------- ------ ------- ------
Total cost of revenues 87 405 240 1,113
------- ------ ------- ------
Gross margin 225 5 697 411
------- ------ ------- ------
Operating expenses:
Sales and marketing 61 183 281 568
Research and development 2,395 1,090 5,811 3,515
General and administrative 714 661 1,380 2,094
------- ------ ------- ------
Total operating expenses 3,170 1,934 7,472 6,177
------- ------ ------- ------
Operating loss (2,945) (1,929) (6,775) (5,766)
------- ------ ------- ------
Other income (expense):
Interest expense, net (47) (66) (129) (1,287)
Other income (expense), net (1) 120 11 89
------- ------ ------- -------
Total other income (expense) (48) 54 (118) (1,198)
------- ------ ------- -------
Net loss (2,993) (1,875) (6,893) (6,964)
Other comprehensive gain (loss):
Currency translation adjustments - 93 (20) 128
------- ------ ------- --------
Comprehensive loss $(2,993) $(1,782) $(6,913) $(6,836)
======== ======= ======== =========
Loss attributable to common stockholders $(2,994) $(1,876) $(6,896) $(6,967)
======== ======= ======== =========
Basic and diluted net loss per share $ (0.49) $ (0.44) $ (1.28) $ (1.65)
======== ======= ======== =========
Basic and diluted weighted average shares outstanding 6,170 4,222 5,394 4,211
======== ======= ======== =========
</TABLE>
See Accompanying Notes To Condensed Consolidated Financial Statements.
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GATEFIELD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(In thousands) 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net loss $ (6,893) $ (6,964)
Reconciliation to net cash used in operating activities:
Depreciation and amortization 264 695
Non-cash subordinated convertible debt interest - 1,231
Changes in assets and liabilities:
Accounts receivable 33 412
Inventories - (358)
Other assets (75) (479)
Accounts payable and accrued expenses (1,127) (118)
Deferred revenues (911) (800)
-------- ------
Net cash used in operating activities (8,709) (6,381)
-------- -------
Investing activities:
Property and equipment purchases, net (108) (830)
-------- --------
Net cash provided (used) in investing activities (108) (830)
-------- --------
Financing activities:
Proceeds from issuance of convertible note 3,750 8,000
Proceeds from issuance of common stock 149 3,226
Principal payments on long term debt & capital lease obligations (182) (329)
-------- --------
Net cash provided by financing activities 3,717 10,897
Effect of exchange rate changes on cash and cash equivalents 20 (118)
-------- --------
Net change in cash and cash equivalents (5,080) 3,568
Cash and cash equivalents, beginning of period 5,418 3,832
------- --------
Cash and cash equivalents, end of period $ 338 $ 7,400
========== ========
Supplemental disclosure of cash flow information:
Cash activities:
Cash paid during the year for interest $ 26 $ 159
</TABLE>
See Accompanying Notes To Condensed Consolidated Financial Statements.
5
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GATEFIELD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 September 30, 2000 and 1999, GateField
Corporation, ("GateField" or the "Company") incurred net losses of approximately
$2,993,000 and $1,782,000, respectively. Additionally, the Company had
stockholders' deficits of approximately $5,930,000 at September 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 an independent 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 quarters
ended on September 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 September 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. CONVERTIBLE PROMISSORY NOTE
In August 2000, the Company issued a convertible promissory note in
the aggregate principal amount of $2,750,000 (the "August 2000 Note"). The
August 2000 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
2000 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 523,810 shares of the Company's common stock, at the
equivalent price of $5.25 per share of common stock. The August 2000 Note is
convertible at the option of the noteholder.
3. SUBSEQUENT EVENTS
CONVERTIBLE PROMISSORY NOTE
In October 2000, the Company issued a convertible promissory note in
the aggregate principal amount of $3,250,000 (the "October 2000 Note"). The
October 2000 Note accrues interest at 5.96% per annum, has a five-year term
and is secured by a lien against all the assets of the Company. The October
2000 Note is convertible into 113,750 shares of the Company's Series C-2
convertible preferred stock. The Series C-2 convertible preferred stock is in
turn convertible into 619,048 shares of the Company's common stock, at the
equivalent price of $5.25 per share of common stock. The October 2000 Note is
convertible at the option of the noteholder.
SPECIAL MEETING OF STOCKHOLDERS
On November 10, 2000, the Company held a Special Meeting of its
stockholders to approve and adopt an
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Amended and Restated Agreement and Plan of Merger dated May 31, 2000 by and
among the Company, Actel Corporation, a California corporation and a
principal stockholder of the Company ("Actel"), GateField Acquisition
Corporation, a Delaware Corporation and wholly-owned subsidiary of Actel
("GAC"), and Idanta Partners Ltd., a Texas Limited Partnership and principal
stockholder of the Company. Pursuant to this agreement, GAC will merge with
and into the Company with the Company continuing as the surviving corporation
and a wholly-owned subsidiary of Actel. Results of the Special Meeting may be
found in "Submission of Matters to a Vote of Security Holders" at page 17
below.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION IN THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT
PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING THE COMPANY'S
EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "FACTORS AFFECTING FUTURE RESULTS" AS WELL AS THOSE DISCUSSED IN
THIS SECTION AND ELSEWHERE IN THIS REPORT, AND THE RISKS DISCUSSED IN THE
COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
Total revenues for the quarters ended September 30, 2000 and 1999 were
$312,000 and $410,000, respectively, a decrease of 24%. Total ProASIC product
revenues for the third quarter of 2000 decreased to $312,000 from $377,000 in
the third 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 third quarter of 1999 consisted of $312,000
in deferred revenue from license fees and $65,000 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 fourth
quarter of 2000 and does not expect sales to reach a volume that could generate
operating cash flow break-even for at least the next two quarters. . While the
Company expects to have the capacity and capability to produce pre-production
parts in the fourth 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. 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, 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 and to achieve market acceptance of such products on a
timely basis would have a material adverse effect on its business, financial
condition and result of operations.
Service revenues for the quarters ended September 30, 2000 and 1999
were $0 and $33,000, 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 nine months ended September 30, 2000 decreased to
$937,000 from $1,524,000 for the same period last year. Product revenue for the
nine months ended September 30, 2000 and 1999 was $937,000 and $1,001,000
respectively. Product revenue for the nine months ended September 30, 2000 is
derived solely from the amortization of deferred revenue. For the first nine
months of 1999, $872,000 was from deferred revenue and $65,000 from sale of our
0.72-micron product. Service revenue was $0 for the nine months ended September
30, 2000, compared to $523,000 for the same period last year. The decline in
service revenue represents termination of the profit sharing arrangement with
the purchaser of those assets.
7
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GROSS PROFIT
Gross profit for the quarters ended September 30, 2000 and 1999 was
$225,000, and $5,000, respectively. Gross profit as a percentage of total
revenues was 72% in the third quarter of 2000 and 1% in the third quarter of
1999. The cost of sales in the current quarter represents manufacturing overhead
and is unrelated to the deferred revenue which made up all of the sales for the
period and therefore the 72% margin does not represent expected margins on the
new 0.25-micron product and thus the results of the quarter should not be used
as a basis for predicting future financial results.
Gross profit from ProASIC product revenues for the quarter ended
September 30, 2000 was $225,000, as compared to a gross loss of $18,000 for the
quarter ended September 30, 1999. 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 both quarters does not in
any way represent expected margins on this product family. Accordingly, the
Company cannot predict its margins for the balance of 2000 or the year 2001 with
any degree of certainty.
Gross profit from service revenues was $23,000 in the quarter ended
September 30, 1999. 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 nine-month period ended September 30, 2000 was
$697,000 compared to $411,000 for the same period last year. The gross profit
from product revenues was $697,000 or 74% of revenues, as compared to a gross
profit of $37,000 for the same period last year. The costs incurred for the
nine-month period ended September 30, 2000 represents the overhead costs of
maintaining the manufacturing function applied against the amortization of
deferred revenue during the period. The 74% margin, therefore, does not
represent expected margins on the new 0.25-micron product and the results of the
nine-month period should not be used as a basis of predicting future financial
results. During the same nine-month period last year the Company had 0.72-micron
product sales with very low margins plus higher overhead costs resulting in the
low overall margins. Gross profit from service revenues was $0 for the nine
months ended September 30, 2000 compared to $374,000, or 72%, for the same
period last year.
SALES AND MARKETING
Sales and marketing expenses were $61,000 for the quarter ended
September 30, 2000 and $183,000 for the quarter ended September 30, 1999.
Expenses incurred in the third quarters of 2000 and 1999 related to the
Company's efforts to support strategic initiatives and product designs and the
67% decline represents reduced headcount. For each nine-month period the Company
had sales and marketing expenses of $281,000 and $568,000 in 2000 and 1999
respectively. The reduction represents reduced headcount as well as reduced
costs associated with new designs in 1999.
RESEARCH AND DEVELOPMENT
Research and development expenses for the quarter ended September 30,
2000 were $2,395,000 as compared to $1,090,000 for the quarter ended September
30, 1999. The majority of 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, however, there have also been small increases due to new
product development. Research and development expenses also increased
significantly, for the same reasons stated above, for the nine-month period
ended September 30, 2000 to $5,811,000 as compared to $3,515,000 for the same
period of 1999. The Company expects expenses due to process related issues to
decline over the next two quarters, and expenses due to new product development
and non-reoccurring engineering expenses related to manufacturing processes to
increase. The Company expects that, depending on the exact timing, research and
development expenses may increase slightly before declining to a level that is
somewhat higher than at the quarter ended September 30, 1999.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended
September 30, 2000 and 1999 were $714,000 and $661,000, respectively. The
increase in the third quarter of 2000 is due to increased legal, investment
banking and
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accounting fees as well as directors and officers insurance expenses incurred in
connection with the Company's merger with GAC. General and administrative
expenses could experience significant increases in future quarters due to
additional legal and accounting expenses related to the merger and interim
financings. General and Administrative expenses for the nine-month period ended
September 30, 2000 and 1999 were $1,380,000 and $2,094,000 respectively.
OTHER INCOME AND EXPENSES
Other income and expenses for the quarter ended September 30, 2000
resulted in an expense of $48,000 as compared to other income of $54,000 for the
quarter ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had cash and cash equivalents of
approximately $338,000 and a working capital deficit of $3,500,000. During
the quarters ended September 30, 2000, and 1999, GateField incurred net
losses of approximately $3,000,000 and $1,900,000, respectively. The Company
expects to continue to generate such losses for at least the next two
quarters. In October 2000, the Company entered into a $3,250,000 convertible
promissory note that the Company expects will cover its cash flow
requirements through December 31, 2000.
Cash used in operations was $8,700,000 in the first nine months of
2000 compared to $6.4 million for the first nine months of 1999. Net cash
used in investing activities during the nine-month periods ended September
30, 2000 and 1999 was $108,000 for acquisition of equipment and $830,000 in
expenses related to the Company's move of its office to a new leased
facility, respectively. The Company expects it would need to invest a minimum
of $700,000 and possibly as much as $1,500,000 in mask sets for its next
generation of products in the next two quarters, but does not anticipate any
other significant capital asset acquisitions.
Net cash provided by financing activities was $3,700,000 for the
nine months ended September 30, 2000, which represents the net proceeds from
a $1,000,000 and a $2,750,000 convertible promissory note issued in May and
August 2000, respectively. Net cash generated by financing activities in the
first nine months of 1999 was $10,900,000 and represents the net proceeds of
an $8,000,000 convertible promissory note issued in May 1999 and $3,200,000
from the sale of common stock.
The Company estimates it will exhaust its capital resources by the
end of 2000 and anticipates that additional capital in the amount of
$8,000,000 to $12,000,000 would be needed to meet its capital requirements
through 2001. In addition, even more capital may be required for the
0.25-micron product to achieve commercial viability. The Company's capital
requirements may actually 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 September 30, 2000, the Company had cash and cash equivalents of
approximately $338,000 and a working capital deficit of $3,500,000. During
the nine-month periods ended September 30, 2000 and 1999, the Company
incurred net losses of approximately $6,900,000 and $7,000,000, 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 next two
quarters. The Company expects that it will have utilized all of its currently
available assets on or about December 31, 2000. If sufficient funding is not
then available, the Company will be unable to continue as a going concern.
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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 Company's
merger with GAC remains unconsummated, 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 will be reduced and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's common stock.
The Company has historically funded its operations primarily through
private equity and debt financings, sale and leaseback arrangements and bank
financing and credit lines. If the merger with GAC 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 December 31, 2000.
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 and process capable of yielding
pre-production status parts however it must complete reliability tests before it
can begin shipping pre-production status parts. Based on its current beliefs,
the Company expects to achieve pre-production qualification before the end of
2000, and production qualification during the first quarter of 2001. No
assurance can be given that the Company's design and manufacturing process
issues have been resolved nor can the Company ensure its current 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 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 the Company at risk should its suppliers be
unable or unwilling to produce the Company's products.
Currently, Infineon manufactures the Company'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 or reduction of supply from a single source.
The Company plans to initially produce its 0.25-micron products in
relatively low volumes. Still, it will be
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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 he Company
does not have second source suppliers for any of its wafer products. the Company
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.
The Company 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 the Company has
supply agreements with Infineon, a shortage of raw materials or production
capacity could lead Infineon to allocate available capacity to other customers
or internal uses could delay manufacture of the Company's products and interrupt
the Company's capability to meet its product delivery obligations. Any inability
or unwillingness of the Company's independent wafer manufacturers to provide
adequate quantities of finished wafers to satisfy the Company's needs in a
timely manner would delay production and product shipments and could have a
material adverse effect on the Company's business, financial 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 its 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 the Company'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 the 0.25-micron
product family. Although Infineon has also invested significant resources into
its relationship with the Company, if Infineon were unable or unwilling to
manufacture such products as anticipated, the Company 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, the Company entered into a strategic relationship with
Actel. In a product marketing agreement, Actel acquired the exclusive right to
distribute standard ProASIC products based on 0.25-micron and smaller
geometries. In connection with the formation of the alliance, the Company
terminated its entire sales force and does not anticipate creating a new sales
force in the foreseeable future. Consequently, the Company is highly dependent
on Actel's sales efforts and the success of its sales force in marketing the
0.25-micron products.
In the event the merger with GAC does not occur, Actel will continue to
market its own products, including products that are competitive with the
Company's products. Accordingly, there is a risk that Actel may give higher
priority to the Actel products, thus reducing its efforts to sell the Company's
products. In addition, the Company's agreement with Actel is terminable by Actel
under a variety of circumstances, including the Company's material breach of the
product marketing agreement. As the Company 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 the Company would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, if Actel's sales and marketing efforts do not achieve
anticipated growth rates, the Company 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 the Company would
be unable to take full advantage of Infineon's manufacturing cost reductions.
The product marketing agreement with Actel contains certain 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 the Company fails to achieve such cost milestones, it must notify
Actel and seek their consent to its corrective action. The Company 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 the Company longer to resolve the delays. Loss of
cooperation and support from Actel could divert resources from other development
efforts and disrupt the Company's development efforts with respect to the
0.25-micron product family. The delays in meeting the Company's milestones
relieve Actel from its milestones as set forth
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in the Product Marketing Agreement. Such consequences of the Company's failure
to achieve its milestones could have a material adverse effect on the Company's
business, financial condition and results of operations.
After the merger with GAC is completed, the Company will continue as a
wholly-owned subsidiary of Actel.
COMPETITION
The semiconductor industry is intensely competitive and is
characterized by rapid rates of technological change, product obsolescence, and
price erosion. The Company'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. The
Company 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 the
Company's technology--or patents--will remain competitive.
Important competitive factors in the Company'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 the Company 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,
the Company believes companies that have broader product lines and longer
standing customer relationships may be in a stronger competitive position than
the Company. Many of the Company's current and potential competitors offer
broader product lines and have significantly greater financial, technical,
manufacturing and marketing resources than the Company has.
DEPENDENCE ON KEY PERSONNEL
The Company'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 current key employees, or the
inability of the Company to attract other qualified personnel, could have a
material adverse effect on the Company. 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 the Company's products in particular; have declined significantly over
the life of each product. Moreover, the Company is highly dependent on Actel for
the marketing of the Company's next generation of ProASIC products. While the
Company expects that the average selling prices of its products will be reduced
over time as the Company achieves manufacturing cost reductions, the Company 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, the Company 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 the Company'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 in a timely manner. Currently,
substantially all of the Company's revenues are derived from products based
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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 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 the
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, the Company 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 its 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. 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. The Company 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 the Company 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. the Company 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 the Company'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
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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 the Company'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, the Company 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 the Company's operating results. To the extent yields
of usable die decrease, the average cost to the Company 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. In 1999 and 2000 the Company 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 the Company 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 the Company 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 the Company will
not experience wafer supply problems in the future, or that any such problem
would not have a material adverse effect on its business, financial condition
and results of operations. See "Dependence on Independent Wafer Manufacturer."
PATENT INFRINGEMENT
Although the Company 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
The Company 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. The Company relies
primarily on a combination of nondisclosure
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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 its 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 the Company to enforce its patents or copyrights or to
protect its trade secrets could have a material adverse effect on its business,
financial condition and results of operations.
RELIANCE ON INTERNATIONAL SALES
The Company 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, the Company's products become
less price competitive in countries with currencies that are declining in value
against the dollar. International sales are subject to a variety of risks,
including longer payment cycles, greater difficulty in accounts receivable
collection, currency restrictions, tariffs, trade barriers, taxes, export
license requirements and the impact of recessionary environments in economies
outside the United States.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT; RAPID TECHNOLOGICAL CHANGE
The market for the Company'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. The Company'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, the Company 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 the Company'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 the Company's business, financial condition and results of operations:
the inability of Infineon to produce the 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 the Company will respond effectively to new technological
changes or new product announcements by others. Any failure of the Company 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
The Company 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 35,000 shares
remain available for issuance), with such designations, rights and preferences
as may be determined from time to time by the board of directors. Accordingly,
the board is empowered, without approval by
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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 the Company. In addition, such
issuance could adversely affect the market price of the Company'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 Company 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. The Company maintains its funds in money market and
Certificate of Deposit accounts at banks. The Company's exposure to market risk
due to fluctuations in interest rates relates primarily to its interest earnings
on its cash deposits. These securities are subject to interest rate risk
inasmuch as their fair value will fall if market interest rates increase. If
market interest rates were to increase immediately and uniformly by 10% from the
levels prevailing at December 31, 1999, the fair value of the portfolio would
not decline by a material amount. The Company 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, the Company 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 the Company'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 the Company'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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 10, 2000, the Company held a Special Meeting of Stockholders to vote
on the matters described below.
I. Approval and adoption of an Amended and Restated Agreement and
Plan of Merger dated May 31, 2000, pursuant to which GAC will
merge with and into the Company, with the Company continuing as
the surviving corporation and wholly-owned subsidiary of Actel.
For............... 3,679,379
Against........... 146,507
Abstain........... 15,845
II. To adjourn the Special Meeting to a future date, if necessary to
seek additional votes, and to transact such business as may
properly come before the Special Meeting.
For............... 3,685,193
Against........... 125,197
Abstain........... 31,341
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Convertible Promissory Note--$2.75 million, dated August 2, 2000.
10.2 Convertible Promissory Note--$3.25 million, dated October 6, 2000.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
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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: November 13, 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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