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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-13244
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GATEFIELD CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 41-1404495
(State of incorporation) (IRS Employer Identification No.)
47436 FREMONT BOULEVARD, FREMONT, CALIFORNIA 94538
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (510) 623-4400
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK, $0.10 PAR VALUE PER SHARE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of common stock held by non-affiliates of the
registrant on February 10, 2000, based upon the closing price on the Nasdaq
Unaffiliated Over the Counter Bulletin Board (the "OTCBB") on such date was
approximately $23,312,000.
The number of shares outstanding of the Registrant's Common Stock, par value
$.10 per share as of February 10, 2000 was 4,662,400 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's definitive Proxy Statement for its 1999
Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after the end of December 31, 1999, are
incorporated by reference into Part III hereof.
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GATEFIELD CORPORATION
TABLE OF CONTENTS
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NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 12
Item 4. Submission Of Matters To A Vote Of Security Holders......... 12
PART II. OTHER INFORMATION
Item 5. Market For Registrant's Common Equity And Related
Stockholder Matters......................................... 13
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations................................... 16
Item 7a. Quantitative And Qualitative Disclosure About Market Risk... 30
Item 8. Financial Statements And Supplementary Data................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 56
PART III
Item 10. Directors And Executive Officers Of The Registrant.......... 56
Item 11. Executive Compensation...................................... 56
Item 12. Security Ownership Of Certain Beneficial Owners And
Management.................................................. 56
Item 13. Certain Relationships And Related Transactions.............. 56
PART IV
Item 14. Exhibits, Financial Statement Schedules, And Reports On Form
8-K......................................................... 56
SIGNATURES............................................................ 58
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PART I
THE DISCUSSION IN THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT
ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED INCLUDING STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE.
ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON
INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES
NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN "FACTORS THAT MAY AFFECT FUTURE RESULTS," IN THE MANAGEMENT'S
DISCUSSION AND ANALYSIS SECTION AND ELSEWHERE IN THIS REPORT.
ITEM 1. BUSINESS
OVERVIEW
GateField Corporation, a Delaware Corporation (GateField" or the "Company")
designs, develops and markets high-density, high-performance programmable logic
solutions and related development software. The Company was originally a
division of the Zycad Corporation, a leader in the development, manufacturing
and marketing of design verification tools and services. Zycad was founded in
1981 and became a public corporation in 1984. The GateField division of Zycad
was formed in the third quarter of 1993 to research and develop a new and
innovative semiconductor logic product: a flash technology-based, high-density
field programmable gate array ("FPGA") device. During 1997, Zycad transitioned
from a provider of high-performance verification products to a provider of FPGA
products based on the GateField division's research and development of an
application specific integrated circuit ("ASIC") technology called ProASIC-TM-.
Zycad introduced and first shipped its 0.72-micron products in 1997. This
transition required the sale of several of Zycad's assets, including: its stock
ownership in QSS Inc.; products and assets relating to its verification product
line, including its rights, title and interest in hardware and software
simulation products; and the assets related to the semiconductor test software
product line. In addition, Zycad sold its maintenance division for the
verification products to Zycad TSS, Inc.
In October 1997, a new management team was put in place and Zycad was
renamed "GateField Corporation". A month later, GateField announced a strategic
alliance with Infineon Technologies AG (formerly Siemens Aktiengesellschaft). In
this alliance, Infineon licensed the GateField ProASIC technology for use in
nonstandard FPGA products and purchased GateField's common stock and warrants
for $3.25 million. In addition, Infineon agreed to provide GateField with early
access and foundry service for Infineon's advanced embedded flash technology for
GateField 0.25-micron products and below. GateField and Infineon concluded a
foundry agreement in June 1998.
In August 1998, the Company entered into a strategic alliance with Actel
Corporation, under which Actel received exclusive, worldwide distribution rights
to GateField's 0.25 micron and below standard ProASIC products. Actel also
purchased the assets of GateField's Design Services product line as well as
$3 million of the Company's Series C Preferred Stock, which is currently
convertible into an aggregate of 200,000 shares of GateField common stock.
GateField's products--flash-based FPGAs trademarked as ProASIC--are based on
two proprietary and patented technologies: a flash-based switching element and a
fine-grained, gate array-like ProASIC architecture. The Company believes that
the principal advantages of GateField's products over alternative--static random
access memory based ("SRAM") and antifuse devices are: smaller chip size for the
same geometries; reprogrammability and non-volatility; and the ability to use a
standard electronic design automation ("EDA") ASIC design flow.
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A RELATIVELY FASTER AND SMALLER CHIP. The flash-based switch allows
GateField to make circuits that provide higher performance in a smaller size
and, therefore, are generally less costly than comparable designs using
alternative switch technologies. For comparable manufacturing device
geometries and for the same device complexity and capability, the GateField
die size is only one-fourth to one-third the size of competing FPGAs.
REPROGRAMMABILITY AND NON-VOLATILITY. Unlike antifuse-based devices,
GateField's devices are field reprogrammable, which means a designer can
change the device program prior to shipment or even change the program in
the field to incorporate product changes and enhancements. Unlike SRAM
devices, GateField's devices are non-volatile; that is, they do not lose
their design and have to be reprogrammed if the system loses power or is
turned off.
COMPATIBILITY WITH EXISTING EDA. The flash-based switch facilitates the
ProASIC architecture, which allows designers to use their existing industry
standard EDA high-level design tools and to accurately simulate the
programmed ProASIC device performance.
GateField's products are designed to provide high integration, fast
time-to-market and fast time-to-volume for electronic equipment manufacturers in
the networking, telecommunications, computer, peripheral, industrial control,
instrumentation and consumer markets. GateField plans to sell and market its
0.25 micron and below ProASIC products through its strategic alliance with
Actel. Actel, a major worldwide supplier of FPGA products, will give GateField
access to a large and diverse customer and design software user base. Infineon
has agreed to manufacture GateField's 0.25-micron product in its production
facility in Dresden, Germany. Subject to exclusive and non-exclusive license
rights granted to Infineon, Actel and Rohm, GateField continues to maintain
rights to its intellectual property for its ProASIC technology and products,
which allow it to license this technology for the emerging embedded
reprogrammability market.
GateField began shipping engineering samples to initial customers in the
first quarter of 1999 and currently has a design it believes is capable of
yielding pre-production parts. However, due to the unqualified status of the
Infineon 0.25-micron process the Company 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. The Company believes it is close to
resolving the process problems it is currently aware of. However, there can be
no assurance that these problems are indeed resolved or that other currently
unknown process and /or design problems may arise that could delay or even
prevent the product from being introduced into the market. In addition there can
be no assurance that these existing or potential problems can be resolved in a
timely or cost-effective manner. Furthermore the Company is currently
experiencing poor manufacturing yields and has identified and instigated several
yield enhancement actions but given its production experience to date the
Company cannot predict when it can commence shipment of pre-production parts or
even advise that other process, design or yield problems will not be encountered
that may prevent shipment of pre-production parts. If the Company is successful
in resolving its process problems, shipments of pre-production units could begin
as early as the end of the second quarter of 2000. However, even if
pre-production shipments would begin immediately, there can be no assurances
that the Company will be able to ramp the manufacturing process up to sufficient
volumes to satisfy anticipated customer demand and therefore inhibit revenue
growth. Disclosures concerning financial results on a segment basis refer to
Note 8.
GateField's corporate office is located at 47436 Fremont Boulevard, Fremont,
California 94538. The Company's telephone number is (510) 623-4400, and its Web
site is http://www.gatefield.com.
INDUSTRY BACKGROUND
The large and rapidly growing logic market is served primarily by
low-density, standard, transistor-transistor logic circuits ("TTLs") and
application specific integrated circuits ("ASICs"). TTLs are standard logic
circuits that can be purchased "off the shelf" and interconnected on a printed
circuit board. ASICs
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are customized or customizable circuits that offer electronic system
manufacturers the benefits of higher levels of circuit integration, including
improved system performance, reduced system size and lower system cost.
ASICs include conventional gate arrays and field programmable gate array
devices (FPGAs). Conventional gate arrays are customized to perform their
desired logical functions at the time the device is manufactured. They are
manufactured with fixed, nonprogrammable logic and are subject to the risks
associated with long manufacturing cycles, inventory obsolescence and an
inherent inability to change the logic design.
FPGAs, on the other hand, are manufactured as standard devices customized by
the user at the designer's desktop or at the end of the manufacturing line by
the customer using the FPGA supplier's programming systems. Design changes can
typically be implemented in as little as a few hours, as compared to several
weeks for conventional gate arrays. FPGAs costs can be attractive in low volumes
because they eliminate the non-recurring engineering costs and expenses and
increased development time associated with the redesign of conventional gate
arrays. FPGAs are being used by a growing number of electronic system
manufacturers in response to increased demand for product differentiation,
time-to-market pressures and desired manufacturing flexibility.
The wider use of more complex FPGAs has been limited by price and
performance factors. On current architectures, programming elements based on
SRAM technology occupy relatively large amounts of area within an integrated
circuit, which tends to increase the overall size and cost of each integrated
circuit. In addition, on current architectures, the size of SRAM programming
elements limits the number of interconnect points in an integrated circuit,
which in turn, limits flexibility and utilization.
Before FPGAs can be programmed, a designer must define the function, verify
the design and lay out the integrated circuit using EDA design software. With
increased integrated circuit complexity, designers are turning to hardware
description languages (HDLs), also known as high-level description (HLD), for
their electronic system and integrated circuit designs. HDL methodology permits
the designer to describe the integrated circuit functions at an abstract level
and to verify the performance of logic functions at that level. The HDL can then
be fed into logic synthesis software that converts the abstract or high-level
description into a gate-level representation equivalent. After a gate-level
representation of the logic function has been created and verified, it must be
translated or "laid out" onto the generic logic elements of the FPGA. This is
achieved by placing the logic gates and routing their interconnections, a
process referred to as "place and route."
The transition to the use of HDL for ASIC designs and FPGAs, in particular,
presents an opportunity for GateField. The effectiveness of logic synthesis and
place and route tools varies considerably with different programmable logic
circuit architectures. Because the HDL EDA tools were initially optimized for
conventional gate arrays, and GateField's ProASIC product architecture is
similar to a conventional gate array, GateField's devices provide higher gate
utilization, more accurate device performance simulations and more effective
synthesis than is possible with other FPGAs. Thanks to our ASIC-like
architecture, systems and electrical device engineers using their standard ASIC
design methodology and tools can transfer a successful design to the more
economical GateField FPGA in a matter of hours and save development time and
production costs.
Electrical system manufacturers are requiring improved functionality,
performance, reliability and lower cost. These are often addressed through the
use of components that integrate ever-larger numbers of logic gates onto a
single integrated circuit. In addition, global competition is shortening product
life cycles and requiring more frequent product enhancements. GateField's
ProASIC standard FPGA products combine the high logic density, ease of use and
predictable performance typically associated with conventional gate arrays with
the time-to-market advantages of a non-volatile and reprogrammable logic
product.
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COMPANY STRATEGY
PROGRAMMABLE ASIC PRODUCTS. Global competition is forcing electronic system
manufacturers to bring increasingly complex products to market within shorter
and shorter development cycles while at the same time shrinking product life
cycles. This competitive environment creates a constant demand for new logic
devices with increased performance and functionality at lower and lower costs.
To serve this need, FPGAs are becoming increasingly complex--and yet also
quick and easy to use. The primary advantage of FPGAs over competing solutions
is that they allow system designers to experiment, iterate and optimize their
designs in a relatively short amount of time and at a lower cost. FPGAs can
often be designed and verified in a few days as opposed to several weeks or
months for gate arrays. The time-to-market advantage is significant: As soon as
the customer has programmed the FPGA, the customer's design is finalized and the
customer can move immediately into production with the FPGA.
The customer also has a lower all-inclusive per unit cost of production for
small to medium volume applications as compared to gate arrays. Total per unit
cost is inversely related to volume for a custom integrated circuit (IC) because
of the high fixed costs of non-recurring engineering, layout and mask costs.
All the advantages of programmability are amplified by reprogrammability.
Reprogrammability allows an electronic systems manufacturer to shorten its own
product life cycles and reduce inventory-carrying costs. It also allows
inventory to be re-configured over and over as enhancements in the
manufacturer's system design evolve. This further saves development time and
costs over several generations of products.
GateField's strategy is to use flash technology to provide standard
reprogrammable logic products that combine the high logic density and
non-volatility typically associated with conventional gate arrays with the
reprogrammability and the time-to-market advantages of FPGAs. Moreover, using
the same manufacturing geometries or design rules GateField products offer a
significant cost advantage because the die size for equivalent complexity and
performance is only one-fourth to one-third the size of SRAM FPGAs. However
flash based technology has typically lagged SRAM technology by one or two
geometries. The Company believes its unique design will allow its products to be
price competitive even if they are one-generation of geometry behind SRAM
production technology. In summary, management believes the performance, density
and cost advantages of the GateField FPGAs combined with their reprogrammability
and non-volatility (all of which scale with the ever-shrinking semiconductor
manufacturing technology) provide our customers--and our Company--with what
GateField believes is a sustainable competitive advantage.
ASIC DEVICE ARCHITECTURE. The Company's strategy is to provide products
that emphasize predictable system performance, device utilization, design
portability and reuse, and, ultimately, increased designer productivity.
GateField's patented ProASIC architecture allows its products to easily
integrate into industry standard ASIC design flows because of the architecture's
similarity to standard gate array technology. Consequently, we believe our
products provide an easy migration from a lower-volume and higher-cost FPGA
application to a higher-volume and lower-cost conventional gate array or custom
ASIC design.
GateField's ProASIC flash-based technology also eliminates the need for the
additional ICs required for FPGA configuration, freeing the system designer from
special design considerations related to board design and system initialization
procedures required for SRAM FPGAs. This further reduces cost and increases
designer productivity. GateField believes these ProASIC product attributes will
appeal to gate array and ASIC designers within established electronic system
companies who are already familiar with high level design methodologies as well
as an emerging group of programmable logic designers who are starting to use
higher density programmable logic devices.
SOFTWARE TOOL. Our development software products use industry standards and
are designed to be integrated with industry standard EDA tools. GateField
believes the industry's acceptance of its ProASIC devices will be enhanced if
the customer can use GateField's software tools along with the customer's own
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preferred design methodology and its chosen "best of breed" open EDA tools and
design methodology to design systems.
CONDUIT FOR INTELLECTUAL PROPERTY PROLIFERATION. The Company believes that
the ASIC design flow and combination of high capacity, reprogrammability and
non-volatility in GateField's ProASIC devices offer significant advantages to
intellectual property providers. Using our devices, they can efficiently verify
their intellectual property in silicon and securely deliver their intellectual
property to customers. Each ProASIC device holds its own electronic signature
and can be configured to effectively preclude copying and reverse engineering.
We believe these key features provide a secure silicon medium for intellectual
property delivery by intellectual property suppliers, and GateField and Actel
intend to include such companies in their direct marketing efforts.
TECHNOLOGY LICENSING AND PRODUCTION RELATIONSHIPS. In addition to the sale
of its standard ProASIC products, GateField will seek to sell nonexclusive
licenses to its ProASIC technology to major semiconductor companies as their
preferred solution for embedded, reprogrammable, system-level-integration (SLI)
integrated circuits. GateField believes that the small size, non-volatility and
reprogrammability of its patented flash-based switch and its patented ProASIC
architecture support of the standard ASIC design flow provide a competitive
advantage for use of the ProASIC technology for reprogrammable SLI ICs. We plan
to position ProASIC technology as the technology of choice to serve this
reprogrammable IC market need. GateField has licensed its technology to both
Infineon and Rohm for embedded reconfigurable ICs. See "License Agreements."
TECHNOLOGY
PROCESS. The Company has entered into an agreement with Infineon to
manufacture the 0.25-micron ProASIC product. It has tested three of the four
products in its initial 0.25-micron product family. The joint Actel/GateField
marketing team began sampling initial customers with engineering samples of its
0.25-micron product in the first quarter of 1999. Since that time the Company
has encountered several process problems and continues to work with Infineon to
identify and correct process issues as soon as they occur. At this time the
Company believes it has adequately addressed every known catastrophic processing
deficiency and it is possible, the Company is at, or close to a sustainable,
stable 0.25-micron flash-manufacturing environment. However, the Company may
continue to experience unpredictable process deficiencies and cannot guarantee
for the foreseeable future that further process problems will not arise. In
addition the Company and its products are exposed to a higher than normal risk
of development until the 0.25-micron flash process has been fully qualified by
Infineon. Infineon has forecast process qualification in the second quarter of
2000. There can be no assurance that process qualification will be accomplished
in that timeframe if at all. The Company has implemented several operating
strategies to minimize the risk and the delays to the development and the
manufacture of its product but the Company is significantly behind our operating
plan and there can be no assurance that any of the Company's development efforts
with Infineon will be successful, timely or cost-effective.
ARCHITECTURE. The patented design of the ProASIC product architecture is
designed to allow GateField to achieve high density; meet performance goals;
obtain predictable gate utilization and performance; and support industry
standard ASIC design flows. The architecture consists of switches that program
the chip; the associated routing, clocking and power grids; and the underlying
logic cell that provides the programmable gates. The ProASIC architecture takes
advantage of the very small switch size (as compared to competitive SRAM or
antifuse approaches) as well as its reprogrammable and non-volatile features.
The Company anticipates that improvements in the architecture will drive
performance enhancements with each subsequent product generation.
EMBEDDED MEMORY BLOCKS. In addition to the flash memory/switch combination,
which is used to configure the GateField device, embedded static memory blocks
are an important feature of GateField's standard ProASIC products. Depending
upon the product, a number of memory blocks, each containing
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256 X 9 bits of memory, are available to support a variety of possible memory
configurations. Each block may be programmed as an independent memory or may be
combined, using dedicated memory routing resources, to form larger, more complex
memories and FIFO structures. In addition, GateField's 0.25-micron product
architecture allows memory paralleling to form memories of up to 11 independent
memory ports (10 read, 1 write port). This approach is designed to provide
GateField products with a flexible and efficient high performance embedded
static memory for both Dual Port and FIFO memory requirements.
PRODUCTS
GateField currently has a four-product family of 0.25-micron, flash-based
programmable logic integrated circuits and associated development software and
hardware. These ProASIC devices will be available in a wide variety of plastic
package types. External configuration storage devices are not needed due to the
non-volatility of flash-based ProASIC devices. A programming unit called a
Silicon Sculptor is used to program devices. GateField's development software
tools facilitate the design process for its integrated circuits. An earlier
0.72-micron product family generated approximately 150 design wins with
approximately 100 customers. Almost all of these customers utilized the
0.72-micron products for ASIC prototyping or IP delivery in low quantities. In
1998, the Company stopped actively promoting the sale of its 0.72-micron product
to concentrate on the development of its 0.25-micron product family. The Company
believes it has a design capable of yielding pre-production parts for all four
family members. The joint Actel / GateField marketing team began sampling
initial customers in the first quarter of 1999. The four-product family ranges
from 20,000 usable ASIC logic gates and 14,000 bits embedded SRAM to 100,000
usable logic gates and 65,000 bits of embedded memory. These devices are
scheduled to be offered in multiple plastic quad flat packages and ball grid
array packages. Production software and device programmer is currently
available. Supporting software-enabling customers to begin their designs became
available in the first quarter of 1999.
PRODUCT DEVELOPMENT
GateField's product development activities are primarily directed toward the
design of new programmable ASIC solutions, the use of advanced semiconductor
manufacturing processes and the development of new software tools.
For the last two years the Company has focused its research and product
development efforts on a new product family based on a 0.25-micron flash process
and enhanced place and route tools. The flash based manufacturing process has
not yet been fully qualified and the Company continues to have significant lot
to lot variation in yields and in the basic functionality of the product and
there can be no assurance that the Company will be successful in its efforts to
stabilize the process and improve yields to an economically attractive level.
Research and development expenses in 1999, 1998 and 1997 were $5.9 million,
$5.5 million and $7.9 million, respectively. To continue this level of research
and development, the Company will need to attract and retain highly skilled
engineering personnel. There can be no assurance that the Company will be
successful in attracting and retaining such personnel in the future.
GateField has in the past, and may in the future, experience delays in new
product development. There can be no assurance that the Company will be
successful in developing and marketing the 0.25-micron product, or future
enhancements or new products that respond to technological change, evolving
industry standards and changing customer requirements; that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these future products or product enhancements; or
that its new products or product enhancements will adequately meet the
requirements of the marketplace and achieve any significant degree of market
acceptance.
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Failure of the Company, for technological or other reasons, to develop and
introduce new products and product enhancements in a timely and cost-effective
manner would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is currently completing initial
testing of its 0.25-micron product and is working with Infineon to finalize the
qualification of a new flash based manufacturing process. Development of the
0.25-micron products and flash process is over one year behind the Company's
original schedule at significant additional costs. GateField's failure to timely
and cost-effectively complete development and commercialization its 0.25-micron
products would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition these delays have
forestalled the development of new products and product features including the
next generation geometry, 0.13-micron.
Complex products, such as the Company's 0.25-micron product, may contain
undetected or unresolved defects when first introduced or as new versions are
released. There can be no assurance that, despite testing by the Company,
defects will not be found in new products, including the Company's 0.25-micron
product, or new versions of such products following commercial release. This
could result in loss of market share, delay in or loss of market acceptance or
product recall. Any such occurrence could have a material adverse effect upon
the Company's business, financial condition and results of operations.
MANUFACTURING
Infineon is manufacturing GateField's 0.25-micron products in its new
fabrication facility located in Dresden, Germany. GateField has designed its
technology and product to be manufactured on Infineon's standard production C9FG
Flash process. Infineon also has agreed to perform wafer die testing although
GateField will perform wafer and finished goods testing in Fremont, California
until the process has been fully qualified and the design completely debugged.
GateField entered into an agreement with Infineon to perform these services in
June 1998.
The GateField/Infineon alliance gives GateField access to Infineon's
proprietary 0.25-micron flash technology for the 0.25-micron product. Test
silicon results have confirmed that GateField's patented flash memory
cell/switch combination and its high density programmable structures work in
Infineon's embedded flash process however the process has not been fully
qualified and the Company has been unable to produce parts that pass its quality
standards and has been unable to build enough parts for Actel to begin its
marketing campaign. Therefore there can be no assurance that such products can
be manufactured commercially, in other words, in large volumes with acceptable
yields. Assembly and the final testing of finished goods are expected to be
performed by third party assembly and test subcontractors, such as Anam.
GateField outsources the manufacture of its products to independent
contractors on a purchase order basis. The Company also relies upon a limited
number of suppliers who can produce its products to its specifications and in
the quantities and quality it desires. This strategy minimizes capital and
management resources dedicated to manufacturing and is intended to take
advantage of the strengths of the Company's strategic partners: manufacturing
knowledge and economies of scale in wafer fabrication, testing, assembly and
quality assurance.
MARKETING, SALES AND CUSTOMERS
GateField and Actel have a strategic alliance that gives Actel exclusive
sales and marketing rights to GateField's 0.25-micron product and below. In
addition, the alliance provides GateField with access to a direct sales and
field application engineering (FAE) team that is approximately ten times larger
than the sales and FAE force that GateField had prior to the alliance. Being one
of the largest FPGA suppliers in the world, Actel provides GateField with access
to a large customer and design software user base. GateField terminated its
entire sales and FAE force in 1998 when it entered into the strategic alliance
with Actel. Consequently, the Company is highly dependent on the marketing
efforts and success of Actel's
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sales force. If Actel were to fail to perform under the Product Marketing
Agreement or if the agreement were to be terminated, GateField would be required
to rebuild its sales force, which would require a significant amount of time and
resources, and the Company's business and financial condition would be adversely
affected.
The Product Marketing Agreement with Actel contains certain GateField
milestones relating to the development schedule and manufacturing costs of the
0.25-micron product family. The agreement also contains Actel milestones with
respect to the marketing and sale of the 0.25-micron products. GateField has
failed to meet certain of its milestones relating to the cost of manufacturing
of the 0.25 products and according to the terms of the Agreement has so notified
Actel and sought their consent regarding corrective action as is required by the
Agreement. GateField's failure to achieve its milestones has caused the
0.25-micron product family's introduction to the market to slip by several
quarters which has had, and in the future could have, a material adverse effect
on GateField's business, financial condition and results of operations.
In addition to marketing its next generation products through the Company's
alliance with Actel, GateField seeks to license its technology for embedded
applications with an upfront fee license and an ongoing royalty. GateField has
entered into licensing agreements with Infineon and Rohm. The Company markets
its technology for embedded applications directly to potential licensees. See
"License Agreements."
During 1999, Rohm accounted for 47% and Zycad TSS accounted for 18% of
consolidated revenues. During 1998 and 1997, Infineon accounted for 22% and
Intel Corporation accounted for 16% of consolidated revenues, respectively.
COMPETITION
The semiconductor industry is intensely competitive and characterized by
rapid technological change. Such an environment produces rapid rates of product
obsolescence and constant erosion of prices. As a new entry in the high-end
programmable logic market, GateField competes directly with a number of
well-financed, profitable and fast-growing companies that devote significant
resources to new product development and existing product enhancements. These
companies have substantially greater financial, technical and marketing
resources than GateField has.
GateField's current competitors include Xilinx, Inc., Altera Corporation,
Actel Corporation, Lucent Technologies Inc., Advanced Micro Devices Inc., Vantis
subsidiary, among others. The Company expects that as the dollar volume of the
programmable logic market grows, this market will become increasingly attractive
to powerful, established companies as well as new entrants to the market. In
addition, the competitions' technology or product features could be superior in
certain applications or markets.
The principal factors upon which the Company competes in the programmable
logic marketplace include product performance and features, the integration
capacity and flexibility of the individual circuits, easy to use yet functional
software development tools, quality and reliability, pricing, technical service
and support and the ability to respond quickly to technical innovation.
GateField believes it can compete favorably with respect to these factors,
although it may be at a disadvantage in comparison to larger companies with
broader product lines and stronger relationships with wafer fabrication
companies. However there can be no assurance that the Company will be able to
successfully compete with these companies and our financial condition and
results of operations could be materially adversely affected.
LICENSE AGREEMENTS
In October 1997, GateField Corporation and Infineon Technologies AG
("Infineon") formerly Siemens Aktiengesellschaft, entered into a strategic
alliance. Under the agreement, Infineon licensed GateField's ProASIC technology
to be embedded into Infineon's system level integration products, and
10
<PAGE>
GateField gained access to Infineon's 0.25-micron flash technology. In
June 1998, GateField entered into a long-term agreement with Infineon to
manufacture and test ProASIC products.
GateField entered into a Technology License Agreement with Rohm Co. Ltd. in
March 1998. Under this agreement, Rohm licensed GateField's ProASIC technology
for use in non-embedded applications and in multichip packages having process
technologies down to 0.5 micron and having an approximate raw gate capacity of a
total of 10,240 gates. In addition, Rohm paid a one-time fee to obtain a master
license to GateField's ASICmaster-TM- software. In August 1998, this license was
expanded to provide Rohm with the nonexclusive right to utilize the ProASIC
technology for standard ProASIC products down to 0.35-micron process geometries
with no limitations on density. In addition, the expanded license allows Rohm to
use the ProASIC technology for future reconfigurable SLI ICs royalty-free down
to process geometries of 0.35 micron, but with royalties for less than
.35-micron products.
In August 1998, GateField and the Actel Corporation entered into a Product
Marketing Agreement. Under the terms of this agreement, Actel received
exclusive, worldwide distribution rights to GateField's standard ProASIC FPGA
products below .35 micron, including FPGA products that are integrated with SRAM
or Flash memory and all resulting next generation reduced process geometry
ProASIC FPGA products. For these rights, Actel paid GateField an initial fee of
$1 million and agreed to pay a $1 million fee upon qualification of the initial
0.25-micron product.
GateField and Actel also entered into a license agreement which grants Actel
a fully paid, exclusive, nontransferable license to sell GateField's standard
ProASIC FPGA products below 0.35 micron and all resulting next generation
reduced process geometry ProASIC FPGA products. Actel agreed to pay GateField a
$1 million fee for the license.
Subject to the license of certain rights to Actel, Infineon and Rohm,
GateField continues to maintain ownership of its intellectual property relating
to its technology and products. This allows GateField to address the emerging
embedded reprogrammability market.
PROPRIETARY RIGHTS
GateField's ability to compete is dependent in part on its proprietary
rights and technology. The Company relies on a combination of patent, copyright
and trademark laws; trade secrets; confidentiality procedures; and contractual
provisions to protect its proprietary rights. It generally enters into
confidentiality or license agreements with its employees, resellers,
distributors, customers and potential customers and limits access to its
software, hardware designs, documentation and other proprietary information.
There can be no assurance that the steps taken by GateField in this regard will
be adequate to prevent misappropriation of its technology.
GateField currently holds ten United States patents and has five patent
applications under consideration. The Company has two patents issued and eight
patents pending in foreign countries. GateField believes that these patent
rights are an important factor in the protection of its proprietary information.
There can be no assurance that the Company's patents will not be invalidated,
circumvented or challenged; that the rights granted thereunder will provide
competitive advantages to the Company; or that any of the Company's pending or
future patent applications, whether or not being currently challenged by
applicable governmental patent examiners, will be issued with the scope of the
claims sought by the Company, if at all. Furthermore, there can be no assurance
that others will not develop technologies that are similar or superior to
GateField's technology or design around the patents owned by the Company.
GateField Corporation has common law trademark protection for the following
trademarks: "GateField," "ProASIC," "ProCore," "ProReady," "GF100K," "GF200F,"
"GF250F," "GF260F," "GF360F," "GF460F," "ASICmaker," "ASICmaster,"
"MEMORYmaster," "Sea-of-Tiles," "ProIP," "ProSLI," and "FlashLink."
11
<PAGE>
The Company's future success is heavily dependent upon its ability to hire
and retain qualified technical, marketing and management personnel. The
competition for such personnel is intense, particularly for engineering
personnel with related networking and integrated circuit design expertise and
for technical support personnel with networking engineering expertise. See "Risk
Factors--Dependence on Key Personnel."
EMPLOYEES
As of December 1999, the Company had a total of 33 full-time employees. The
Company believes its relations with its employees to be good. The Company's
employees are not represented by any collective bargaining agreement with
respect to their employment by the Company, and the Company has never
experienced an organized work stoppage.
ITEM 2. PROPERTIES
The Company leases approximately 24,000 square feet of office space in
Fremont, California, which is currently used for its headquarters and test and
engineering operations. The lease terminates on July 31, 2004.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the OTCBB under the symbol "GATE."
On July 15, 1998, GateField Corporation's stock was delisted from the Nasdaq
National Market and began trading on the Nasdaq SmallCap Market. On
September 17, 1998, the Company's stock was delisted from the Nasdaq SmallCap
Market for failing to meet Nasdaq's on-going minimum bid price requirement. At
that date, the Company's stock began to trade on the OTC Bulletin Board.
The following table sets forth, for the periods indicated, the high and low
bid prices for the common stock as reported by the OTCBB, Nasdaq National Market
or Nasdaq SmallCap Market, as applicable. Such over the counter market
quotations reflect inter-dealer prices, without retail back up, markdown or
commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1999
First Quarter............................................... $ 9.20 $ 6.40
Second Quarter.............................................. $17.80 $ 6.20
Third Quarter............................................... $ 7.63 $ 3.44
Fourth Quarter.............................................. $ 7.00 $ 3.81
------ ------
1998
First Quarter............................................... $22.50 $10.30
Second Quarter.............................................. $21.30 $ 8.40
Third Quarter............................................... $13.10 $ 3.00
Fourth Quarter.............................................. $11.30 $ 2.70
------ ------
</TABLE>
At February 10, 2000, there were 1,158 stockholders of record of common
stock.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock. The
Company currently intends to retain any earnings for future growth and,
therefore, does not anticipate paying any cash dividends on its common stock in
the foreseeable future. Moreover, no dividends shall be paid on shares of common
stock until the holders of the Company's Series B and Series C Convertible
Preferred Stock then outstanding shall have received a distribution as specified
in the Company's Restated Certificate of Incorporation.
RECENT SALES OF UNREGISTERED SECURITIES
In September 1999, the Company issued approximately 471,000 shares of common
stock to outside investors for an aggregate purchase price of $3,062,000
pursuant to a Stock Purchase Agreement entered into on September 30, 1999. The
common stock was issued in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act").
In May 1999, the Company issued a convertible promissory note in the
aggregate principal amount of $8.0 million. The note accrues interest at 5.22%
per annum, has a five-year term and is secured by a lien against all the assets
of the Company. The Principal and interest under the note are payable quarterly
from the date of issuance of the note The note is convertible into 420,000
shares of the Company's Series C-1 Convertible Preferred Stock. The Series C-1
Convertible Preferred Stock is in turn convertible into 1,230,769 shares of the
Company's common stock, or the equivalent price of $6.50 per share of common
stock. The note is convertible at the option of the noteholder. The Series B
Stock and the common stock were issued in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.
13
<PAGE>
In August 1998, the Company issued 300,000 shares of Series C Convertible
Preferred Stock ("Series C Stock") to Actel for an aggregate purchase price of
$3,000,000. The Series C Stock was issued in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act. Each share of
outstanding Series C Stock is convertible into 6.67 shares of Common Stock plus
an amount of shares at the conversion price equal to the amount of accrued and
unpaid dividends on the Series C Stock. In the event all shares of the Company's
Series B Preferred Stock ("Series B Stock") are redeemed, each share of
Series C Stock is subject to redemption at a price of $10.00 per share plus the
amount of declared but unpaid dividends.
In November 1997, the Company, Idanta Partners Ltd., Dunn Family Trust and
Perscilla Faily Trust (collectively, the "Idanta Entities") entered into a
two-phase private placement transaction, pursuant to a Series B Preferred Stock
Purchase Agreement (the "Idanta Agreement"). In phase one of the transaction,
the Idanta Entities agreed to purchase 1,000,000 shares of the Company's
Series B Preferred Stock (the "Series B Stock") for an aggregate purchase price
of $4,582,500. Each share of Series B Stock is convertible into .45825 shares of
the Company's Common Stock plus the amount of accrued and unpaid dividends on
the Series B Stock at the conversion price. In addition, Idanta agreed to
purchase 458,250 shares of the Company's Common Stock for an aggregate purchase
price of $4,582,500, pending stockholder approval of certain management
proposals contained in the proxy statement filed in connection with the
Company's 1997 Annual Meeting. In December 1997, the stockholders approved all
the management proposals. Accordingly, in January 1998, in phase two of the
transaction, Idanta purchased an aggregate of 458,250 shares of the Company's
Common Stock for an aggregate purchase price of $4,582,500. Upon the occurrence
of certain events specified in the Company's Restated Certificate of
Incorporation, each share of Series B Stock is either (i) subject to redemption
at the election of at least 51% of the then outstanding shares of Series B Stock
or (ii) convertible into the number of shares of Common Stock equal to the
number of shares obtained by dividing the sum of .45825 plus accrued and unpaid
dividends by 0.75. The Series B Stock and the Common Stock were issued in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act. In October 1998, the Company was notified by Idanta of their
desire to redeem, in cash, an aggregate of 981,997 shares of the Company's
Series B Stock (the "Shares") at a redemption price equal to $4.5825 per share
plus accrued dividends thereon. Pursuant to the Idanta Agreement, Idanta became
entitled to redemption upon the delisting of the Company's Common Stock from the
Nasdaq SmallCap Market. In December 1998, the Company redeemed the Shares for an
aggregate price of $4,648,000. An aggregate of 18,003 shares of Series B
Preferred Stock remain outstanding.
In February 1997, the Company completed a $3,500,000 private placement with
certain investors whereby the Company issued 6% subordinated convertible
debentures (the "1997 Debentures") and warrants to purchase an aggregate of
50,000 shares of Common Stock (the "Warrants"). The 1997 Debentures accrued
interest at an annual rate of 6%, beginning on the date of issue, with principal
due and payable three years from the date of issue, if and to the extent that
the 1997 Debentures were not previously converted. The 1997 Debentures were
convertible at the option of the holder into the Company's Common Stock at a
discount up to 20% from market price. The Warrants have a term of 60 months and
have an exercise price of $22.50 per share. The 1997 Debentures and Warrants
were issued in reliance upon the exemption from the registration set forth in
Section 4(2) of the Securities Act. In May 1997, the 1997 Debentures were
converted into 100,000 shares of the Company's Series A Convertible Preferred
Stock having an aggregate stated value of $3,500,000.
In May 1999 Preferred Stock Purchase Warrants (the "Preferred Warrants")
were issued to the holders of the 1997 Debentures to purchase a total of 42,858
shares of Series A Stock. The term of the Preferred Warrants is 60 months with
an exercise price of $35.00 per share (provided such warrants could only be
exercisable when the last reported sales price of the Common Stock on the most
recent trading day is equal to or greater than $15.00 per share). The Preferred
Warrants and the Series A Stock issued upon exercise were issued in reliance
upon the exemption from the registration set forth in Section 4(2) of the
14
<PAGE>
Securities Act. Subsequently, 51,972 shares of the Series A Stock were converted
into 454,693 shares of the Company's Common Stock at prices ranging from $3.67
to $6.06 per share. The shares of Common Stock issued upon the conversion of the
Series A Stock were issued in reliance upon the exemption from the registration
set forth in Section 3(a)(9) of the Securities Act. In August 1997, the Company
redeemed all of the remaining outstanding shares of the Series A Stock and the
Preferred Warrants for an aggregate price of $1,827,000. Also in August 1997,
the outstanding Warrants for 50,000 shares of Common Stock were exchanged for
new warrants to purchase 35,000 shares of the Company's Common Stock at an
exercise price of $5.3125 per share. The warrants, issued upon exchange of the
old warrants, were issued in reliance upon the exemption from the registration
set forth in Section 4(2) of the Securities Act. In September 1997, Common Stock
warrants to purchase an aggregate of 10,500 shares of Common Stock were
exercised for an aggregate price of $56,000. The shares of Common Stock issued
upon exercise of the warrants were issued in reliance upon the exemption from
the registration set forth in Section 3(a)(9) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997(C) 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues................................ $ 1,987 $ 7,700(b) $ 15,503(b) $ 33,577 $51,117(a)
Gross profit............................ $ 690 $ 393 $ 4,600 $ 16,569 $33,624
Operating income (loss)................. $(8,946) $(8,061) $(15,101) $(18,435) $ 2,324
Net income (loss)....................... $(9,961) $(8,268) $(16,432) $(21,376) $ 1,957
Basic net income (loss) per share:
Profit (loss) before extraordinary
item................................ $ (2.30) $ (2.00) $ (7.15) $ (10.30) $ 0.90
Extraordinary item.................... (0.35)
------- ------- -------- -------- -------
Net income (loss) per share........... $ (2.30) $ (2.00) $ (7.50) $ (10.30) $ 0.90
Diluted net income (loss) per share:
Profit (loss) before extraordinary
item................................ $ (2.30) $ (2.00) $ (7.15) $ (10.30) $ 0.90
Extraordinary item.................... (0.35)
------- ------- -------- -------- -------
Net income (loss) per share........... $ (2.30) $ (2.00) $ (7.50) $ (10.30) $ 0.90
Basic weighted average shares
outstanding........................... 4,332 4,125 3,030 2,066 1,939
Diluted weighted average shares
outstanding........................... 4,332 4,125 3,030 2,066 2,123
------- ------- -------- -------- -------
YEAR END FINANCIAL DATA:
Working capital (deficit)............... $ (561) $(3,510) $ (47) $ (1,240) $ 6,741
Total assets............................ $ 7,085 $ 6,853 $ 11,256 $ 29,527 $28,980
Redeemable preferred stock.............. $ 3,086 $ 3,083 $ 4,594 -- --
Long-term debt.......................... $ 8,079 $ 330 $ 58 $ 6,636(c) $ 1,207
------- ------- -------- -------- -------
</TABLE>
- - ------------------------
(a) Revenues, net income and net income per share for 1995 included amounts
related to a technology distributed by GateField and owned by a U.K.
Company. Effective January 1, 1996, the two companies formed a joint
venture. Consequently, specific revenues and costs related to this product
were no longer consolidated in GateField's financial statements beginning in
1996.
(b) Revenues decreased in 1998 and 1997 due to the sale of certain assets of the
Company (see Note 3 of Notes to Consolidated Financial Statements).
(c) As restated, see Note 11 of Notes to Consolidated Financial Statements.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read this Management's Discussion and Analysis of Financial
Condition and Results of Operations in conjunction with our 1999 Financial
Statements and notes thereto. The matters addressed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, with
the exception of the historical information presented, contain forward-looking
statements involving risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under the heading "Certain
Factors That May Affect Future Results" following this Management's Discussion
and Analysis section, and elsewhere in this report.
OVERVIEW
GateField Corporation designs, develops, manufactures and markets high
density, high performance programmable logic solutions and related development
software. The Company's products are flash-based FPGAs trademarked as
programmable ASICs ("ProASIC-TM-"). The products were developed using two
proprietary and patented technologies: a flash-based switching element and a
fine-grained, gate array-like ProASIC architecture. The Company believes the
principal advantages of GateField products over alternative SRAM-based and
antifuse devices are: smaller chip size for the same geometries,
reprogrammability and non-volatility and the ability to use a standard
electronic design automation ("EDA") application specific integrated circuit
("ASIC") design flow.
GateField's products are designed to provide high integration, fast
time-to-market and fast time-to-volume for electronic equipment manufacturers in
the networking, telecommunications, computer, peripheral, industrial control,
instrumentation and consumer markets. Infineon has agreed to manufacture
GateField's 0.25-micron product wafers in its production facility in Dresden,
Germany.
The Company began selling 0.72-micron standard ProASIC product in late 1996
and terminated sales in 1999. The 0.72-micron product was not competitive due to
its late introduction and experienced negative gross margin due to poor
manufacturing yields, both of which were the result of difficulties encountered
in developing the manufacturing processes with Rohm, the third-party
manufacturer of the Company's 0.72-micron wafers. However the 0.72-micron
product did prove the feasibility of the technology.
The Company began development of its family of 0.25-micron programmable ASIC
products in 1998 to be manufactured by Infineon in their fab in Dresden. The
Company reviewed its strategies, organization and expenses in the third quarter
of 1998 and decided to significantly reduce personnel and other operational
expenses. In addition, the Company entered into a strategic alliance with Actel
Corporation, under which Actel received exclusive, worldwide distribution rights
to GateField's 0.25-micron and below standard ProASIC products. The alliance
allowed the Company to essentially eliminate its sales and marketing department
while at the same time, in management's opinion, increase the ProASIC product's
exposure to the market place.
As a result of this strategy the Company was able to reduce its operating
expenses, net of wafer and mask costs included in R&D expenses, to approximately
$2.1 million per quarter since the fourth quarter of 1998. GateField expects
operating costs in the fiscal year 2000 to range between $2 million and
$3 million per quarter due to additions to head count required to support a
transition from development to production and an increased level of spending for
new masks. Management's plan in 2000 is to control operating expenses at the $2
to $3 million per quarter level, to have the capacity to produce pre-production
parts in volume in the third quarter of 2000, and to obtain additional
financing. Because the Company has terminated product lines and changed
development direction and its operating model, its historical financial
performance cannot and should not be used to indicate future financial
performance.
GateField maintains rights to the intellectual property underlying its
technology allowing it to address the emerging market for embedded
reprogrammability. The Company will seek to license its technology
16
<PAGE>
for embedded products in the future. GateField has entered into licensing
agreements with Infineon and Rohm, which provide them with manufacturing or
distribution rights to various GateField products; these agreements resulted in
approximately $4.5 million in deferred revenue in 1998. (see Description of
Business-License Agreements). These agreements do not include per unit royalty
fees.
In March 1999, the Company's Board of Directors approved a ten-for-one
reverse stock split of the Company's common stock. In June 1999, the Company's
shareholders approved the reverse stock split. The reverse split became
effective on June 30, 1999 (the "Effective Date"). No fractional shares were
issued. In lieu of any such fractional share interest, each holder will receive
cash in an amount equal to the product obtained by multiplying (i) the closing
sales price of the Company's Common Stock on the Effective Date as reported on
the OTCBB by (ii) the number of shares of Common Stock held by such holder that
would otherwise have been exchanged for such fractional share interest. All
amounts in the accompanying financial statements have been adjusted to give
effect to the reverse stock split.
RESULTS OF OPERATIONS
REVENUES
Total product revenues declined to $1.3 million in 1999 down from
$2.6 million in 1998 and $5.4 million in 1997. The 1997 figure includes
$2.5 million in verification products from assets the Company sold in that year.
Sales of ProASIC related products were $1.3 million in 1999, $2.6 million in
1998 and $2.9 million in 1997. ProASIC product revenue includes deferred license
revenue from Infineon and from Rohm of approximately $.9 million in 1999 and
$1.1 million in 1998. The decline in ProASIC revenues from 1997 through 1999 was
due to a decision by the Company to halt active sales of the 0.72-micron product
in the third quarter of 1998 and due to the current delay in shipment of its
0.25-micron product that was scheduled to begin in the second half of 1999.
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. The Company does not expect to begin shipment of
pre-production quality parts for this family until the second 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. 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.
Service revenues were $.6 million, $5.1 million and $10.1 million in 1999,
1998 and 1997, respectively. Service revenues are comprised of two components:
maintenance contracts on the verification systems and design services.
Verification maintenance revenues were $.6 million in 1999, $2.3 million in 1998
and $8.7 million in 1997. The decline in verification maintenance revenues in
1998 from 1997 relates to the sale of the underlying verification products and
the termination of new sales of those products by the purchaser. The Company
expects revenues from the verification services to cease in 2000. Service fees
related to the Company's Design Service product line, which was sold to Actel in
August 1998, were $2.8 million in 1998, and $3.8 million in 1997.
GROSS MARGIN
Gross margin in 1999, 1998 and 1997 was affected by many factors, including
but not limited to: license fees, pricing strategies, product mix, yield
variations and increased costs incurred in the introduction of new products.
Gross margin was approximately $690,000 in 1999, $393,000 in 1998 and
$4.6 million in 1997. Gross margin as a percentage of total revenues was 35% in
1999, 5% in 1998 and 30% in 1997.
17
<PAGE>
Gross margin (deficit) from product revenues was $213,000 in 1999, ($2.0)
million in 1998, and $(1.0) million in 1997. Gross margin related to
verification products was ($1.8) million in 1997. Gross margin (deficit) related
to ProASIC products was $.2 million in 1999, $(2.0) million in 1998, ($3.3)
million in 1997. In 1998, negative ProASIC product margins were significantly
affected by a $1.8 million inventory write-down charge for 0.72-micron product
inventories to reflect a decrease in the net realizable value, which was
partially offset by $1.2 million in license revenue with minimal related costs.
The decline in ProASIC gross margins in 1998 versus 1997 were largely due to
volume differences and the inventory write-down charge. As the design and
manufacturing processes are different for the 0.72-micron and the 0.25-micron
products, the yield and, hence, the gross margins on the two products are
totally unrelated, thus, the Company cannot predict its margins for 2000 with
any degree of certainty.
Gross margin from service revenues was $.5 million in 1999, $2.4 million in
1998, and $5.6 million in 1997. Gross margin as a percentage of service revenues
was 75%, 48%, and 56% for the three years respectively. Margins related to
maintenance contracts on the verification systems were $2.2 million or 69.7% in
1998 and $4.8 million or 77.5% in 1997. Margins related to design services were
$277,000 or 14% in 1998 and $725,000 or 19% in 1997. The decline in service
margin was due to the sale of the respective assets as detailed in Note 3.
Service margin after this date relate to profit sharing agreements with the
purchasers which are expected to cease in the year 2000.
SALES AND MARKETING
Sales and marketing expenses were $.8 million or 39% of total revenue in
1999, $4.1 million or 53% in 1998, and $9.7 million or 62% in 1997. In 1999,
sales and marketing expenses declined 81% due to the Company's strategic
decision to largely eliminate that function in August of 1998 and enter into a
strategic marketing agreement with Actel. In 1998, sales and marketing expenses
also decreased 58% or $5.6 million from earlier year figures reflecting reduced
staffing levels in the second half of 1997 resulting from the disposition of
product lines in 1997.
As a result of GateField's efforts to market its 0.72-micron products in
1997 and early 1998, the Company realized the process of introducing new
products to the semiconductor marketplace required significant sales and
marketing resources. The Company elected to sell the exclusive worldwide
distribution rights to its 0.25 and below standard ProASIC products to the Actel
Corporation in August 1998 and to focus on product development. With this
strategic alliance in place GateField only needs to support its strategic
initiatives and product design efforts and therefore expects marketing expenses
in 2000 to be similar with those in 1999.
RESEARCH AND DEVELOPMENT
GateField's research and development expenses were $5.9 million or 298% of
total revenue in 1999, $5.5 million or 71% of total revenue in 1998 and
$7.9 million or 51% of total revenue 1997. R&D expenses increase 8% in 1999 over
1998 due to $.8 million in wafer costs necessary to refine the design of the
0.25-micron family and develop the manufacturing process with Infineon, these
costs were partially offset by reduced headcount. A similar level of wafer costs
and masks expense is anticipated in 2000. The 30% decrease in R&D costs in 1998
over 1997 were principally due to reduced staffing levels resulting from the
sale of the verification businesses in 1997. R&D expenses related to ProASIC
development have remained relatively constant over the three-year period from
1997 to 1999. GateField's current research and development efforts are currently
focused on its four member 0.25-micron ProASIC product family; the Company
believes its research and development expenses will increase slightly in 2000
over those experienced in 1999 due to anticipated increases in headcount
associated with the development of new product families, increase mask costs and
increased cost associated with yield improvement efforts on the 0.25-micron
product family.
18
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GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.7 million, $3.3 million and
$4.2 million in 1999, 1998 and 1997, respectively. This declining trend in
general and administrative expenses in 1999 as compared to 1998 and in 1998 as
compared to 1997 was primarily related to decreased staffing levels, cost
cutting measures and reduced overhead. These reduced expenses were partially
offset by higher legal, financial, and consulting expenses associated with the
implementation of strategic relationships in 1997 and 1998. 1999 expenses
included $.2 million related to a moving the Company's offices to a smaller
facility. The Company believes that general and administrative expenses in 2000
will be approximately the same as those experienced in 1999.
LOSS (GAIN) ON SALE OF ASSETS
As mentioned earlier, the current Company was originally a division of Zycad
Corporation, a leader in the development, manufacturing and marketing of design
verification tools and services. It realized the verification industry was dying
and in 1993 began a division, GateField, to research and develop a new and
innovative semiconductor logic product. From 1993 to 1998 the Company
transitioned to a designer, developer and marketer of high-density,
high-performance programmable logic solutions and related development software.
This transition required the sale of several of Zycad's assets in 1997 which,
when combined resulted in a $2.7 million gain in the operating expenses for that
year. Assets sold in 1997 included: its stock ownership in QSS Inc.; products
and assets related to its verification product line, including its rights, title
and interest in hardware and software simulation products; and the assets
related to the semiconductor test software product line. In addition, Zycad sold
its maintenance division for the verification products to Zycad TSS, Inc. The
Company also incurred a $722,000 loss from the sale of excess equipment in 1997.
In 1998 the Company had a $4.5 million gain from the sale of its Design Services
product line which it sold to focus solely on the research and development of
ProASIC, its programmable logic technology and a $70,000 loss on the sale of
excess equipment. Finally in 1999 the Company had an additional loss on the sale
of excess equipment in the amount of $199,000 when the Company moved to smaller
office space. (See Note 3 of the "Notes to Consolidated Financial Statements.")
OTHER INCOME AND EXPENSE
Net interest expense was $1.3 million in 1999 compared to $173,000 in 1998
and $1.4 million in 1997. The increase in 1999 relates to the $8.0 million in
Convertible Promissory Note entered into in May 1999 while the decrease in 1998
reflects the lack of interest-bearing debt compared to earlier periods and
interest income on positive bank balances held throughout the year due to the
Company's issuance of equity at the end of 1997 and during 1998. Interest
expense in 1997 relates primarily to subordinated convertible debentures that
were converted to common stock in 1997.
Other income was $313,000 in 1999, $34,000 in 1998 and $1.1 million in 1997
and represent interest income on the cash balances of the Company.
NET LOSS
The net loss for 1999 was $10.0 million, which compares to a net loss of
$8.3 million in 1998 and a net loss of $16.4 million in 1997. The 1999 figure
includes a $1.2 million Conversion Discount recognized in the second quarter of
1999 as a non-cash interest expense and $.8 million in wafer costs necessary to
develop the manufacturing process at the fab. Recognizing the impact of lower
sales in these years, the Company took steps to decrease operating expenses
through a series of reorganizations, which helped to progressively reduce the
annual net loss. The Company has consistently maintained its operating expenses
for the last five quarters at approximately $2.1 million, not including mask
expenses, wafer development lots and write off of obsolete inventory.
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The $8.3 million net loss in 1998 was aided by a $4.5 million gain in other
income from the sale of the Company's Design Services assets to Actel. This
compares to a $16.4 million net loss in 1997 which was also aided by a
$2.7 million gain in other income from the sale of certain assets in that year
and offset by $500,000 in debt discount amortization and $1 million debt
extinquishment losses. (See Note 3 of the "Notes to Consolidated Financial
Statements.") The loss in 1998 was additionally impacted by a $2.2 million
one-time inventory write-down charge to cost of sales.
LIQUIDITY AND CAPITAL RESOURCES
GateField has historically used private offerings of convertible debt and
convertible preferred stock, public and private offerings of common stock, sale
and leaseback arrangements and bank financing and credit lines to finance its
business.
Net cash used in operations was $8.8 million in 1999 compared to
$8.2 million in 1998 and $11.3 million in 1997. During 1999, 1998 and 1997,
there was a significant decline in the size of the business as the Company
transitioned to an intellectual property Company and sold off its other
significant assets related to non-ProASIC product lines. This decrease in the
size of the business resulted in decreasing accounts receivable, accounts
payable and accrued liabilities balances and decreasing depreciation expenses.
The decrease in net cash used in operations was partially offset in 1998 by the
receipt of $4.5 million in license fees resulting in deferred revenue.
Net cash used in investing activities was $.7 million in 1999 compared to
net cash provided by investing activities of $5.2 million in 1998 and
$11.2 million in 1997. The amounts generated in 1998 and 1997 were primarily due
to cash receipts from the disposition of product families. GateField expects to
invest a minimum of $300,000 and possibly as much as $1.1 million in mask sets
for its new product families in 2000 but does not currently anticipate any other
significant capital asset acquisitions during 2000.
Net cash generated by financing activities was $10.8 million in 1999, which
compares to $2.9 million in 1998 and $3.0 million in 1997. The increase in 1999
includes the sale of $3.1 million of common stock to private investors and the
issuance to Actel of a convertible promissory note in the aggregate principle
amount of $8.0 million. The cash generated by financing activities in 1998 was
due to the $4.6 million sale of common stock to a single investor in the first
quarter of 1998, the $3.0 million sale of Convertible Preferred Stock in
August 1998, offset by the $4.6 million redemption of the Company's Series B
Convertible Preferred Stock in December 1998. (See Note 9 of the "Notes to
Consolidated Financial Statements.") The 1997 figure includes the sale of
$4.6 million in Convertible Preferred Stock. (See Note 9 of the "Notes to
Consolidated Financial Statements.").
At December 31, 1999, the Company had cash and cash equivalents of
$5.4 million. The Company had a working capital deficit of $.6 million compared
to deficits of $3.5 million at December 31, 1998 and $47,000 at December 31,
1997.
During 1999, 1998 and 1997, GateField incurred net losses of approximately
$10.0 million, $8.3 million and $16.4 million, respectively. The Company expects
to continue to generate such losses for at least the remainder of 2000.
Additionally, the Company had working capital deficit of $.6 million at
December 31, 1999. As a result, the Company estimates it will have utilized all
of its currently available capital resources on or about June 30, 2000. The
Company estimates that it will need at least an additional $10 million to
$15 million to reach operating breakeven and maybe more if the product is not
enthusiastically accepted into the marketplace. Thus, the Company will be unable
to continue as a going concern if sufficient funding is not available.
Accordingly, the Board of Directors has authorized management to identify all
options to strengthen its operating capabilities and provide greater financial
resources including, but not limited to, the sale of debt, sell common stock or
preferred stock. The Board has authorized management to pursue its options in
raising from $10 million to $15 million in additional capital to fund
operations.
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In the past GateField has contacted a number of potential providers of
additional capital, including investment banking firms, financial investors,
customers, potential customers, strategic partners and potential strategic
partners. The price per share of common stock to be issued in any new financing
would be determined at about the time the offering is made. It is anticipated
that should the Company be able to sell equity or debt to investor stockholders
the common stock would be issued at a substantial discount to the prevailing
market price to reflect the illiquidity of the shares. GateField is seeking one
or more investors to participate in the proposed financing; however, it has not
yet identified such investors. If additional funds are raised through the
issuance of equity securities, the percentage ownership of current stockholders
will be reduced and such equity securities may have rights, preferences or
privileges senior to those of current stockholders. No assurance can be given
that additional financing will be available or that, if available, it can be
obtained on terms favorable to GateField and its stockholders. If adequate funds
were not available, the Company would be required to delay, limit or eliminate
some or all of its proposed operations.
In a Security Agreement dated May 25, 1999 between Actel and the Company,
the Company may elect to borrow an additional $4.0 million under the same terms
and conditions as its $8.0 million convertible promissory note. Actel in its
sole and absolute discretion may make such loan and has indicated to the Company
its interest in doing so. However Actel is under no obligation to fund the
Company in any manner and there can be no assurance that Actel funding, or any
other source of funding will be available when needed or that, if available, it
can be obtained on terms favorable to GateField and its stockholders. If
adequate funds were not available, the Company would be required to delay, limit
or eliminate some or all of its proposed operations.
On July 15, 1998, the GateField Corporation's stock was delisted from the
Nasdaq National Market and moved to the Nasdaq SmallCap Market. On
September 17, 1998, the Company's stock was delisted from the Nasdaq SmallCap
Market for failing to meet Nasdaq's on-going minimum bid price requirement. At
that date, the Company's stock immediately began to trade on the OTC Bulletin
Board.
YEAR 2000 ISSUES
GateField Corporation is aware that many existing information technology
("IT") systems, such as computer systems and software products, as well as
non-IT systems that include embedded technology, were not designed to correctly
process dates after December 31, 1999. In 1999 the Company assessed the impact
of such "Year 2000" issues on its internal IT and non-IT systems, as well as on
its customers, suppliers and service providers. The Company formed a "Year 2000
Team" to identify, access and resolve Year 2000 compliance issues. The Year 2000
Team tested and evaluated GateField's products and the Company's IT systems and
completed an inventory of all material Year 2000 issues.
The assessment and all remedial action for all of its products, IT systems
and non-IT systems were completed by the end of calendar year 1999. GateField
has not experienced any Year 2000 related problems and is not aware of any
material Year 2000 issues that may arise in the future but will take the
necessary steps to make its systems Year 2000 compliant if those issues
materially impact the Company's ability to transact its business. These steps
may require the Company to modify, upgrade or replace some of its internal
financial and operational systems. While there is some chance future Year 2000
issues may yet arise the Company does not believe they will arise and therefore
cannot determine what efforts if any may be required nor the costs of such
efforts. GateField believes, based upon currently available information, that
these costs will not have a material adverse effect on the business, financial
condition or results of operations of the Company--although no assurances can be
given. Nor can GateField be assured that unresolved or undetected internal and
external Year 2000 issues with third parties will not have a material adverse
effect on the Company's business, financial condition and results of operations.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 and June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" And SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133", respectively, which establishes accounting and
reporting standards for derivative instruments and hedging activities. These
statements require companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. SFAS
No. 133 will be effective for the Company's fiscal year ending December 31,
2001. Management believes that these statements will not have a significant
impact on the Company's financial position, results of operations or cash flows.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of February 10, 2000
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ---- -------- ------------------------------------------
<S> <C> <C>
Timothy Saxe.............................. 44 President, Chief Executive Officer and
Chief Operating Officer
Peter G. Feist............................ 45 Senior Vice President, Marketing
James B. Boyd............................. 47 Chief Accounting Officer and Controller
</TABLE>
TIMOTHY SAXE, a founder of the Company, has been President and Chief
Operating Officer of the Company since July 23, 1998 and Chief Executive Officer
of the Company since February 8, 1999. From October 1997 to July 1998 he was
Vice President of Engineering and Research and Development of the Company. From
1993 to 1997, Dr. Saxe was Vice President of Engineering of the GateField
division of Zycad.
PETER G. FEIST has served as Vice President, Business Development of the
Company since October 1996. From January 1995 to September 1996, he was Regional
Manager, Europe for Hyundai Electronics, Digital Media Division, a semiconductor
Company. From April 1985 to December 1994, he was Director of Marketing for LSI
Logic GmbH, an ASIC Company.
JAMES B. BOYD has served as Chief Accounting Officer and Controller of the
Company since April 1998. From February 1998 to April 1998, he was a consultant
with various companies for Re:Sources, an accounting agency. Prior to that time,
he was Chief Financial Officer of AirMedia, Inc. a software developer and
manufacturer of wireless mobile products. From March 1996 to August 1997, he was
Controller of Netopia Communications, Inc., a manufacturer of network
communications equipment. From December 1992 to March 1996, he was an
independent consultant working for several technology companies.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-K contains forward-looking statements concerning our existing
and future products, markets, expenses, revenues, performance and cash needs as
well as our plans and strategies. These forward-looking statements involve risks
and uncertainties and are based on current management expectations, and we re
not obligated to update this information. Many factors could cause actual
results and events to differ significantly from the results anticipated by us
and described in these forward-looking statements, including but not limited to
the following risk factors.
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OPERATING LOSSES AND NEGATIVE WORKING CAPITAL
Currently, GateField has a negative working capital position. Also, the
Company has not reported an operating profit since fiscal 1995. The Company
reported operating losses of $8.8 million in 1999, $12.5 million in 1998 and
$17.1 million in 1997. In addition, a substantial number of parts will have to
be sold on a quarterly basis before the Company can achieve quarterly
profitability and 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 loss, or whether or if it will become profitable.
NO ASSURANCE OF FUTURE FUNDING
GateField must continue to make significant investments in research and
development to 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 existing
resources and future earnings are insufficient to fund the Company's operations,
GateField may need to raise additional funds through public or private debt or
equity financings. If additional funds are raised through the issuance of equity
securities, the percentage ownership of current stockholders will be reduced and
such equity securities may have rights, preferences or privileges senior to
those of the holders of the Company's common stock.
The Company has historically funded its operations primarily through private
equity and debt financings, sale and leaseback arrangements and bank financing
and credit lines. The Company intends to continue to explore and, as
appropriate, enter into discussions with current stockholders and other parties
regarding possible future sources of capital (See "Liquidity and Capital
Resources"). Although Actel has indicated their preliminary interest in
providing additional funding, no assurance can be given that this additional
financing will be available or that, if available, it can be obtained on terms
favorable to GateField and its stockholders. Unless the Company obtains
additional funding, the Company will have utilized all its currently available
resources on or about June 30, 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 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, 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
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<PAGE>
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. Furthermore, Infineon is in the process of being
spun off as a public Company from its parent Company Siemens, so there can be no
assurance that the wafer manufacturing portion of such operations will be
willing and capable of continuing to support the manufacture of GateField's
products.
GateField plans to initially produce its 0.25-micron products in relatively
low volumes. Still, it will be competing with 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 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 condition and results
of operations. These risks are particularly pronounced with respect to the
Company's 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. Although Infineon has also invested significant
resources into its relationship with GateField, 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
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<PAGE>
foreseeable future. Consequently, GateField is highly dependent on Actel's sales
efforts and the success of its sales force in marketing GateField's 0.25-micron
products.
Actel will continue to market its own products, including products that are
competitive with GateField's products. Accordingly, there is a risk that Actel
may give higher priority to the Actel products, thus reducing its efforts to
sell GateField's products. In addition, GateField's agreement with Actel is
terminable by Actel under a variety of circumstances, including GateField's
material breach of the product marketing agreement. As GateField would require
significant amounts of time and resources to rebuild its sales force, reduction
in sales efforts by Actel or a termination of its agreement with GateField would
have a material adverse effect on GateField's business, financial condition and
results of operations. Furthermore, if Actel's sales and marketing efforts do
not achieve anticipated growth rates, GateField would be forced to reduce the
amount of product that is manufactured. As a result, the Company's profit
margins on future sales of higher cost products would be reduced because
GateField would be unable to take full advantage of 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
.25-micron product family. The agreement also contains Actel milestones with
respect to the marketing and sale of the .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 .25
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 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.
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<PAGE>
DEPENDENCE ON KEY PERSONNEL
GateField's success is dependent in large part on the continued service of
its key management, engineering, marketing and support employees. Competition
for qualified personnel, particularly skilled IC engineers, is intense in the
semiconductor industry. The loss of GateField's current key employees, or the
inability of the company to attract other qualified personnel, could have a
material adverse effect on GateField. The Company does not have employment
agreements with any of its key employees, but it does have standard
non-disclosure agreements with all technical and management employees and it
does have indemnity agreements with Dr. Timothy Saxe, its chief executive
officer, president and chief operating officer, and Peter G. Feist, its senior
vice president of marketing, and James B. Boyd, its chief accounting officer.
PRICE EROSION
The semiconductor industry is characterized by intense competition.
Historically, average selling prices in the semiconductor industry in general,
and for GateField's products in particular; have declined significantly over the
life of each product. Moreover, GateField is highly dependent on Actel for the
marketing of the Company's next generation of ProASIC products. While GateField
expects that the average selling prices of its products will be reduced over
time as the Company achieves manufacturing cost reductions, GateField may from
time to time be required by competitive pressures to reduce the prices of its
products more quickly than such cost reductions can be achieved. In addition,
GateField occasionally approves price reductions on specific sales to meet
competition. If these reductions are not offset by reductions in manufacturing
costs or by a shift in the mix of products sold toward higher-margin products,
declines in the average selling prices of GateField's products will reduce gross
margins and could have a material adverse effect on the Company's business,
financial condition and results of operations.
MANUFACTURING YIELDS
GateField depends upon its independent wafer manufacturers to produce wafers
with acceptable yields and to deliver them to GateField in a timely manner.
Currently, substantially all of the Company's revenues are derived from products
based on GateField's proprietary ProASIC technology. Successful implementation
of ProASIC technology requires a high degree of coordination between GateField
and its independent wafer manufacturers. In particular, with respect to the
manufacture of GateField's 0.25-micron products, 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.
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
26
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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 gross margin.
27
<PAGE>
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 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
In the past, GateField has operated sales offices in England, Germany and
Japan. Sales from these offices were in the local currency and, therefore,
exposed the Company to currency exchange fluctuations. Sales to customers
located outside the United States accounted for approximately 15% in 1999, 30%
in
28
<PAGE>
1998, and 48% in 1997. Of these sales, sales to customers located in the Asia
Pacific region and Japan accounted for approximately 15%, 25% and 28% of net
revenues for 1999, 1998 and 1997, respectively.
Although GateField has closed its foreign sales offices, with the exception
of the Japan office, it expects that revenues derived from international sales
will continue to represent a significant portion of the Company's total revenues
because of its marketing relationship with Actel. Further, such direct foreign
sales are denominated in U.S. dollars. Therefore, GateField's products become
less price competitive in countries with currencies that are declining in value
against the dollar. International sales are subject to a variety of risks,
including longer payment cycles, greater difficulty in accounts receivable
collection, currency restrictions, tariffs, trade barriers, taxes, export
license requirements and the impact of recessionary environments in economies
outside the United States.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT; RAPID TECHNOLOGICAL CHANGE
The market for GateField's products is characterized by rapidly changing
technology, frequent new product introductions, and declining average selling
prices over product life cycles. All of these factors make the timely
introduction of new products a critical objective of the Company. GateField's
future success is highly dependent upon the timely completion and introduction
of new products at competitive price and performance levels, including the
timely introduction of its 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
29
<PAGE>
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 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.
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GATEFIELD CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 5,418 $ 3,832
Accounts receivable, less allowance for doubtful accounts
of $536 in 1999 and $244 in 1998........................ 33 463
Inventories............................................... -- 117
Other current assets...................................... 205 556
-------- --------
Total current assets.................................... 5,656 4,968
Property and equipment, net................................. 1,423 1,783
Other assets................................................ 6 102
-------- --------
Total assets............................................ $ 7,085 $ 6,853
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term obligations.................. $ 244 $ 393
Accounts payable.......................................... 1,586 1,372
Accrued expenses.......................................... 825 1,941
Deferred revenues......................................... 3,562 4,772
-------- --------
Total current liabilities............................... 6,217 8,478
Long-term obligations....................................... 8,079 330
-------- --------
Total liabilities....................................... 14,296 8,808
Commitments and contingencies (Note 5)
Redeemable Preferred Stock
$0.10 par value; 2,000,000 shares authorized; shares
issued and outstanding: 318,000 in 1999 and 1998--at
redemption value.......................................... 3,086 3,083
Stockholders' deficit
Common stock
$0.10 par value; 65,000,000 shares authorized; shares
issued and outstanding: 4,693,000 in 1999 and 4,193,000
in 1998................................................. 469 419
Additional paid-in capital................................ 86,307 81,900
Accumulated deficit....................................... (96,584) (86,620)
Accumulated other comprehensive loss...................... (489) (737)
-------- --------
Total stockholders' deficit............................. (10,297) (5,038)
-------- --------
Total liabilities and stockholders' deficit............. $ 7,085 $ 6,853
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
31
<PAGE>
GATEFIELD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenues
Product................................................... $ 1,348 $ 2,624 $ 5,385
Service................................................... 639 5,076 10,118
-------- ------- --------
Total revenues.......................................... 1,987 7,700 15,503
-------- ------- --------
Cost of revenues
Product................................................... 1,135 4,648 6,421
Service................................................... 162 2,659 4,482
-------- ------- --------
Total cost of revenues.................................. 1,297 7,307 10,903
-------- ------- --------
Gross profit............................................ 690 393 4,600
-------- ------- --------
Operating expenses
Sales and marketing....................................... 783 4,112 9,664
Research and development.................................. 5,915 5,478 7,854
General and administrative................................ 2,739 3,256 4,202
Loss/(gain) on sale of assets............................. 199 (4,392) (2,019)
-------- ------- --------
Total operating expenses................................ 9,636 8,454 19,701
-------- ------- --------
Operating loss.............................................. (8,946) (8,061) (15,101)
-------- ------- --------
Other income (expense)
Interest expense, net..................................... (1,328) (173) (1,379)
Other income (expense), net............................... 313 (34) 1,096
-------- ------- --------
Total other expense..................................... (1,015) (207) (283)
-------- ------- --------
Loss before extraordinary item.............................. (9,961) (8,268) (15,384)
Extraordinary item--loss on early extinguishment of debt.... -- -- (1,048)
-------- ------- --------
Net loss.................................................... (9,961) (8,268) (16,432)
Other comprehensive loss:
Currency translation adjustments.......................... (248) (193) (496)
-------- ------- --------
Comprehensive loss.......................................... $(10,209) $(8,461) $(16,928)
======== ======= ========
Loss attributable to common stockholders.................... $ (9,964) $(8,405) $(22,725)
======== ======= ========
Basic and diluted net loss per share:
Loss before extraordinary item............................ $ (2.30) $ (2.00) $ (7.15)
Extraordinary item........................................ -- -- (0.35)
-------- ------- --------
Basic and diluted net loss per share........................ $ (2.30) $ (2.00) $ (7.50)
======== ======= ========
Basic and diluted weighted average shares outstanding....... 4,332 4,125 3,030
======== ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
32
<PAGE>
GATEFIELD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities
Net loss.................................................. $(9,961) $(8,268) $(16,432)
Reconciliation to net cash used in operating activities
Depreciation and amortization........................... 894 1,866 3,124
Subordinated convertible debt interest and debt
extinquishment loss................................... 1,231 -- 1,745
Loss on disposition of property and equipment........... 199 70 722
Gain on sale of assets.................................. -- (4,462) (2,741)
Stock compensation expense.............................. -- 56 9
Sales under capital leases.............................. -- -- (606)
Collections under capital leases........................ -- -- 620
Changes in assets and liabilities
Accounts receivable................................... 430 1,484 9,543
Inventories........................................... 117 618 143
Other assets.......................................... 447 159 31
Accounts payable and accrued expenses................. (902) (3,578) (5,951)
Deferred revenues..................................... (1,210) 3,819 (1,549)
------- ------- --------
Net cash used in operating activities............... (8,755) (8,236) (11,342)
------- ------- --------
Investing activities:
Property and equipment purchases.......................... (733) (332) (1,568)
Proceeds from sale of assets.............................. -- 5,400 12,750
Proceeds from sale of short-term investments.............. -- 98 --
------- ------- --------
Net cash provided by (used in) investing
activities........................................ (733) 5,166 11,182
------- ------- --------
Financing activities:
Proceeds from issuance of convertible debt, net........... 8,000 -- 2,650
Proceeds from issuance of common stock.................... 3,226 5,108 458
Proceeds from issuance of redeemable preferred stock...... -- 3,000 4,583
Redemption of preferred stock............................. -- (4,648) (1,827)
Proceeds from subscribed stock............................ -- -- 761
Proceeds from warrants.................................... -- 161 1,589
Bank financing, net....................................... -- -- (3,203)
Borrowings under debt obligations......................... -- -- 199
Repayments of debt obligations............................ (400) (676) (2,161)
------- ------- --------
Net cash provided by financing activities........... 10,826 2,945 3,049
------- ------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... 248 (232) (403)
------- ------- --------
Net change in cash and cash equivalents..................... 1,586 (357) 2,486
Cash and cash equivalents, beginning of year................ 3,832 4,189 1,703
------- ------- --------
Cash and cash equivalents, end of year...................... $ 5,418 $ 3,832 $ 4,189
======= ======= ========
Supplemental disclosure of cash flow information
Noncash activities
Common stock issued for convertible debentures.......... $ -- $ -- $ 5,998
Preferred stock issued for convertible debentures....... $ -- $ -- $ 3,553
Accretion of redeemable preferred stock (Note 9)........ $ -- $ -- $ 5,866
Accrued dividends on preferred stock.................... $ 3 $ 137 $ 283
Common stock issued for preferred stock................. $ -- $ -- $ 1,805
Equipment acquired under capital leases................. $ -- $ 825 $ 19
Cash activities
Cash paid during the year for interest.................. $ 173 $ 429 $ 363
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
33
<PAGE>
GATEFIELD CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------
ADDITIONAL ACCUMULATED
PAID-IN OTHER ACCUMULATED
SHARES AMOUNT CAPITAL COMP. LOSS DEFICIT TOTAL
-------- -------- ---------- ----------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997...................... 2,322 $ 232 $59,300 $ (48) $(55,490) $ 3,994
Exercise of common stock options............... 28 3 250 -- -- 253
Compensation for accelerated vesting of stock
options...................................... -- -- 47 -- -- 47
Sale of common stock to employees.............. 9 1 78 -- -- 79
Issuance of common stock to nonemployees for
services..................................... 6 1 69 -- -- 70
Issuance of common stock for debentures, net... 742 74 5,924 -- -- 5,998
Discount on convertible debentures............. -- -- 875 -- -- 875
Accrued dividends on preferred stock........... -- -- 63 -- (283) (220)
Conversion of preferred stock to common
stock........................................ 455 45 1,760 -- -- 1,805
Redemption of preferred stock.................. -- -- -- (144) (144)
Exercise of common stock warrants.............. 10 1 55 -- -- 56
Subscribed common stock........................ 50 5 756 -- -- 761
Accretion of preferred stock................... -- -- 5,866 -- (5,866) --
Issuance of warrants........................... -- -- 1,589 -- -- 1,589
Current translation adjustment................. -- -- -- (496) -- (496)
Net loss....................................... -- -- -- -- (16,432) (16,432)
----- ----- ------- ------ -------- --------
Balances, December 31, 1997.................... 3,622 362 76,632 (544) (78,215) (1,765)
Exercise of common stock options............... 74 7 381 -- -- 388
Sale of common stock to employees.............. 25 2 148 -- -- 150
Issuance of common stock to nonemployees for
services..................................... 1 1 5 -- -- 6
Issuance of common stock....................... 459 46 4,536 -- -- 4,582
Cash received for warrants..................... -- -- 161 -- -- 161
Exercise of common stock warrants.............. 12 1 37 -- -- 38
Accretion of preferred stock................... -- -- -- -- (137) (137)
Current translation adjustment................. -- -- -- (193) -- (193)
Net loss....................................... -- -- -- (8,268) (8,268)
----- ----- ------- ------ -------- --------
$(86,620)
Balances, December 31, 1998.................... 4,193 $ 419 $81,900 $ (737) $(5,038)
Exercise of common stock options............... 17 1 83 -- -- 84
Sale of common stock to employees.............. 8 1 58 -- -- 59
Issuance of common stock....................... 470 47 3,014 -- -- 3,061
Exercise of common stock warrants.............. 5 1 22 -- -- 23
Discount on conversion of promissory note...... -- -- 1,230 -- -- 1,230
Accretion of preferred stock................... -- -- -- -- (3) (3)
Current translation adjustment................. -- -- -- 248 -- 248
Net loss....................................... -- -- -- -- (9,961) (9,961)
----- ----- ------- ------ -------- --------
Balances, December 31, 1999.................... 4,693 $ 469 $86,307 $ (489) $(96,584) $(10,297)
===== ===== ======= ====== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
GateField Corporation, (the "Company"), based in Fremont, California,
designs, develops, manufactures and markets high density, high performance
programmable logic solutions and related development software. During 1998, the
Company disposed of its system engineering services and custom solutions assets
(see Note 3). During 1997, the Company disposed of its verification and
simulation assets (see Note 3).
On July 16, 1998 the Company's common stock was delisted from the Nasdaq
National Market (a distinct tier of the Nasdaq Stock Market) and moved to the
Nasdaq SmallCap Market. Effective September 17, 1998 the Company's stock was
delisted from The Nasdaq SmallCap Market for failure to meet the on-going
minimum bid price requirement. Since that time, the Company's stock has traded
on the OTC Bulletin Board.
The Company reviewed its strategies, organization and expenses in the fourth
quarter of 1998 and as a result of management actions, reduced its monthly cash
expenditures. Management's plan in 2000 is to maintain the level of operating
expenses it established in the fourth quarter of 1999, begin volume shipment of
its .25-micron standard ProASIC products manufactured by Infineon, and to obtain
additional financing. Because the Company is essentially a restart, its
historical financial performance cannot and should not be used to indicate
future financial performance.
In June 1999, the Company effected a ten-for-one reverse stock split. All
shares and per share amounts in these financial statements have been adjusted to
give effect to the stock split.
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 1999, 1998 and 1997, the Company incurred net losses of
approximately $10.0 million, $8.3 million and $16.4 million, respectively.
Additionally, the Company had stockholders' deficits of approximately
$10.3 million and $5.0 million at December 31, 1999 and 1998, respectively, and
is highly dependent on its ability to obtain sufficient additional financing in
order to fund the current and planned operating levels. These factors among
others raise substantial doubt about the ability of the Company to continue as a
going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to obtain additional financing to complete
its new product development and begin commercial sales, and ultimately obtain
sufficient customer demand to attain profitable operations. Management intends
to reduce operating expenses, begin sales of new products currently in
development and obtain additional financing to cover its additional cash flow
requirements until it reaches a break-even level of operations. No assurance can
be given that the Company will be successful in these efforts.
35
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the 1999
presentation. Such reclassification had no effect on previously reported results
of operations or financial position.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All intercompany accounts and transactions have
been eliminated in consolidation. The functional currency of the Company's
foreign subsidiaries is the local currency.
ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
BUSINESS RISKS AND UNCERTAINTIES
The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse effect
on the Company's future financial position or results of operations: dependence
on independent wafer manufacturers and assembly subcontractors; changes in
certain strategic partners or customer relationships; competitive pressures in
the form of new products or price reductions on existing products; advances and
trends in new technologies; ability to capture design wins; cyclical economic
effects of the semiconductor industry; litigation or claims against the Company
based on intellectual property, patent, product, regulatory or other factors and
the Company's ability to attract and retain employees necessary to support its
growth.
CASH EQUIVALENTS
Cash and cash equivalents consist of cash on deposit with banks and money
market instruments with maturities of three months or less when acquired.
SHORT-TERM INVESTMENTS
Short-term investments consist of Certificates of Deposit, stated at cost
plus accrued interest, which approximates market.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company invests in high credit quality short-term money market
instruments and certificates of deposit and limits the amount of credit exposure
to any one entity. The majority of the Company's trade accounts receivables are
derived from sales to manufacturers in the semiconductor, computer, military and
aerospace industries. The Company
36
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
performs ongoing credit evaluations of its customers' financial condition and
limits the amount of credit extended when deemed necessary, but generally
requires no collateral. The Company maintains reserves for estimated potential
credit losses.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment acquired under capital
lease obligations is stated at the lower of fair value or the present value of
future minimum lease payments at the inception of the lease. Depreciation and
amortization is provided over the shorter of the estimated useful lives of the
assets or the life of the lease, using the straight-line method. An impairment
loss is recognized when estimated future cash flows expected to result from the
use of the asset including disposition, is less than the carrying value of the
asset.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109
(SFAS No. 109), "Accounting for Income Taxes," which requires an asset and
liability approach to account for income taxes and requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax basis of assets and liabilities and net operating loss and tax credit
carryforwards. Valuation allowances are provided when necessary to reduce net
deferred tax assets to an amount that is more likely then not to be realized.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board No. 25 (APB
No. 25), "Accounting for Stock Issued to Employees".
REVENUE RECOGNITION
The Company recognizes product revenues at the time of shipment, but may
delay revenue recognition until products are installed or accepted, depending on
the particular product and contract terms. Design and verification service
revenues are recognized as the services are performed. Revenues from the sale of
maintenance contracts are recognized over the term of the respective contract.
ProASIC products are shipped to Actel who in turn may ship them to distributors
under agreements allowing certain rights of return and price protection on
unsold merchandise. Because of this two-layer process of sales, the Company
defers recognition of revenue and related cost of revenue on sales of products
to Actel until such products are sold by Actel or Actel's distributors.
In 1998, the Company adopted Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," which requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. Revenue for software licenses
37
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
included in product revenues is recognized when an agreement has been signed,
the product has been shipped, the fee is fixed or determinable, and collection
of resulting receivable is probable. Software support and maintenance revenue
are deferred and amortized over the maintenance period on a straight-line basis.
Adoption of this statement did not have a material impact on the Company's
financial position, results of operations and cash flows.
NET INCOME (LOSS) PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income or loss attributable to common stockholders by the weighted
average of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock (convertible preferred stock, warrants to purchase common stock and
common stock options using the treasury stock method) were exercised or
converted into common stock. The following potential weighted average common
shares in the diluted EPS computation are excluded in net loss periods, as their
effect would be antidilutive.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Conversion of preferred stock.................... 208,250 514,200 171,800
Warrants......................................... 379,159 398,100 135,600
Stock options.................................... 376,099 268,500 268,600
Convertible Promissory Note...................... 745,204 -- --
</TABLE>
In the computation of loss per share, loss attributable to common
stockholders includes the accretion and dividends on Preferred Stock totaling
$6,293,000 in 1997 and the accrual of dividends on Preferred Stock of $3,000 and
$137,000 in 1999 and 1998, respectively.
COMPREHENSIVE LOSS
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS"), No. 130, "Reporting Comprehensive Income," which requires an
enterprise to report, by major components and as a single total, the change in
net assets during the period from nonowner sources. Statements of comprehensive
loss for 1999, 1998 and 1997 have been included with the statements of
operations.
GEOGRAPHIC AND OPERATING SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
The Company has two reportable segments under SFAS No. 131 (Note 8).
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge
38
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting. SFAS No. 133 will be effective for the Company's fiscal year ending
December 31, 2001. Management believes that these statements will not have a
significant impact on the Company's financial position, results of operations or
cash flows.
NOTE 2: STRATEGIC ALLIANCES
PRODUCT MARKETING AGREEMENT
In August 1998, the Company and Actel Corporation ("Actel") entered into a
Product Marketing Agreement (the "Marketing Agreement"). Under the terms of the
Marketing Agreement, Actel received exclusive, worldwide distribution rights to
the Company's standard ProASIC FPGA products utilizing less than 0.35-micron
geometries, including FPGA products that are integrated with SRAM or Flash
memory and all resulting next generation reduced process geometry ProASIC FPGA
products. For these rights, Actel agreed to pay the Company an initial fee of
$1.0 million and a $1.0 million fee upon qualification of the initial .25-micron
product. Revenue recognition of the $1.0 million initial fee received has been
deferred until delivery of pre-production quality parts to Actel of products
below 0.35-micron.
ACTEL LICENSE AGREEMENT
In August 1998, the Company and Actel entered into a license agreement
pursuant to which the Company granted to Actel a fully paid, non-exclusive,
non-transferable license to sell and upon certain events, make, have made,
import and use the Company's standard ProASIC FPGA products below 0.35-micron
and all resulting next generation reduced process geometry ProASIC FPGA products
(the "Actel License Agreement"). Actel agreed to pay the Company a $1.0 million
fee for such license. Revenue recognition of the $1.0 million license fee
received has been deferred until delivery of pre-production quality parts to
Actel of products below 0.35-micron.
ROHM LICENSE AGREEMENT
In July 1998, the Company and Rohm Co., Ltd. ("Rohm") entered into a license
agreement (the "Rohm License Agreement"). Pursuant to the Rohm License
Agreement, the Company granted to Rohm for a license fee of $2.5 million: (i) a
worldwide, nonexclusive and royalty-free license of the Company's ProASIC
Technology for Standard ProASIC and embedded products down to 0.35-micron with
no limitation on density; and (ii) a license for 0.25-micron and below embedded
products with a per unit royalty. Revenue recognition of the $2.5 million
license fee was initially deferred but is currently being recognized as the
underlying work is performed.
INFINEON LICENSE AGREEMENT
In October 1997, the Company and Infineon Technologies, ("Infineon")
formerly Siemens AG entered into a license agreement (the "Infineon License
Agreement"). Pursuant to the Infineon License Agreement, the Company sold to
Infineon for an unlimited, worldwide, non-exclusive right and license to use the
technology, software, engineering services, and equipment related to ProASIC
products; 50,000 shares of common stock and warrants to purchase 9.9% of the
Company's outstanding common stock for a fee of $3,250,000. In 1997, the Company
received $1,500,000, of which $761,000 was allocated to the shares
39
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 2: STRATEGIC ALLIANCES (CONTINUED)
of Common Stock (see Note 9) and $739,000 was allocated to warrants net of a
warrant receivable of $161,000 (see Note 9). In 1998, the Company received
$1,750,000, of which $750,000 was recorded as Service Revenue for consulting
services, and $839,000 was recorded as Product Revenue for license fees, and
$161,000 was recorded as a receipt of cash for warrants issued in 1997.
NOTE 3: LOSS (GAIN) ON SALE OF ASSETS
DESIGN SERVICES
In August 1998, the Company sold certain assets relating to its Design
Services products, providing prototyping design services and verification
services for electronic systems, integrated circuits and other electronic
components, located in Mt. Arlington, New Jersey to Actel. The purchase price
for such assets was (i) $5.4 million plus (ii) contingent payments to be paid
over a three-year period on a quarterly basis based on Design Services achieving
certain profitability levels which payments shall not exceed $1.0 million in the
aggregate. The Design Services represented approximately 17% of 1998 revenues.
See table below for details of the transaction.
VERIFICATION PRODUCT
In August 1997, the Company sold its assets relating to its verification
products, excluding the maintenance and support business, for a total of
$4,450,000. As defined in the purchase agreement, all of the rights, title and
interest to the intangible assets of the XP and PXP hardware fault simulation
product business were sold for $2,200,000. In a separate agreement, all of the
assets of the Attest division were sold for $2,250,000. The verification
products represented approximately 16% of 1997 revenues. See table below for
details of the transaction.
In October 1997, as a result of the Company selling its rights, title, and
interest in the assets of the XP and PXP hardware fault simulation product, the
Company transferred its related maintenance contracts to Zycad TSS Corporation
("Zycad TSS") in October 1997 for future royalties. Zycad TSS is a Company
formed by former employees of the Company to perform maintenance services. The
agreement with Zycad TSS entitles the Company to receive 30% of all domestic
XP/PXP maintenance revenue in the first two years and 10% in the third year. In
addition, the Company is generally entitled to receive 10% of Japanese revenues
for the first five years up to a $1.8 million.
LIGHTSPEED PRODUCT
In April 1997, the Company sold its software and hardware simulation
technology relating to its LightSpeed product family for $5,000,000. Revenues in
1997 were nominal. See table below for details of the transaction.
QUALITY SYSTEMS SOFTWARE, INC.
In May 1997, the Company sold its interest in QSS Inc. a distributor of the
DOORS technology for $3,500,000. See table below for details of the transaction.
40
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 3: LOSS (GAIN) ON SALE OF ASSETS (CONTINUED)
Details of these transactions are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1999 1998 1997
------------ --------------- -------------------------------------------------
OTHER ASSETS DESIGN SERVICES VERIFICATION LIGHTSPEED QSS 1997 TOTAL
------------ --------------- ------------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales Price........................ $ -- $(5,400) $(4,450) $(5,000) $(3,500) $(12,950)
Net Assets disposed................ 0 687 5,130 3,201 179 $ 8,510
Liabilities incurred............... 0 251 245 1,454 -- $ 1,699
Loss on disposition of other
assets........................... 199 70 -- -- -- 722
---- ------- ------- ------- ------- --------
Loss (Gain) on sale of assets.... $199 $(4,392) $ 925 $ (345) $(3,321) $ (2,019)
==== ======= ======= ======= ======= ========
</TABLE>
NOTE 4: LONG-TERM DEBT
Debt obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Capital leases (see Note 5)................................. $ 323 $ 723
Convertible Promissory Note................................. $8,000 $ --
------ -----
$8,323 $ 723
Current portion............................................. (244) (393)
------ -----
Long term debt.............................................. $8,079 $ 330
====== =====
</TABLE>
TERM LOANS
In May 1999, the Company issued a convertible promissory note in the
aggregate principal amount of $8.0 million (the Note). The Note accrues interest
at 5.22% per annum, has a five-year term and is secured by a lien against all
the assets of the Company. The Note is convertible into 420,000 shares of the
Company's Series C-1 Convertible Preferred Stock. The Series C-1 Convertible
Preferred Stock is in turn convertible into 1,230,769 shares of the Company's
common stock, or the equivalent price of $6.50 per share of common stock.
The Note is convertible at the option of the noteholder. On the date of
issuance, the Note was convertible into common stock at a price equal to
approximately a 13% discount (the Conversion Discount) to the closing market
price as reported on the OTCBB. The Company recognized the Conversion Discount
of $1.2 million during the second quarter of 1999 as a non-cash interest expense
with a corresponding increase in the common stock additional paid in capital.
In 1997, the Company obtained promissory notes from key vendors that bear
interest rates from 12% to 18%. At December 31, 1997 all amounts were classified
as current positions of long-term obligations.
41
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 4: LONG-TERM DEBT (CONTINUED)
SUBORDINATED CONVERTIBLE DEBENTURE NOTES
In May 1996, the Company sold a total of $10,000,000 of subordinated
convertible debenture notes (the "Notes") to institutional investors as part of
a private placement. The Notes accrue interest at an annual rate of 6%,
beginning on the date of issue, with the principal due and payable three years
from the date of issue if and to the extent that the Notes are not previously
converted. The Notes were convertible at the option of the noteholders into
Common Stock at a price equal to 80% to 85% of the average closing bid price for
the Common Stock on the Nasdaq National Market for the five trading days prior
to the date of conversion. During 1997, an aggregate of $5,998,000 ($5,700,000
of the original principal of the Notes and $298,000 of accrued interest) were
converted into 741,800 shares of Common Stock.
In February 1997, the Company completed a $3,500,000 private placement with
investors whereby the Company issued 6% Subordinated Convertible Debentures (the
Debentures) with warrants to purchase 50,000 shares of Common Stock at $22.50
per share. The warrants are valued at $850,000 and recorded as a discount to the
debentures. The Debentures accrue interest at an annual rate of 6%, beginning on
the date of issue, with principal due and payable three years from the date of
issue, if and to the extent that the Debentures are not previously converted.
The Debentures are convertible at the option of the holder into the Company's
Common Stock at a discount up to 20% from market price (the Conversion Discount)
resulting in debenture discount of $875,000. In May 1997, the Debentures were
converted into 100,000 shares of the Company's Series A Convertible Preferred
Stock ("Series A Stock") having an aggregate stated value of $3,500,000. In
addition, Preferred Stock Purchase Warrants (the "Preferred Warrants") were
issued to the holders of the Debentures to purchase a total of 42,858 shares of
the Series A Stock. The conversion of the debentures to Series A Stock resulted
in a debt extinguishment loss of $1,048,000. During the year ended December 31,
1997, a total of $456,000 was recorded as interest expense relating to the
Debentures and $272,000 was recorded as accrued dividends on the Series A Stock.
The interest expense and dividend principally include a charge for the
Conversion Discount and default discounts. During 1997, 51,972 shares of the
Series A Preferred Stock were converted to 454,693 shares of the Company's
Common Stock. In August 1997, the Company redeemed all of the remaining
outstanding shares of the Company's Series A Stock and the Preferred Warrants
for $1,827,000 and all of the outstanding common stock warrants were exchanged
for 35,000 warrants for the Company's Common Stock at an exercise price of $5.30
per share. A preferred dividend of $144,000 was recognized for the excess of the
redemption price over the carrying amount of the preferred stock. During 1997,
10,500 of the warrants were exercised for $56,000.
NOTE 5: LEASES AND COMMITMENTS
The Company leases its facilities and other equipment under operating lease
agreements, which expire at various dates through 2004. The Company also leases
certain manufacturing equipment under
42
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 5: LEASES AND COMMITMENTS (CONTINUED)
capital leases that expire in 2001. Approximate future minimum lease payments
under these leases are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
- - ---- -------- ---------
<S> <C> <C>
2000 $269 298
2001 81 275
2002 -- 290
2003 -- 299
2004 -- 178
---- ------
350 $1,340
======
Less amount representing imputed interest.................. 27
----
323
Less current portion....................................... 244
----
$ 79
====
</TABLE>
Accumulated depreciation of equipment under capital leases totaled $517,915
and $747,000 at December 31, 1999 and 1998, respectively. Depreciation expense
on equipment under capital leases was $257,867 in 1999 and $127,000 in 1998 and
$203,000 in 1997.
The Company leases office facilities under an operating lease, which expires
in July 2004. Rent expense of $538,000, $948,000 and $1,582,000 was incurred in
1999, 1998, and 1997, respectively. A portion of the Company's facilities had
been sublet and sublease income received was $291,583, $491,000, and $76,000
during 1999, 1998, and 1997, respectively.
43
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 6: SELECTED BALANCE SHEET INFORMATION
Selected Balance Sheet information is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Accounts receivable
Accounts receivable....................................... $ 569 $ 707
Less allowance for doubtful accounts...................... (536) (244)
------ ------
$ 33 $ 463
====== ======
Inventories
Finished goods............................................ -- 117
------ ------
$ -- $ 117
====== ======
Property and equipment
Engineering, manufacturing, and general office
equipment............................................... $2,562 $3,761
Leasehold improvements.................................... 205 1,064
Equipment under capital lease............................. 865 1,752
------ ------
3,632 6,577
Accumulated depreciation and amortization................... (2,209) (4,794)
------ ------
$1,423 $1,783
====== ======
Accrued expenses
Salaries and commissions.................................. $ 348 $ 521
Other accrued expenses.................................... 477 1,420
------ ------
$ 825 $1,941
====== ======
</TABLE>
NOTE 7: INCOME TAXES
The Company was not required to pay income taxes in 1999, 1998 or 1997 due
to its net operating loss carryforwards.
The following is a reconciliation of the provision for income taxes at the
U.S. federal income tax rate to the income taxes reflected in the Statements of
Operations:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax benefit............................. $(3,486) $(2,811) (5,587)
State tax................................................... (665) (504) (1,514)
Other....................................................... 553 (162) 544
Valuation Allowance......................................... 3,598 3,477 6,557
------- ------- -------
Income tax benefit.......................................... $ -- $ -- $ --
======= ======= =======
</TABLE>
44
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 7: INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax asset are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards.......................... $30,809 $24,457
Tax credit carryforwards.................................. 2,659 3,529
Capitalized research and development costs................ 638 433
Depreciation.............................................. 253 853
Accruals and reserves not currently deductible............ 338 3,318
------- -------
Total gross deferred tax assets......................... 34,697 32,590
Valuation allowance....................................... (34,697) (32,590)
------- -------
Total deferred tax assets............................... $ -- $ --
======= =======
</TABLE>
The net change in the total valuation allowance for the year ended
December 31, 1999 was a net increase of $2,107,000. The increase in the
valuation allowance was primarily a result of increased net operating loss and
tax credit carryforwards and capitalized research and development costs
generated in 1999 which the Company provided a full valuation allowance against
based on the Company's evaluation of the likelihood of realization of future tax
benefits resulting from the deferred tax assets.
Net pretax foreign income (losses) were $65,000, ($405,000) and ($93,000) in
1999, 1998 and 1997, respectively. The Company has net operating loss
carryforwards of approximately $80,700,000 for federal tax purposes and
$18,162,000 for state tax purposes that will begin to expire in 2005 and 2000,
respectively. Of the $18,162,000 net operating loss carryforwards for state tax
purposes, $94,000 will expire in 2000, $3,056,000 in 2001 and $8,042,000 in
2002. The Company's tax credit carryforwards of $1,922,000 and $1,133,000 are
available to reduce future federal and California income taxes, respectively. Of
the $1,922,000 tax credit carryforwards for federal income tax purposes,
$636,000 will expire in 2000, $962,000 in 2001 and $39,000 in 2002. The Company
also has foreign net operating loss carryforwards of approximately $3,057,000
that may be used to offset future foreign taxable income.
The Tax Reform Act of 1986 and California Conformity Act of 1987 impose
substantial restrictions on the utilization of net operating losses and tax
credit carryforwards in the event of an "ownership change" as defined by the
Internal Revenue Code. If there should be such a change, the Company's ability
to utilize the stated carryforwards could be significantly limited.
NOTE 8: GEOGRAPHIC SEGMENT AND OPERATING INFORMATION
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker. Using this definition the Company operates in
two reportable segments: product and services and follows the requirements of
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information."
In 1997 through 1999 these segments reflect the Company's transition from the
design, development and marketing of special purpose systems for the EDA market
to the design, development, and marketing of high density, high performance
programmable logic solutions and related development software. Included in the
product segment are all hardware, software and license revenue and costs related
to the Company's
45
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 8: GEOGRAPHIC SEGMENT AND OPERATING INFORMATION (CONTINUED)
proprietary technology. Included in the service segment are fees and costs
associated with the maintenance of hardware systems related software and
consulting services related to the design of programmable logic solutions. The
Company evaluated performance and allocates resources based on the gross margin
of the reportable segments and does not identify assets to any segment.
NET REVENUES BY REPORTABLE SEGMENT (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Product
Revenues........................................ $1,348 $ 2,624 $ 5,385
Cost of Revenues................................ 1,135 4,648 6,421
------ ------- -------
Gross Margin.................................. $ 213 $(2,024) $(1,036)
====== ======= =======
Services
Revenues........................................ $ 639 $ 5,076 $10,118
Cost of Revenues................................ 162 2,659 4,482
------ ------- -------
Gross Margin.................................. $ 477 $ 2,417 $ 5,636
====== ======= =======
</TABLE>
NET REVENUES TO UNAFFILIATED CUSTOMERS BY GEOGRAPHIC REGION (IN THOUSANDS):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
United States...................................... $1,696 $5,613 $ 9,565
Japan.............................................. 291 1,947 4,382
Other.............................................. 0 140 1,556
------ ------ -------
$1,987 $7,700 $15,503
====== ====== =======
</TABLE>
The amounts reported for Japan and other reflect amounts sold by foreign
subsidiaries. Included in the United States revenue amounts are sales directly
to Japan and other Asian countries amounting to $291,000 in 1999, $217,000 in
1998 and $1,648,000 in 1997. Outside the United States, the Company operated
three subsidiaries in Europe, one subsidiary in Japan and also supported a
branch office in Taiwan. All these subsidiaries have been or are in the process
of being shut down and dissolved. For the years ended December 31, 1999, 1998
and 1997, export sales (including sales by foreign subsidiaries), principally to
Europe and Japan, comprised approximately 15%, 38% and 38% of consolidated
revenues, respectively. During 1999, Rohm accounted for 47% and Zycad TSS
accounted for 18% of consolidated revenues. During 1998 and 1997, Infineon
accounted for 22% and Intel Corporation accounted for 16% of consolidated
revenues, respectively.
46
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 8: GEOGRAPHIC SEGMENT AND OPERATING INFORMATION (CONTINUED)
LONG-LIVED ASSETS BEFORE DEPRECIATION BY GEOGRAPHIC LOCATION ARE AS FOLLOWS
(IN THOUSANDS):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Long-lived assets
United States............................................... $3,631 $5,949
Japan....................................................... -- 94
Other....................................................... -- 635
------ ------
$3,631 $6,678
====== ======
</TABLE>
NOTE 9: STOCKHOLDERS' EQUITY
REDEEMABLE PREFERRED STOCK
On November 10, 1997, the Board of Directors authorized the designation of
1,000,000 shares of preferred stock, par value $0.10 per share, as Series B
Preferred Stock ("Series B Preferred Stock"). In November 1997, the Company
issued 1,000,000 shares of Series B Preferred Stock for $4.6 million. Each share
is convertible into .45825 shares of Common Stock at the discretion of the
holder and accrues a dividend of $0.137475 per share per annum. The holders of
outstanding shares of Series B Preferred Stock are entitled to vote as a
separate class with respect to certain actions (as defined by the preferred
stock agreement) by the Company. The Company has granted demand registration
rights for the common stock to be issued pursuant to the conversion.
In addition, the Certificate of Designation of the Series B Convertible
Preferred Stock requires the Company to maintain a listing on a public market
(as defined in the agreement). In the event of default, the holders of the
Series B Preferred Stock can redeem the preferred stock at a redemption price of
$4.5825 in cash per share plus accrued and unpaid dividends thereon or be
convertible, at the option of the holder, into .611 shares of Common Stock.
Effective September 17, 1998 the Company's stock was delisted from The Nasdaq
SmallCap Market. In October 1998 certain holders of its Series B Preferred Stock
requested redemption and on December 16, 1998 the Company redeemed an aggregate
of 981,997 shares of its Series B Preferred Stock at a price equal to $4.5825
per share plus accrued and unpaid dividends for an aggregate cash redemption
price of approximately $4.6 million. A total of 18,003 shares of the Series B
Preferred Stock remain outstanding as of December 31, 1999.
On August 14, 1998, the Company issued 300,000 shares of the Company's
Series C Convertible Preferred Stock ("Series C Preferred Stock"), par value
$0.10, for an aggregate purchase price of $3,000,000 to Actel Corporation
("Actel"). The Series C Preferred Stock are initially convertible into 200,000
shares of the Company's common stock, are entitled to certain liquidation rights
and are redeemable in the event that all of the Company's remaining outstanding
shares of Series B Preferred Stock are redeemed.
COMMON STOCK
The Company's Certificate of Incorporation was duly amended by a proposal by
the Board of Directors on November 10, 1997 and by vote of the stockholders at
the Annual Meeting of Stockholders on December 15, 1997, to increase the
Company's Common Stock from 40,000,000 shares to 65,000,000
47
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 9: STOCKHOLDERS' EQUITY (CONTINUED)
shares of Common Stock authorized at $0.10 par value. At December 31, 1999 there
were 4,693,038 shares of the Company's Common Stock outstanding including 50,000
unissued shares of subscribed stock.
In October 1997, the Company entered into a $3,250,000 Strategic Partnership
Agreement with Infineon, which principal terms included the delivery of
technology, software, equipment, engineering services, a warrant to purchase
Common Stock, and 50,000 shares of Common Stock. The Company has valued the
Common Stock at $761,000 and the warrant to purchase common stock at $900,000
(see Warrants). At December 31, 1997, $739,000 cash related to the warrants had
been received and the remaining $161,000 was received during 1998. At
December 31, 1999, subscribed stock represents cash received for this Common
Stock, which has not been issued as of that date.
In March 1999, the Company's Board of Directors approved a ten for one
reverse stock split of the Company's common stock. In June 1999, the Company's
shareholders approved the reverse stock split. The reverse split became
effective on June 30, 1999 (the "Effective Date"). No fractional shares were
issued. In lieu of any such fractional share interest, each holder will receive
cash in an amount equal to the product obtained by multiplying (i) the closing
sales price of the Company's Common Stock on the Effective Date as reported on
the OTCBB by (ii) the number of shares of Common Stock held by such holder that
would otherwise have been exchanged for such fractional share interest.
STOCK COMPENSATION PLANS
EMPLOYEE PLANS.
The 1993 Stock Option Plan (the "1993 Plan"), as amended, provides for
300,000 shares of Common Stock to be issued under the 1993 Plan.
The 1996 Stock Option Plan (the "1996 Plan"), as amended, provides for
200,000 shares of Common Stock to be issued under the 1996 Plan.
The 1999 Stock Option Plan (the "1999 Plan"), as amended, provides for
300,000 shares of Common Stock to be issued under the 1999 Plan.
Under the Company's stock option Plans, incentive stock options granted must
have a per share exercise price of not less than the fair market value per share
at the date of grant. Non-qualified stock options may be granted at such price
as may be determined by the Board of Directors. Dependent upon the Plan, options
generally vest at specific intervals over a three to four year period and expire
eight to ten years after the grant date. In the event of termination, the
Company has the right to cancel any vested options not exercised within 90 days
of termination.
In July 1997, the Board of Directors authorized the exchange of outstanding
stock options held by all employees for new options with an exercise price of
$4.70 per share, the fair market value of the Common Stock on such date. In
return, participating employees who chose to exchange their options agreed to
accept stock options which will vest on a quarterly basis upon achievement of
certain management goals to be established quarterly for each such employee, or
in any event, in July 1999, should the employee still be employed by the
Company. Options covering a total of 174,410 shares were exchanged under this
program. The effect of such exchange reduced the weighted average exercise price
of the outstanding options from $17.90 to $8.00 per share.
48
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 9: STOCKHOLDERS' EQUITY (CONTINUED)
Activity under the employee stock option plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE EXERCISE
FOR GRANT SHARES PRICE
--------- -------- ---------
<S> <C> <C> <C>
Balance, January 1, 1997....................... 105,592 329,812 $18.80
Granted........................................ (374,319) 374,319 4.20
Exercised...................................... -- (27,800) 13.70
Cancelled...................................... 336,034 (336,034) 16.60
-------- -------- ------
Balance, December 31, 1997..................... 67,307 340,297 6.80
Additional shares authorized................... 125,000 -- --
Retire 1984 Plan............................... (58,631) -- --
Granted........................................ (172,283) 172,283 6.30
Exercised...................................... -- (74,254) 5.30
Cancelled...................................... 101,580 (101,531) 11.70
-------- -------- ------
Balance, December 31, 1998..................... 62,973 336,795 5.40
Additional shares authorized................... 300,000
Granted........................................ (175,700) 175,700 6.49
Exercised...................................... -- (16,310) 4.70
Cancelled...................................... 26,760 (26,760) 6.70
-------- -------- ------
Balance, December 31, 1999..................... 214,033 469,425 $ 5.73
======== ======== ======
</TABLE>
The weighted average per share fair value of the stock options granted in
1999, 1998 and 1997 was $6.49, $6.30 and $4.20, respectively. At December 31,
1999, 1998 and 1997, outstanding options under the employee stock option plans
were exercisable for 184,009, 141,533 and 142,321 shares, respectively and
exercisable at weighted-average exercise prices of $5.25, $4.90 and $6.80,
respectively. All outstanding options are nonqualified options and / or
incentive stock options.
The following tables summarize information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED-AVG
EXERCISE PRICE NUMBER REMAINING WEIGHTED-AVG NUMBER WEIGHTED-AVG
- - -------------------------------- OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
FROM TO AT 12/31/99 LIFE PRICE AT 12/31/99 PRICE
- - --------------------- -------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
$4.70 $ 4.70 139,353 6.18 $ 4.70 139,353 $ 4.70
$5.30 $ 5.30 147,297 8.96 $ 5.30 36,831 $ 5.30
$6.44 $ 6.44 169,200 9.67 $ 6.44 0 $ --
$7.63 $17.50 13,575 6.99 $11.96 7,825 $14.92
----- ------ ------- ---- ------ ------- ------
$4.70 $17.50 469,425 8.33 $ 5.73 184,009 $ 5.25
===== ====== ======= ==== ====== ======= ======
</TABLE>
49
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 9: STOCKHOLDERS' EQUITY (CONTINUED)
NON-EMPLOYEE PLANS.
During 1995, stockholders approved a Non-Employee Directors' stock option
plan (the "Director Option Plan") whereby 20,000 shares of common stock have
been reserved for issuance. Under the Company's Director Option Plan, each
non-employee director initially elected to the Board of Directors in the future
will be granted an option, upon his or her initial election as a director, to
purchase 1,500 shares of common stock. Each non-employee director is also
entitled to receive an option for 750 shares on the date of each Annual Meeting
of Stockholders. All options granted under the Director Option Plan have or will
have an exercise price equal to the fair market value of the common stock on the
date of grant and expire ten years from the date of grant (subject to earlier
termination in the event the optionee ceases to serve as a director of the
Company). Under the Director Option Plan, options from an Initial Grant vest in
full two years after the date of grant. Options from an Annual Grant vest one
year after the date of grant and the right to exercise vested options terminate
one year after a Director ceases to be a director. The Company granted 1,500,
3,750 and 3,750 options to purchase Common Stock at $8.10 to $15.00 per share to
non-employee directors in 1999, 1998 and 1997, respectively, of which 3,750 and
1,500 option grants were canceled in 1999 and 1998, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Through the Company's 1999 Employee Stock Purchase Plan (the "1999 Plan"),
eligible employees of the Company may purchase common stock at 85% of the fair
market value of the stock at the beginning or end of each offering period
(12 months except for the initial period which is 18 months), whichever is
lower. Each participant may contribute up to 15% of total compensation, to a
maximum of $25,000 annually. Additionally, each participant is prohibited from
participation if he owns more than 5% of the Company's common stock. The maximum
number of shares available for purchase under the plan during any six-month
purchase period is 20,000 shares, thus, the plan is designed to last a minimum
of five purchase periods. The 1999 Plan was approved by the stockholders in
June 1999 with an initial 100,000 shares of which 19,362 shares were issued at
the end of the first purchase period in February 2000, at a purchase price of
$3.35 per share. Simultaneous with the creation of the 1999 Plan the Company
terminated its 1987 ESPP (the "Old Plan") which was created in May 1987 with an
initial 10,000 shares of Common Stock and added to over the ensuing years in
blocks of 20,000 until a total of 70,000 shares had been authorized by May of
1998, of which a total of 60,500 shares had been issued at December 31, 1999.
During 1999, 8,083 shares were purchased under the Old Plan for prices ranging
from $6.20 to $7.60 with an average price of $6.89 per share. The fair value of
the 1999 awards under both plans was not considered significant.
ADDITIONAL STOCK PLAN INFORMATION
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, which establishes financial accounting and reporting standards for
stock-based employee compensation plans. This statement defines a fair value
based method of accounting for an employee stock option of similar equity
instrument. Under this method, compensation costs are measured at the grant date
based on the value of the award and are recognized over the service period,
which is the vesting period. The Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB
No. 25 and its related interpretations. Had compensation cost for the Company's
various stock option plans been
50
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 9: STOCKHOLDERS' EQUITY (CONTINUED)
determined consistent with SFAS No. 123, the Company's net loss and diluted net
loss attributable to common stockholders per share would have been changed to
the pro forma amounts indicated below (in thousands, except net loss
attributable to common stockholders per share amounts):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C> <C>
Net loss attributable to common
stockholders..................... As reported $ (9,964) $(8,405) $(22,725)
Pro forma (10,593) (9,116) (23,562)
Diluted net loss per share......... As reported (2.30) (2.00) (7.50)
Pro forma (2.45) (2.20) (7.80)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1999, 1998 and 1997 respectively; expected
volatility of 137% for 1999, 157% for 1998 and 145% for 1997, dividend yield of
0%, risk-free interest rates of 4.78%, 4.60%, and 5.91% for 1999, 1998, and 1997
respectively, and expected lives from the grant date of 7.5 years for 1999,
6.5 years for 1998, and 3.5 years for 1997.
WARRANTS
At December 31, 1999, total warrants outstanding were 377,625. Purchase
price of the securities subject to these warrants range from $5.30 to $14.40 and
they expire at various dates through November 2005.
In April 1999, James R. Fiebiger exercised 5,000 warrants granted in
July 1997 at an option price of $4.70 per share.
In November 1997, the Company entered into a Stock Purchase Agreement ("the
Agreement") in connection with the Series B Preferred Stock financing. Pursuant
to this Agreement, the Company issued warrants to purchase 997,751 shares of
common stock at $1.00 per share. In January 1998, the warrants expired in
accordance with the Agreement upon approval by the stockholders of an increase
in the Company's authorized common stock and the closing of the common stock
financing contemplated by the Agreement.
In October 1997, the Company entered into a licensing agreement under which
the Company granted a stock warrant to purchase 9.9% of its outstanding shares
of Common Stock to a strategic partner at an exercise price equal to 80% of the
Market Price of the Company's Common Stock on the trading day immediately prior
to the date of exercise, subject to a minimum exercise price of $10.00 per
share. Market Price is defined as the last trade price for common stock as
reported on the Nasdaq. In the event that the strategic partners' interest is
decreased to less than 9.9% by future equity offerings, they will have the right
to increase the stock warrant under the same conditions as the equity offering
to maintain its 9.9% interest in the Company. The term of this warrant is for
five years and is exercisable as follows: the first 1/3 shares after 6 months,
an additional 1/3 shares after 12 months, and the final 1/3 after 18 months. The
fair value of the warrants was $900,000 at grant, which has been included in
additional paid-in capital.
51
<PAGE>
GATEFIELD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 9: STOCKHOLDERS' EQUITY (CONTINUED)
In July 1997, the Board of Directors approved the exchange of Common Stock
warrants and nonqualifying stock options held by certain directors for new
Common Stock warrants to purchase 20,256 shares of Common Stock at an exercise
price of $4.70 per shares, the fair market value of the common stock on that
date of exchange. The effect of such exchange reduced the weighted average
exercise price of the warrants and nonqualifying options from $19.70 to $4.70
per share. In November 1997, a director was issued warrants to purchase 750
shares of Common Stock at an exercise price of $14.40 per share. In
February 1998, certain directors exercised their warrants for 13,756 shares of
Common Stock.
In February 1997, the Company issued 50,000 warrants at $22.50 per share in
conjunction with the $3,500,000 convertible debentures. The value of the
warrants was $850,000 and was recorded as a discount to the debentures. In
August 1997, the 50,000 warrants were exchanged for 35,000 warrants at $5.30 per
share. During 1997, 10,500 warrants were exercised for $56,000.
NOTE 10
EMPLOYEE BENEFIT PLANS
Through the Company's elective 401(k) savings plan, eligible U.S. employees
of the Company may contribute up to 17.6% of their pre-tax earnings, subject to
current IRS restrictions. Under the plan, the Company may make discretionary
matching contributions up to $1,500 or 25% of an employee's contributions. The
participants vest in the Company's contribution over five years. Company
contributions to this plan were $38,000 in 1999, $73,000 in 1998 and $161,000 in
1997.
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of GateField Corporation:
We have audited the accompanying consolidated balance sheets of GateField
Corporation and its subsidiaries at December 31, 1999 and 1998, and the related
consolidated statements of operations and comprehensive loss, stockholders'
deficit, and cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the GateField Corporation and
its subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations, working
capital deficit, and stockholders' deficiency raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE, LLP
San Jose, California
February 19, 2000
53
<PAGE>
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of GateField Corporation:
We have audited the consolidated financial statements of GateField
Corporation and its subsidiaries as of December 31, 1999, and for the year then
ended, and have issued our report thereon dated February 19, 2000 (which report
expresses an unqualified opinion and includes an explanatory paragraph
concerning certain factors which raise substantial doubt about the Company's
ability to continue as a going concern). Our audit also included the financial
statement schedule listed in the Index at Item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- - ---------------------------------
Deloitte & Touche LLP
San Jose, California
February 19, 2000
54
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
GATEFIELD CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO COST END OF
DESCRIPTIONS OF PERIOD AND EXPENSE DEDUCTIONS PERIOD
- - ------------ ---------- --------------- ---------- ----------
<S> <C> <C> <C> <C>
Deducted from assets:
Allowance for doubtful accounts (accounts
receivable):
Years ended December 31,
1999.......................................... $ 244 $ 292 $ 0 $536
====== ====== ===== ====
1998.......................................... $ 528 $ 225 $(509)(1) $244
====== ====== ===== ====
1997.......................................... $1,337 $ 169 $(978)(1) $528
====== ====== ===== ====
</TABLE>
- - ------------------------
(1) Write-off of accounts and notes determined to be uncollectable.
55
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 concerning directors of the Company
is incorporated herein by reference from the information entitled "Election of
Directors" included in the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders for the fiscal year ended December 31, 1999, which will
be filed with the Securities and Exchange Commission within 120 days of the
Company's fiscal year end (the "1999 Proxy Statement"). The information required
by this Item 10 concerning executive officers of the Company is included in
Part I of this Annual Report on Form 10-K under the section captioned "Executive
Officers of the Registrant". The information required by this Item 10 concerning
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, is incorporated herein by reference from the section entitled
"Section 16(a) Beneficial Ownership Reporting Compliance" included in the 1999
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference
from the information under the caption "Election of Directors" "Compensation of
Directors", "Compensation Committee Interlocks and Insider Participation",
"Executive Compensation", "Employment and Severance Agreements" included in the
1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated herein by reference
from the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" included in the 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
from the information under the caption "Certain Relationships and Related
Transactions", "Compensation Committee Interlocks and Insider Participation",
"Employment and Severance Agreements" included in the 1999 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial information is incorporated by reference into
Part II hereof from the Annual Report
1. Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations and Comprehensive Loss for the
three years ended December 31, 1999
Consolidated Statements of Stockholders' Equity (Deficit) for the
three years ended December 31, 1999
56
<PAGE>
Consolidated Statements of Cash Flows for the three years ended
December 31, 1999
Notes to Consolidated Financial Statements
Report of Independent Auditors on Financial Statement Schedule
2. Schedule II: Valuation and Qualifying Accounts
All other schedules have been omitted because they are not
applicable, not required, or the information required is included in
the financial statements or notes thereto.
3. Exhibits: See Item 14(c) below
(b) Reports on Form 8-K
The requestor filed a current report on Form 8-K on January 4, 2000 to
announce the resignation of Michael J. Kucha, a director of the Company,
effective December 31, 1999.
(c) Exhibits
The exhibits listed on the accompanying index to exhibits immediately
following the signature page are filed as part of, or incorporated by reference
into, this Form 10-K.
(d) Financial Statement Schedules
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
Date: March 16, 2000 GATEFIELD CORPORATION
/s/ JAMES B. BOYD
------------------------------------------------
James B. Boyd
PRINCIPAL ACCOUNTING OFFICER AND PRINCIPAL
FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of March 16, 2000 by the following persons on
behalf of the registrant and in the capacities indicated.
<TABLE>
<S> <C>
/s/ TIMOTHY SAXE President, Chief Executive Officer, Chief
- - ------------------------------------------- Operating Officer and Director (Principal
Timothy Saxe Executive Officer)
/s/ JAMES B. BOYD
- - ------------------------------------------- Principal Accounting Financial Officer
James B. Boyd (Principal Accounting Financial Officer)
/s/ JONATHAN S. HUBERMAN
- - ------------------------------------------- Chairman of the Board of Directors
Jonathan S. Huberman
/s/ HORST G. SANDFORT
- - ------------------------------------------- Director
Horst G. Sandfort
</TABLE>
58
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - --------------------- -----------
<C> <S>
2.1 Asset Purchase Agreement dated August 14, 1998, regarding
the purchase of GateField Corporation's Design Services
Business by Actel Corporation (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on August 14, 1998).
3.1 Restated Certificate of Incorporation dated August 28, 1998
(incorporated by reference to Exhibit 4.3 to the Company's
Current Report on Form 8-KA dated August 31, 1998).
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of GateField Corporation dated June 7, 1999
(incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
3.3 Certificate of Correction of Restated Certificate of
Incorporation of GateField Corporation dated October 20,
1998 (incorporated by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998).
3.4 Certificate of Designations of Preferred Stock of GateField
Corporation to be Designated Series B Convertible Preferred
Stock of the Company (incorporated by reference to
Exhibit 3.3 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
3.5 Certificate of Designations of Preferred Stock of GateField
Corporation to be Designated Series C Convertible Preferred
Stock of the Company (incorporated by reference to
Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998).
3.6 Bylaws of the Company, as amended (incorporated by reference
to Exhibit 3.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998).
4.1 See Exhibit 3.1 referenced above.
4.2 See Exhibit 3.2 referenced above.
4.3 See Exhibit 3.3 referenced above.
4.4 See Exhibit 3.4 referenced above.
4.5 See Exhibit 10.26 referenced below.
4.6 See Exhibit 10.27 referenced below.
4.7 Convertible Promissory Note dated May 25, 1999, in the
aggregate principle amount of $8.0 million issued to Actel
Corporation (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed on May 28, 1999).
4.8 Certificate of Designations of the Preferred Stock of
GateField Corporation to be designated Series C-1
Convertible Preferred Stock (incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K
filed on May 28, 1999).
4.9 Common Stock Purchase Agreement, dated September 30, 1999,
between the Company and Mitsui Create USA, Inc.
(incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
4.10 Common Stock Purchase Agreement, dated September 30, 1999,
between the Company and MHT American Holding, Inc.
(incorporated by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
4.11 Common Stock Purchase Agreement, dated September 30, 1999,
between the Company and Actel Corporation (incorporated by
reference to Exhibit 4.3 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - --------------------- -----------
<C> <S>
4.12 Common Stock Purchase Agreement, dated September 30, 1999,
between the Company and Idanta Partners Limited
(incorporated by reference to Exhibit 4.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
4.13 Common Stock Purchase Agreement, dated September 30, 1999,
between the Company and the Dunn Family Trust (incorporated
by reference to Exhibit 4.5 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999).
10.1** 1993 Stock Option Plan (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-8
(File No. 333-42363) filed on December 16, 1997).
10.2** 1996 Stock Option Plan (incorporated by reference to Exhibit
4.2 to the Company's Registration Statement on Form S-8
(File No. 333-42363) filed on July 31, 1998).
10.3** 1995 Stock Option Directors Plan for Non-Employee Directors
(incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (File No. 333-42363)
filed on December 16, 1997).
10.4** Employee Stock Purchase Plan (incorporated by reference to
Exhibit 4.4 to the Company's Registration Statement on
Form S-8 (File No. 333-42363) filed on July 31, 1998).
10.5** 1999 Stock Option Plan (incorporated by reference to the
Company's 1998 Proxy Statement).
10.6** Form of Stock Option Agreement (incorporated by reference to
Exhibit 99.2 to the Company's Registration Statement on
Form S-8 (File No. 333-84015) filed on July 29, 1999).
10.7** 1999 Employee Stock Purchase Plan (incorporated by reference
to the Company's 1998 Proxy Statement).
10.8** Form of Employee Stock Purchase Plan Offering (incorporated
by reference to Exhibit 99.4 to the Company's Registration
Statement on Form S-8 (File No. 333-84015) filed on
July 29, 1999).
10.9** Employment, Confidential Information and Invention and
Assignment Agreement, between the Company and Douglas E.
Klint, as amended on June 5, 1997 (incorporated by reference
to Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.10** Employment, Confidential Information and Invention and
Assignment Agreement, between the Company Stephen A. Flory,
as amended on June 5, 1997 (incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
10.11 Warrant Certificate for the purchase of 5,000 shares of
Common Stock, dated July 28, 1997, issued to James R.
Fiebiger (incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.12 Warrant Certificate for the purchase of 750 shares of Common
Stock, dated November 25, 1997, issued to Benjamin Huberman
(incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997).
10.13 Common Stock Purchase Warrant, dated August 21, 1997 issued
to Halifax Fund L.P. (incorporated by reference to
Exhibit 10.10 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.14 Common Stock Purchase Warrant, dated August 21, 1997, issued
to Capital Ventures International (incorporated by reference
to Exhibit 10.11 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.15 Form of Registration Rights Agreement, dated February 13,
1997 between the Company and each of Halifax Fund L.P. and
Capital Ventures International (incorporated by reference to
Exhibit 4.19 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - --------------------- -----------
<C> <S>
10.16 Stock Purchase Agreement, dated November 10, 1997, between
the Company, Idanta Partners Ltd., Dunn Family Trust and
Perscilla Faily Trust (incorporated by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.17 Registration Rights Agreement, dated November 10, 1997,
between the Company, Idanta Partners Ltd., Dunn Family Trust
and Perscilla Faily Trust (incorporated by reference to
Exhibit 10.14 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.18 Credit Loan and Security Agreement, entered into at
January 6, 1997, between the Company and Coast Business
Credit, a division of Southern Pacific Thrift and Loan
Association (incorporated by reference to Exhibit 10.25 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.19 Lease, dated March 6, 1992, between the Company and Renco
Equities IV, relating to the premises at 47100 Bayside
Parkway, Fremont, California (incorporated by reference to
Exhibit 10.16 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.20 Sub-Lease Agreement, dated October 27, 1997, between the
Company and Mattson Technology, relating to the premises at
47100 Bayside Parkway, Fremont, California (incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.21 Lease Agreement, dated July 1999, between the Company and
ProLogis Limited Partnerships-I, a Delaware Limited
Partnership, relating to the premises at 47436 Fremont
Blvd., Fremont, California.
10.22 SICAN/GateField Technology Agreement, dated September 23,
1993, between SICAN G.m.b.H. and the Company (incorporated
by reference to Exhibit 10.18 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
10.23 License Agreement, dated October 22, 1997, between the
Company and Siemens Aktiengesellschaft (incorporated by
reference to Exhibit 10.29 to the Company's Current Report
on Form 8-K dated November 14, 1997).
10.24 Asset Purchase Agreement, dated April 14, 1997, between the
Company and IKOS Systems, Inc., regarding the purchase of
the Company's LightSpeed product family by IKOS Systems,
Inc. (incorporated by reference to Exhibit 10.26 to the
Company's Current Report on Form 8-K dated April 15, 1997).
10.25 Asset Purchase Agreement, dated August 18, 1997, between the
Company and IKOS Systems, Inc., regarding the purchase of
the Company's XP and PXP hardware fault simulation product
business by IKOS Systems, Inc. (incorporated by reference to
Exhibit 10.27 to the Company's Current Report on 8-K, dated
September 5, 1997).
10.26 Asset Purchase Agreement, dated August 20, 1997, between the
Company and Test Systems Strategies, Inc., regarding the
purchase of the Company's TDX software fault simulation and
test business (incorporated by reference to Exhibit 10.28 to
the Company's Current Report on Form 8-K dated September 5,
1997).
10.27 Purchase Agreement, dated October 31, 1997, between the
Company, Zycad Japan (GateField) KK and Zycad TSS Inc.,
regarding the purchase of the maintenance business
(incorporated by reference to Exhibit 10.24 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997).
10.28 Series C Preferred Stock Purchase Agreement dated
August 14, 1998 between GateField Corporation and Actel
Corporation (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K A dated August 31,
1998).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - --------------------- -----------
<C> <S>
10.29 Registration Rights Agreement dated August 14, 1998 between
GateField Corporation and Actel Corporation (incorporated by
reference to Exhibit 4.2 to the Company's Current Report on
Form 8-K A dated August 31, 1998).
10.30** Severance Agreement and General Release of All Claims, dated
September 30, 1997, between the Company and Phillips W.
Smith (incorporated by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.31 Product Marketing Agreement, dated August 14, 1998, between
the Company and Actel Corporation (incorporated by reference
to Exhibit 10.24 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998).
10.32 License Agreement, dated August 14, 1998, between the
Company and Actel Corporation (incorporated by reference to
Exhibit 10.25 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998).
10.33 License Agreement dated July 31, 1998 between GateField
Corporation and Rohm Co., Ltd. (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on August 14, 1998).
10.34 Agreement for Wafer Production and Testing between GateField
Corporation and Siemens Aktiengesellschaft (incorporated by
reference to Exhibit 99.3 to the Company's Current Report on
Form 8-KA dated August 31, 1998).
10.35 Security Agreement dated May 25, 1999 between GateField
Corporation and Actel Corporation (incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on May 28, 1999).
10.36 Amendment No. 1 to the Series C Preferred Stock Purchase
Agreement dated May 25, 1999 between GateField Corporation
and Actel Corporation (incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K
filed on May 28, 1999).
10.37 Amendment No. 1 to the Registration Rights Agreement dated
May 25, 1999 between GateField Corporation and Actel
Corporation (incorporated by reference to Exhibit 10.3 to
the Company's Current Report on Form 8-K filed on May 28,
1999).
10.38 Amendment No. 1 to the Product Marketing Agreement dated
May 25, 1999 between GateField Corporation and Actel
Corporation (incorporated by reference to Exhibit 10.4 to
the Company's Current Report on Form 8-K filed on May 28,
1999).
10.39** Severance Agreement and General Release of All Claims, dated
August 18, 1998, between the Company and Stephen A. Flory
(incorporated by reference to Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1998).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors, Deloitte & Touche LLP.
27.1 Financial Data Schedule.
</TABLE>
- - ------------------------
** Management contract or compensation plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K.
<PAGE>
Exhibit 10.21
Lease Agreement, dated July 1999, between the Company and ProLogis Limited
Partherships-I, a Delaware Limited Partnership, relating to the premises at
47436 Fremont Blvd., Fremont, California.
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT is made this 22nd day of June, 1999 between
ProLogis Limited Partnership-I, a Delaware Limited Partnership
("Landlord"), and the Tenant named below.
TENANT: Gatefield Corporation, a Delaware
Corporation
TENANT'S REPRESENTATIVE, Jim Boyd
ADDRESS, AND PHONE NO.: 47100 Bayside Parkway
Fremont, CA 94538
PREMISES: That portion of the Building, containing
approximately 24,000 rentable square feet,
as determined by Landlord and commonly known
as 47436 Fremont Blvd., Fremont, CA as shown
on Exhibit A.
PROJECT: Spinnaker III
BUILDING: Building B
TENANT'S PROPORTIONATE SHARE
OF PROJECT: 15.58%
TENANT'S PROPORTIONATE SHARE 80.00%
OF BUILDING:
LEASE TERM: Beginning on the Commencement Date and
ending on the last day of the 60th full
calendar month thereafter.
COMMENCEMENT DATE: The later to occur of (i) Landlord's
delivery of possession of the premises, or
(ii) August 1, 1999
INITIAL MONTHLY BASE RENT:
Twenty One Thousand Six Hundred
dollars $21,600
INITIAL ESTIMATED MONTHLY 1. Common Area Charges: $1,013
OPERATING EXPENSE PAYMENTS:
(estimates only and subject to 2. Taxes: $3,405
adjustment to actual costs and
expenses according to the 3. Insurance: $60
provisions of this Lease)
4. Management Fee: $82
INITIAL ESTIMATED MONTHLY
OPERATING EXPENSE PAYMENTS: $4,560
INITIAL MONTHLY BASE RENT AND
OPERATING EXPENSE PAYMENTS: $26,160
SECURITY DEPOSIT: $25,000
BROKER: Jim Abarta, Colliers Parrish
ADDENDA: Addendum I, II, III, IV, V, VI, VII and
VIII, Exhibit A, B and C
1. GRANTING CLAUSE. In consideration of the obligation of Tenant to pay
rent as herein provided and in consideration of the other terms, covenants, and
conditions hereof, Landlord leases to Tenant, and Tenant takes from Landlord,
the Premises, to have and to hold for the Lease Term, subject to the terms,
covenants and conditions of this Lease.
2. ACCEPTANCE OF PREMISES. Tenant shall accept the Premises in its
condition as of the Commencement Date, subject to all applicable laws,
ordinances, regulations, covenants and restrictions. Landlord has made no
representation or warranty as to the suitability of the Premises for the conduct
of Tenant's business, and Tenant waives any implied warranty that the Premises
are suitable for Tenant's intended purposes. Except as provided in Paragraph 10,
in no event shall Landlord have any obligation for any defects in the Premises
or any limitation on its use. The taking of possession of the Premises shall be
conclusive evidence that Tenant accepts the Premises and that the Premises were
in good condition at the time possession was taken except for items that are
Landlord's responsibility under Paragraph 10 and any punchlist items agreed to
in writing by Landlord and Tenant.
3. USE. The Premises shall be used only for the purpose of light
research and development, lab, receiving, storing, shipping and selling (but
limited to wholesale sales) products, materials and merchandise made and/or
distributed by Tenant and for such other lawful purposes as may be incidental
thereto; provided, however, Tenant may also use the Premises for light
manufacturing. Tenant shall not conduct or give notice of any auction,
liquidation, or going out of business sale on the Premises. Tenant will use the
Premises in a careful, safe and proper manner and will not commit waste,
overload the floor or structure of the Premises or subject the Premises to use
that would damage the Premises. Tenant shall not permit any objectionable or
unpleasant odors, smoke, dust, gas, noise, or vibrations to emanate from the
Premises, or take any other action that would constitute a nuisance or would
disturb, unreasonably interfere with, or endanger Landlord or any tenants of the
<PAGE>
Project. Outside storage, including without limitation, storage of trucks and
other vehicles, is prohibited without Landlord's prior written consent which
shall not be unreasonably withheld. Tenant, at its sole expense, shall use and
occupy the Premises in compliance with all laws, including, without limitation,
the Americans With Disabilities Act, orders, judgments, ordinances, regulations,
codes, directives, permits, licenses, covenants and restrictions now or
hereafter applicable to the Premises (collectively, "Legal Requirements"). The
Premises shall not be used as a place of public accommodation under the
Americans With Disabilities Act or similar state statutes or local ordinances or
any regulations promulgated thereunder, all as may be amended from time to time.
Tenant shall, at its expense, make any alterations or modifications, within or
without the Premises, that are required by Legal Requirements related to
Tenant's use or occupation of the Premises. Tenant will not use or permit the
Premises to be used for any purpose or in any manner that would void Tenant's or
Landlord's insurance, increase the insurance risk, or cause the disallowance of
any sprinkler credits. If any increase in the cost of any insurance on the
Premises or the Project is caused by Tenant's use or occupation of the Premises,
or because Tenant vacates the Premises, then Tenant shall pay the amount of such
increase to Landlord. Any occupation of the Premises by Tenant prior to the
Commencement Date shall be subject to all obligations of Tenant under this
Lease.
4. BASE RENT. Tenant shall pay Base Rent in the amount set forth above.
The first month's Base Rent, the Security Deposit, and the first monthly
installment of estimated Operating Expenses (as hereafter defined) shall be due
and payable on the date hereof, and Tenant promises to pay to Landlord in
advance, without demand, deduction or set-off, monthly installments of Base Rent
on or before the first day of each calendar month succeeding the Commencement
Date. Payments of Base Rent for any fractional calendar month shall be prorated.
All payments required to be made by Tenant to Landlord hereunder shall be
payable at such address as Landlord may specify from time to time by written
notice delivered in accordance herewith. The obligation of Tenant to pay Base
Rent and other sums to Landlord and the obligations of Landlord under this Lease
are independent obligations. Tenant shall have no right at any time to abate,
reduce, or set-off any rent due hereunder except as may be expressly provided in
this Lease. Tenant waives and releases all statutory liens and offset rights as
to rent. If Tenant is delinquent in any monthly installment of Base Rent or of
estimated Operating Expenses for more than 5 days, after written notice,
(provided however, such notice shall not be required more than twice in any
twelve month period or more than four (4) times over the term), Tenant shall pay
to Landlord on demand a late charge equal to 5 percent of such delinquent sum.
The provision for such late charge shall be in addition to all of Landlord's
other rights and remedies hereunder or at law and shall not be construed as a
penalty.
5. SECURITY DEPOSIT. The Security Deposit shall be held by Landlord as
security for the performance of Tenant's obligations under this Lease. The
Security Deposit is not an advance rental deposit or a measure of Landlord's
damages in case of Tenant's default. Upon each occurrence of an Event of Default
(hereinafter defined), Landlord may use all or part of the Security Deposit to
pay delinquent payments due under this Lease, and the cost of any damage,
injury, expense or liability caused by such Event of Default, without prejudice
to any other remedy provided herein or provided by law. Tenant shall pay
Landlord on demand the amount that will restore the Security Deposit to its
original amount. Landlord's obligation respecting the Security Deposit is that
of a debtor, not a trustee; no interest shall accrue thereon. The Security
Deposit shall be the property of Landlord, but shall be returned to Tenant
within forty-five (45) days of the expiration or earlier termination of this
Lease, provided Tenant's obligations under this Lease have been completely
fulfilled. Landlord shall be released from any obligation with respect to the
Security Deposit upon transfer of this Lease and the Premises to a person or
entity assuming Landlord's obligations under this Paragraph 5.
6. OPERATING EXPENSE PAYMENTS. During each month of the Lease Term, on
the same date that Base Rent is due, Tenant shall pay Landlord an amount equal
to 1/12 of the annual cost, as reasonably estimated by Landlord from time to
time, of Tenant's Proportionate Share (hereinafter defined) of Operating
Expenses for the Project. Payments thereof for any fractional calendar month
shall be prorated. The term "Operating Expenses" means all costs and expenses
incurred by Landlord with respect to the ownership, maintenance, and operation
of the Project including, but not limited to costs of: Taxes (hereinafter
defined) and fees payable to tax consultants and attorneys for consultation and
contesting taxes; insurance; utilities; maintenance, repair and replacement of
all portions of the Project, including without limitation, paving and parking
areas, roads, roofs, alleys, and driveways, mowing, landscaping, exterior
painting, utility lines, heating, ventilation and air conditioning systems,
lighting, electrical systems and other mechanical and building systems; amounts
paid to contractors and subcontractors for work or services performed in
connection with any of the foregoing; charges or assessments of any association
to which the Project is subject; property management fees payable to a property
manager, not to exceed 10% of operating expenses, including any affiliate of
Landlord, or if there is no property manager, an administration fee of 10
percent of Operating Expenses payable to Landlord; security services, if any;
trash collection, sweeping and removal; and additions or alterations made by
Landlord to the Project or the Building in order to comply with Legal
Requirements (other than those expressly required herein to be made by Tenant)
or that are appropriate to the continued operation of the Project or the
Building as a bulk warehouse facility in the market area, provided that the cost
of additions or alterations that are required to be capitalized for federal
income tax purposes shall be amortized on a straight line basis over a period
equal to the useful life thereof in accordance with generally accepted
accounting principles. Operating Expenses do not include costs, or expenses,
depreciation or amortization for capital repairs and capital replacements
required to be made by Landlord under Paragraph 10 of this Lease; debt service
under mortgages or ground rent under ground leases; costs of restoration to the
extent of net insurance proceeds received by Landlord with respect thereto;
leasing commissions; or the costs of renovating space for tenants; attorneys'
fees, costs disbursements, and other expenses incurred in connection with
negotiations or disputes with tenants;
-2-
<PAGE>
The cost of any service sold to any tenant (including Tenant) or other
occupant for which Landlord is entitled to be reimbursed as an additional charge
or rental over and above the basic rent and escalations payable under the lease
with that tenant;
Any depreciation on the Building or Property;
Expenses in connection with services or other benefits of a type that
are not provided to Tenant but which are provided another tenant or occupant of
the Building or Property;
Costs incurred due to Landlord's violation of any terms or conditions
of this Lease or any other lease relating to the Building or Property;
All interest, loan fees, and other carrying costs related to any
mortgage or deed of trust or related to any capital item, and all rental and
other payable due under any ground or underlying lease, or any lease for any
equipment ordinarily considered to be of a capital nature (except janitorial
equipment which is not affixed to the Building.)
Advertising and promotional expenditures;
The part of any costs or other sum paid to any affiliate of Landlord
that may exceed the fair market price or cost generally payable for
substantially similar goods or services in the area of the project;
Any costs, fines, or penalties incurred due to violations by Landlord
of any governmental RULE or authority, this Lease or any other lease in the
Property, or due to Landlord's negligence or willful misconduct.
Wages, salaries, or other compensation paid to any executive employees
above the grade of property manager; or
The cost of removing Hazardous Materials or correcting any other
conditions in order to comply with any environmental law or ordinance (but this
exclusion shall not constitute a release by Landlord of Tenant for any such
costs for which Tenant is liable pursuant to Paragraph 30 of this Lease).
If Tenant's total payments of Operating Expenses for any year
are less than Tenant's Proportionate Share of actual Operating Expenses for
such year, then Tenant shall pay the difference to Landlord within 30 days
after demand, and if more, then Landlord shall retain such excess and credit
it against Tenant's next payments. For purposes of calculating Tenant's
Proportionate Share of Operating Expenses, a year shall mean a calendar year
except the first year, which shall begin on the Commencement Date, and the
last year, which shall end on the expiration of this Lease. With respect to
Operating Expenses which Landlord allocates to the entire Project, Tenant's
"Proportionate Share" shall be the percentage set forth on the first page of
this Lease as Tenant's Proportionate Share of the Project as reasonably
adjusted by Landlord in the future for changes in the physical size of the
Premises or the Project; and, with respect to Operating Expenses which
Landlord allocates only to the Building, Tenant's "Proportionate Share" shall
be the percentage set forth on the first page of this Lease as Tenant's
Proportionate Share of the Building as reasonably adjusted by Landlord in the
future for changes in the physical size of the Premises or the Building.
Landlord may equitably increase Tenant's Proportionate Share for any item of
expense or cost reimbursable by Tenant that relates to a repair, replacement,
or service that benefits only the Premises or only a portion of the Project
or Building that includes the Premises or that varies with occupancy or use.
The estimated Operating Expenses for the Premises set forth on the first page
of this Lease are only estimates, and Landlord makes no guaranty or warranty
that such estimates will be accurate.
Within 60 days of the end of each calendar year, Landlord shall
deliver to Tenant a statement setting forth actual Operating Expenses and
Real Property Taxes. Upon Tenant's written request (which request must be
made within thirty (30) days of receipt of statement), Landlord shall provide
photocopies of invoices, bills and other verification to substantiate
disputed costs.
7. UTILITIES. Tenant shall pay for all water, gas, electricity, heat,
light, power, telephone, sewer, sprinkler services, refuse and trash collection,
and other utilities and services used on the Premises, all maintenance charges
for utilities, and any storm sewer charges or other similar charges for
utilities imposed by any governmental entity or utility provider, together with
any taxes, penalties, surcharges or the like pertaining to Tenant's use of the
Premises. Landlord may cause at Tenant's expense any utilities to be separately
metered or charged directly to Tenant by the provider. Tenant shall pay its
share of all charges for jointly metered utilities based upon consumption, as
reasonably determined by Landlord. No interruption or failure of utilities shall
result in the termination of this Lease or the abatement of rent. Tenant agrees
to limit use of water and sewer for normal restroom use.
Notwithstanding anything to the contrary contained in Paragraph
7, if an interruption or cessation of utilities results from a cause within
Landlord's reasonable control and the Premises are not usable by Tenant for
the conduct of Tenant's business as a result thereof, Base Rent and
applicable Operating Expenses not actually incurred up to that point by
Tenant shall be abated for the period which commences five (5) business days
after the date Tenant gives to Landlord notice of such interruption until
such utilities are restored.
-3-
<PAGE>
8. TAXES. Landlord shall pay all taxes, assessments and governmental
charges (collectively referred to as "Taxes") that accrue against the Project
during the Lease Term, which shall be included as part of the Operating Expenses
charged to Tenant. Landlord may contest by appropriate legal proceedings the
amount, validity, or application of any Taxes or liens thereof. All capital
levies or other taxes assessed or imposed on Landlord upon the rents payable to
Landlord under this Lease and any franchise tax, any excise, transaction, sales
or privilege tax, assessment, levy or charge measured by or based, in whole or
in part, upon such rents from the Premises and/or the Project or any portion
thereof shall be paid by Tenant to Landlord monthly in estimated installments or
upon demand, at the option of Landlord, as additional rent; provided, however,
in no event shall Tenant be liable for any net income taxes imposed on Landlord
unless such net income taxes are in substitution for any Taxes payable
hereunder. If any such tax or excise is levied or assessed directly against
Tenant, then Tenant shall be responsible for and shall pay the same at such
times and in such manner as the taxing authority shall require. Tenant shall be
liable for all taxes levied or assessed against any personal property or
fixtures placed in the Premises, whether levied or assessed against Landlord or
Tenant.
9. INSURANCE. Landlord shall maintain all risk property insurance
covering the full replacement cost of the Building. Landlord may, but is not
obligated to, maintain such other insurance and additional coverages as it may
deem necessary, including, but not limited to, commercial liability insurance
and rent loss insurance. All such insurance shall be included as part of the
Operating Expenses charged to Tenant. The Project or Building may be included in
a blanket policy (in which case the cost of such insurance allocable to the
Project or Building will be determined by Landlord based upon the insurer's cost
calculations). Tenant shall also reimburse Landlord for any increased premiums
or additional insurance which Landlord reasonably deems necessary as a result of
Tenant's use of the Premises.
Tenant, at its expense, shall maintain during the Lease Term:
all risk property insurance covering the full replacement cost of all
property and improvements installed or placed in the Premises by Tenant at
Tenant's expense; worker's compensation insurance with no less than the
minimum limits required by law; employer's liability insurance with such
limits as required by law; and commercial liability insurance, with a minimum
limit of $1,000,000 per occurrence and a minimum umbrella limit of
$1,000,000, for a total minimum combined general liability and umbrella limit
of $2,000,000 (together with such additional umbrella coverage as Landlord
may reasonably require) for property damage, personal injuries, or deaths of
persons occurring in or about the Premises. Landlord may from time to time
require reasonable increases in any such limits. The commercial liability
policies shall name Landlord as an additional insured, insure on an
occurrence and not a claims-made basis, be issued by insurance companies
which are reasonably acceptable to Landlord, not be cancelable unless 30
days' prior written notice shall have been given to Landlord, contain a
hostile fire endorsement and a contractual liability endorsement and provide
primary coverage to Landlord (any policy issued to Landlord providing
duplicate or similar coverage shall be deemed excess over Tenant's policies).
Such policies or certificates thereof shall be delivered to Landlord by
Tenant upon commencement of the Lease Term and upon each renewal of said
insurance.
The all risk property insurance obtained by Landlord and Tenant
shall include a waiver of subrogation by the insurers and all rights based
upon an assignment from its insured, against Landlord or Tenant, their
officers, directors, employees, managers, agents, invitees and contractors,
in connection with any loss or damage thereby insured against. Neither party
nor its officers, directors, employees, managers, agents, invitees or
contractors shall be liable to the other for loss or damage caused by any
risk coverable by all risk property insurance, and each party waives any
claims against the other party, and its officers, directors, employees,
managers, agents, invitees and contractors for such loss or damage. The
failure of a party to insure its property shall not void this waiver.
Landlord and its agents, employees and contractors shall not be liable for,
and Tenant hereby waives all claims against such parties for, business
interruption and losses occasioned thereby sustained by Tenant or any person
claiming through Tenant resulting from any accident or occurrence in or upon
the Premises or the Project from any cause whatsoever, including without
limitation, damage caused in whole or in part, directly or indirectly, by the
negligence of Landlord or its agents, employees or contractors.
10. LANDLORD'S REPAIRS. Landlord shall maintain, at its expense, the
structural soundness of the roof, foundation, and exterior walls of the Building
in good repair, reasonable wear and tear and damages caused by Tenant, its
agents and contractors excluded. The term "walls" as used in this Paragraph 10
shall not include windows, glass or plate glass, doors or overhead doors,
special store fronts, dock bumpers, dock plates or levelers, or office entries.
Tenant shall promptly give Landlord written notice of any repair required by
Landlord pursuant to this Paragraph 10, after which Landlord shall have a
reasonable opportunity to repair.
In the event of an emergency, Tenant shall have the right to
make such temporary, emergency repairs (and only such temporary, emergency
repairs) to the roof, foundation or exterior walls of the Project as may be
reasonably necessary to prevent material damage to Tenant's property at the
Premises and/or personal injury to Tenant's employees at the Premises
(provided Tenant first attempts to notify Landlord telephonically of such
emergency and notifies Landlord of such circumstances in writing as soon as
practicable thereafter). In such event, Landlord shall reimburse Tenant for
the reasonable, out-of-pocket costs actually incurred by Tenant in making
such emergency repairs. If Landlord fails to reimburse Tenant for the
reasonable, out-of-pocket costs incurred by Tenant in making such repairs, up
to but not to exceed $7,000.00 with respect to such emergency within 30 days
after demand therefor, accompanied by supporting evidence of the costs
incurred by Tenant, then Tenant may bring an action for damages against
Landlord to recover such costs, together with interest thereof at the rate
provided for in Paragraph 37(j) of the Lease, and reasonable attorney's fees
incurred by Tenant in bringing such action for damages.
-4-
<PAGE>
11. TENANT'S REPAIRS. Landlord, at Tenant's expense as provided in
Paragraph 6, shall maintain in good repair and condition the parking areas and
other common areas of the Building, including, but not limited to driveways,
alleys, landscape and grounds surrounding the Premises. Subject to Landlord's
obligation in Paragraph 10 and subject to Paragraphs 9 15, and 16, Tenant, at
its expense, shall repair, replace and maintain in good condition all portions
of the Premises and all areas, improvements and systems exclusively serving the
Premises including, without limitation, dock and loading areas, truck doors,
plumbing, water, and sewer lines up to points of common connection, fire
sprinklers and fire protection systems, entries, doors, ceilings and roof
membrane, windows, interior walls, and the interior side of demising walls, and
heating, ventilation and air conditioning systems. Such repair and replacements
include capital expenditures and repairs whose benefits may extend beyond the
Term, and such capital expenditures and repairs shall be amortized on a straight
line basis over a period equal to the useful life thereof in accordance to
generally accepted accounting principals. Heating, ventilation and air
conditioning systems and other mechanical and building systems serving the
Premises shall be maintained at Tenant's expense pursuant to maintenance service
contracts entered into by Tenant or, at Landlord's election, by Landlord. The
scope of services and contractors under such maintenance contracts shall be
reasonably approved by Landlord. At Landlord's request, Tenant shall enter into
a joint maintenance agreement with any railroad that services the Premises. If
Tenant fails beyond any APPLICABLE CURE period to perform any repair or
replacement for which it is responsible, Landlord may perform such work and be
reimbursed by Tenant within 10 days after demand therefor. Subject to Paragraphs
9 and 15, Tenant shall bear the full cost of any repair or replacement to any
part of the Building or Project that results from damage caused by the
negligence of Tenant, its agents, contractors, or invitees and any repair that
benefits only the Premises.
12. TENANT-MADE ALTERATIONS AND TRADE FIXTURES. Any alterations,
additions, or improvements THAT AFFECT ANY STRUCTURAL OR EXTERIOR PORTIONS OF
THE BUILDING OR EXCEED $2,500 IN COSTS, made by or on behalf of Tenant to the
Premises ("Tenant-Made Alterations") shall be subject to Landlord's prior
written consent which shall not be unreasonably withheld or delayed. TENANT
SHALL BE REQUIRED TO REMOVE ANY ALTERATION, ADDITIONS, IMPROVEMENTS OR UTILITY
INSTALLATIONS AND RETURN PREMISES IN LIKE NEW CONDITION UNLESS LANDLORD HAS
INDICATED IN WRITING PRIOR TO CONSTRUCTION THAT SUCH REMOVAL WILL NOT BE
REQUIRED AT THE END OF THE LEASE TERM. Tenant shall cause, at its expense, all
Tenant-Made Alterations to comply with insurance requirements and with Legal
Requirements and shall construct at its expense any alteration or modification
required by Legal Requirements as a result of any Tenant-Made Alterations. All
Tenant-Made Alterations shall be constructed in a good and workmanlike manner by
contractors reasonably acceptable to Landlord and only good grades of materials
shall be used. All plans and specifications for any Tenant-Made Alterations
shall be submitted to Landlord for its approval. Landlord may monitor
construction of the Tenant-Made Alterations. Tenant shall reimburse Landlord for
its reasonable costs in reviewing plans and specifications and in monitoring
construction. Landlord's right to review plans and specifications and to monitor
construction shall be solely for its own benefit, and Landlord shall have no
duty to see that such plans and specifications or construction comply with
applicable laws, codes, rules and regulations. Tenant shall provide Landlord
with the identities and mailing addresses of all persons performing work or
supplying materials, prior to beginning such construction, and Landlord may post
on and about the Premises notices of non-responsibility pursuant to applicable
law. Tenant shall furnish security or make other arrangements satisfactory to
Landlord to assure payment for the completion of all work free and clear of
liens and shall provide certificates of insurance for worker's compensation and
other coverage in amounts and from an insurance company satisfactory to Landlord
protecting Landlord against liability for personal injury or property damage
during construction. Upon completion of any Tenant-Made Alterations, Tenant
shall deliver to Landlord sworn statements setting forth the names of all
contractors and subcontractors who did work on the Tenant-Made Alterations and
final lien waivers from all such contractors and subcontractors. Upon surrender
of the Premises, all Tenant-Made Alterations and any leasehold improvements
constructed by Landlord or Tenant shall remain on the Premises as Landlord's
property, except to the extent Landlord requires removal at Tenant's expense of
any such items or Landlord and Tenant have otherwise agreed in writing in
connection with Landlord's consent to any Tenant-Made Alterations. Tenant shall
repair any damage caused by such removal.
Tenant, at its own cost and expense and without Landlord's
prior approval, may erect such shelves, bins, machinery and trade fixtures
(collectively "Trade Fixtures") in the ordinary course of its business provided
that such items do not alter the basic character of the Premises, do not
overload or damage the Premises, and may be removed without injury to the
Premises, and the construction, erection, and installation thereof complies with
all Legal Requirements and with Landlord's requirements set forth above. Upon
the expiration or earlier termination of this Lease, Tenant shall remove its
Trade Fixtures and shall repair any damage caused by such removal.
13. SIGNS. Tenant shall not make any changes to the exterior of the
Premises, install any exterior lights, decorations, balloons, flags, pennants,
banners, or painting, or erect or install any signs, windows or door lettering,
placards, decorations, or advertising media of any type which can be viewed from
the exterior of the Premises, without Landlord's prior written consent. Upon
surrender or vacation of the Premises, Tenant shall have removed all signs and
repair, paint, and/or replace the building facia surface to which its signs are
attached. Tenant shall obtain all applicable governmental permits and approvals
for sign and exterior treatments. All signs, decorations, advertising media,
blinds, draperies and other window treatment or bars or other security
installations visible from outside the Premises shall be subject to Landlord's
approval and conform in all respects to Landlord's requirements.
14. PARKING. Tenant shall be entitled to park in common with other
tenants of the Project in those areas designated for nonreserved parking.
Landlord may allocate parking spaces among Tenant and other tenants in the
Project if Landlord determines that such parking facilities are becoming
crowded. Landlord shall not be responsible for enforcing Tenant's parking rights
against any third parties. Tenant at Tenant's expense shall be entitled to six
(6) "Visitor" parking spaces to be located in front of the Premises.
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15. RESTORATION. If at any time during the Lease Term the Premises are
damaged by a fire or other casualty, Landlord shall notify Tenant within 45 days
after such damage as to the amount of time Landlord reasonably estimates it will
take to restore the Premises. If the restoration time is estimated to exceed 6
months, either Landlord or Tenant may elect to terminate this Lease upon notice
to the other party given no later than 30 days after Landlord's notice. If
neither party elects to terminate this Lease or if Landlord estimates that
restoration will take 6 months or less, then, subject to receipt of sufficient
insurance proceeds, Landlord shall promptly restore the Premises excluding the
improvements installed by Tenant or by Landlord and paid by Tenant, subject to
delays arising from the collection of insurance proceeds or from Force Majeure
events. Tenant at Tenant's expense shall promptly perform, subject to delays
arising from the collection of insurance proceeds, or from Force Majeure events,
all repairs or restoration not required to be done by Landlord and shall
promptly re-enter the Premises and commence doing business in accordance with
this Lease. Notwithstanding the foregoing, either party may terminate this Lease
if the Premises are damaged during the last year of the Lease Term and Landlord
reasonably estimates that it will take more than one month to repair such
damage. Tenant shall pay to Landlord with respect to any damage to the Premises
the amount of the commercially reasonable deductible, NOT TO EXCEED $20,000,
under Landlord's insurance policy (currently $10,000) within 10 days after
presentment of Landlord's invoice. If the damage involves the premises of other
tenants, Tenant shall pay the portion of the deductible that the cost of the
restoration of the Premises bears to the total cost of restoration, as
reasonably determined by Landlord. Base Rent and Operating Expenses shall be
abated from the date of casualty until the repair and restoration is completed,
in the proportion which the area of the Premises, if any, which is not usable by
Tenant bears to the total area of the Premises. Such abatement shall be the sole
remedy of Tenant, and except as provided herein, Tenant waives any right to
terminate the Lease by reason of damage or casualty loss.
16. CONDEMNATION. If any part of the Premises or the Project should be
taken for any public or quasi-public use under governmental law, ordinance, or
regulation, or by right of eminent domain, or by private purchase in lieu
thereof (a "Taking" or "Taken"), and the Taking would prevent or materially
interfere with Tenant's use of the Premises or in Landlord's judgment would
materially interfere with or impair its ownership or operation of the Project,
then upon written notice by Landlord this Lease shall terminate and Base Rent
shall be apportioned as of said date. If part of the Premises shall be Taken,
and this Lease is not terminated as provided above, the Base Rent payable
hereunder during the unexpired Lease Term shall be reduced to such extent as may
be fair and reasonable under the circumstances. In the event of any such Taking,
Landlord shall be entitled to receive the entire price or award from any such
Taking without any payment to Tenant, and Tenant hereby assigns to Landlord
Tenant's interest, if any, in such award. Tenant shall have the right, to the
extent that same shall not diminish Landlord's award, to make a separate claim
against the condemning authority (but not Landlord) for such compensation as may
be separately awarded or recoverable by Tenant for moving expenses and damage to
Tenant's Trade Fixtures, if a separate award for such items is made to Tenant.
17. ASSIGNMENT AND SUBLETTING. Without Landlord's prior written
consent, which Landlord shall not unreasonably withhold or delay, Tenant shall
not assign this Lease or sublease the Premises or any part thereof or mortgage,
pledge, or hypothecate its leasehold interest or grant any concession or license
within the Premises and any attempt to do any of the foregoing shall be void and
of no effect. For purposes of this paragraph, a transfer of the ownership
interests controlling Tenant shall be deemed an assignment of this Lease unless
such ownership interests are publicly traded. Notwithstanding the above, Tenant
may assign or sublet the Premises, or any part thereof, to any entity
controlling Tenant, controlled by Tenant or under common control with Tenant (a
"Tenant Affiliate"), without the prior written consent of Landlord. Tenant shall
reimburse Landlord for all of Landlord's reasonable out-of-pocket expenses in
connection with any assignment or sublease. Upon Landlord's receipt of Tenant's
written notice of a desire to assign or sublet 75% or more of the Premises,
(other than to a Tenant Affiliate), Landlord may, by giving written notice to
Tenant within 10 business days after receipt of Tenant's notice, terminate this
Lease with respect to the space described in Tenant's notice, as of the date
specified in Tenant's notice for the commencement of the proposed assignment or
sublease. If Landlord so terminates the Lease, Landlord may enter into a lease
directly with the proposed sublessee or assignee. Tenant may withdraw its notice
to sublease or assign by notifying Landlord within 10 business days after
Landlord has given Tenant notice of such termination, in which case the Lease
shall not terminate but shall continue.
It shall be reasonable for the Landlord to withhold its consent
to any assignment or sublease in any of the following instances: (i) an Event
of Default has occurred and is continuing that would not be cured upon the
proposed sublease or assignment; (ii) the assignee does not have a net worth
calculated according to generally accepted accounting principles at least
equal to the greater of the net worth of Tenant immediately prior to such
assignment or the net worth of the Tenant at the time it executed the Lease;
(iii) the intended use of the Premises by the assignee or sublessee is not
reasonably satisfactory to Landlord; (iv) the intended use of the Premises by
the assignee or sublessee would materially increase the pedestrian or
vehicular traffic to the Premises or the Project; (v) occupancy of the
Premises by the assignee or sublessee would, in Landlord's opinion, violate
an agreement binding upon Landlord or the Project with regard to the identity
of tenants, usage in the Project, or similar matters; (vi) the identity or
business reputation of the assignee or sublessee will, in the good faith
judgment of Landlord, tend to damage the goodwill or reputation of the
Project; (vii) the assignment or sublet is to another tenant in the Project
AND the sublease space is larger than 11,000 square feet and is at rates
which are below those charged by Landlord for comparable space in the
Project; (viii) in the case of a sublease, the subtenant has not acknowledged
that the Lease controls over any inconsistent provision in the sublease; (ix)
the proposed assignee or sublessee is a governmental agency; Tenant and
Landlord acknowledge that each of the foregoing criteria are reasonable as of
the date of execution of this Lease. The foregoing criteria shall not exclude
any other reasonable basis for Landlord to refuse
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its consent to such assignment or sublease. Any approved assignment or sublease
shall be expressly subject to the terms and conditions of this Lease. Tenant
shall provide to Landlord all information concerning the assignee or sublessee
as Landlord may request.
Notwithstanding any assignment or subletting, Tenant and any
guarantor or surety of Tenant's obligations under this Lease shall at all
times remain fully responsible and liable for the payment of the rent and for
compliance with all of Tenant's other obligations under this Lease
(regardless of whether Landlord's approval has been obtained for any such
assignments or sublettings). In the event that the rent due and payable by a
sublessee or assignee (or a combination of the rental payable under such
sublease or assignment plus any bonus or other consideration therefor or
incident thereto) exceeds the rental payable under this Lease, then Tenant
shall be bound and obligated to pay Landlord as additional rent hereunder 50%
of all such excess rental and other excess consideration within 10 days
following receipt thereof by Tenant, after Tenant recovers it's reasonable
costs incurred in such assignment or subleasing.
If this Lease be assigned or if the Premises be subleased
(whether in whole or in part) or in the event of the mortgage, pledge, or
hypothecation of Tenant's leasehold interest or grant of any concession or
license within the Premises or if the Premises be occupied in whole or in
part by anyone other than Tenant, then upon a monetary default by Tenant
hereunder Landlord may collect rent from the assignee, sublessee, mortgagee,
pledgee, party to whom the leasehold interest was hypothecated, concessionee
or licensee or other occupant and, except to the extent set forth in the
preceding paragraph, apply the amount collected to the next rent payable
hereunder; and all such rentals collected by Tenant shall be held in trust
for Landlord and immediately forwarded to Landlord. No such transaction or
collection of rent or application thereof by Landlord, however, shall be
deemed a waiver of these provisions or a release of Tenant from the further
performance by Tenant of its covenants, duties, or obligations hereunder.
18. INDEMNIFICATION. Except for the negligence or willful misconduct of
Landlord, its agents, employees or contractors, and to the extent permitted by
law, Tenant agrees to indemnify, defend and hold harmless Landlord, and
Landlord's agents, employees and contractors, from and against any and all
losses, liabilities, damages, costs and expenses (including attorneys' fees)
resulting from claims by third parties for injuries to any person and damage to
or theft or misappropriation or loss of property occurring in or about the
Project and arising from the use and occupancy of the Premises or from any
activity, work, or thing done, permitted or suffered by Tenant in or about the
Premises or due to any other act or omission of Tenant, its subtenants,
assignees, invitees, employees, contractors and agents. The furnishing of
insurance required hereunder shall not be deemed to limit Tenant's obligations
under this Paragraph 18.
19. INSPECTION AND ACCESS. Landlord and its agents, representatives,
and contractors may enter the Premises at any reasonable time, WITH REASONABLE
NOTICE, to inspect the Premises and to make such repairs as may be required or
permitted pursuant to this Lease and for any other business purpose. Landlord
and Landlord's representatives may enter the Premises during business hours for
the purpose of showing the Premises to prospective purchasers and, during the
last six months of the Lease Term, to prospective tenants. Landlord may erect a
suitable sign on the Premises stating the Premises are available to let or that
the Project is available for sale. Landlord may grant easements, make public
dedications, designate common areas and create restrictions on or about the
Premises, provided that no such easement, dedication, designation or restriction
materially interferes with Tenant's use or occupancy of the Premises. At
Landlord's request, Tenant shall execute such instruments as may be necessary
for such easements, dedications or restrictions.
20. QUIET ENJOYMENT. If Tenant shall perform all of the covenants and
agreements herein required to be performed by Tenant, Tenant shall, subject to
the terms of this Lease, at all times during the Lease Term, have peaceful and
quiet enjoyment of the Premises against any person claiming by, through or under
Landlord.
21. SURRENDER. Upon termination of the Lease Term or earlier
termination of Tenant's right of possession, Tenant shall surrender the Premises
to Landlord in the same condition as received, broom clean, ordinary wear and
tear and casualty loss and condemnation covered by Paragraphs 15 and 16
excepted. Any Trade Fixtures, Tenant-Made Alterations and property not so
removed by Tenant as permitted or required herein shall be deemed abandoned and
may be stored, removed, and disposed of by Landlord at Tenant's expense, and
Tenant waives all claims against Landlord for any damages resulting from
Landlord's retention and disposition of such property. All obligations of Tenant
hereunder not fully performed as of the termination of the Lease Term shall
survive the termination of the Lease Term, including without limitation,
indemnity obligations, payment obligations with respect to Operating Expenses
and obligations concerning the condition and repair of the Premises.
22. HOLDING OVER. If Tenant retains possession of the Premises after
the termination of the Lease Term, unless otherwise agreed in writing, such
possession shall be subject to immediate termination by Landlord at any time,
and all of the other terms and provisions of this Lease (excluding any expansion
or renewal option or other similar right or option) shall be applicable during
such holdover period, except that Tenant shall pay Landlord from time to time,
upon demand, as Base Rent for the holdover period, an amount equal to 150% the
Base Rent in effect on the termination date, computed on a monthly basis for
each month or part thereof during such holding over. All other payments shall
continue under the terms of this Lease. In addition, Tenant shall be liable for
all damages incurred by Landlord as a result of such holding over. No holding
over by Tenant, whether with or without consent of Landlord, shall operate to
extend this Lease except as otherwise expressly provided, and this Paragraph 22
shall not be construed as consent for Tenant to retain possession of the
Premises.
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23. EVENTS OF DEFAULT. Each of the following events shall be an event
of default ("Event of Default") by Tenant under this Lease:
(i) Tenant shall fail to pay any installment of Base Rent or
any other payment required herein when due, and such failure shall
continue for a period of 5 days from the date such payment was due.
(ii) Tenant or any guarantor or surety of Tenant's obligations
hereunder shall (A) make a general assignment for the benefit of
creditors; (B) commence any case, proceeding or other action seeking to
have an order for relief entered on its behalf as a debtor or to
adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it
or its debts or seeking appointment of a receiver, trustee, custodian
or other similar official for it or for all or of any substantial part
of its property (collectively a "proceeding for relief"); (C) become
the subject of any proceeding for relief which is not dismissed within
60 days of its filing or entry; or (D) die or suffer a legal disability
(if Tenant, guarantor, or surety is an individual) or be dissolved or
otherwise fail to maintain its legal existence (if Tenant, guarantor or
surety is a corporation, partnership or other entity).
(iii) Any insurance required to be maintained by Tenant
pursuant to this Lease shall be cancelled or terminated or shall
expire or shall be reduced or materially changed, except, in each
case, as permitted in this Lease.
(iv) Tenant shall not occupy or shall vacate the Premises or
shall fail to continuously operate its business at the Premises for the
permitted use set forth herein, whether or not Tenant is in monetary or
other default under this Lease.
(v) Tenant shall attempt or there shall occur any assignment,
subleasing or other transfer of Tenant's interest in or with respect to
this Lease except as otherwise permitted in this Lease.
(vi) Tenant shall fail to discharge any lien placed upon the
Premises in violation of this Lease within 30 days after any such lien
or encumbrance is filed against the Premises.
(vii) Tenant shall fail to comply with any provision of this
Lease other than those specifically referred to in this Paragraph 23,
and except as otherwise expressly provided herein, such default shall
continue for more than 30 days after Landlord shall have given Tenant
written notice of such default. (or, if the default is not capable of
cure within such thirty (30) days but reasonably can be cured within a
period not to exceed ninety (90) days, and Tenant fails to commence the
cure within the thirty (30)-day period or thereafter fails to
diligently prosecute the cure to completion within 90 days, except for
delays caused by force majure, after written notice of default).
24. LANDLORD'S REMEDIES. Upon each occurrence of an Event of Default
and so long as such Event of Default shall be continuing, Landlord may at any
time thereafter at its election: terminate this Lease or Tenant's right of
possession (but Tenant shall remain liable as hereinafter provided), and/or
pursue any other remedies at law or in equity. Upon the termination of this
Lease or termination of Tenant's right of possession, it shall be lawful for
Landlord, without formal demand or notice of any kind, to re-enter the Premises
by summary dispossession proceedings or any other action or proceeding
authorized by law and to remove Tenant and all persons and property therefrom.
If Landlord re-enters the Premises, Landlord shall have the right to keep in
place and use, or remove and store, all of the furniture, fixtures and equipment
at the Premises.
Except as otherwise provided in the next paragraph, if Tenant
breaches this Lease and abandons the Premises prior to the end of the term
hereof, or if Tenant's right to possession is terminated by Landlord because
of an Event of Default by Tenant under this Lease, this Lease shall
terminate. Upon such termination, Landlord may recover from Tenant the
following, as provided in Section 1951.2 of the Civil Code of California: (i)
the worth at the time of award of the unpaid Base Rent and other charges
under this Lease that had been earned at the time of termination; (ii) the
worth at the time of award of the amount by which the reasonable value of the
unpaid Base Rent and other charges under this Lease which would have been
earned after termination until the time of award exceeds the amount of such
rental loss that Tenant proves could have been reasonably avoided; (iii) the
worth at the time of award by which the reasonable value of the unpaid Base
Rent and other charges under this Lease for the balance of the term of this
Lease after the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonably avoided; and (iv) any other amount
necessary to compensate Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under this Lease or that in the
ordinary course of things would be likely to result therefrom. As used
herein, the following terms are defined: (a) The "worth at the time of award"
of the amounts referred to in Sections (i) and (ii) is computed by allowing
interest at the lesser of 15 percent per annum or the maximum lawful rate.
The "worth at the time of award" of the amount referred to in Section (iii)
is computed by discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent; (b) The
"time of award" as used in clauses (i), (ii), and (iii) above is the date on
which judgment is entered by a court of competent jurisdiction; (c) The
"reasonable value" of the amount referred to in clause (ii) above is computed
by determining the mathematical product of (1) the "reasonable annual rental
value" (as defined herein) and (2) the number of years, including fractional
parts thereof, between the date of termination and the time of award. The
"reasonable value" of the amount referred to in clause (iii) is computed by
determining the mathematical product of (1) the annual Base Rent and other
charges under this Lease and (2) the number of years including fractional
parts thereof remaining in the balance of the term of this Lease after the
time of award.
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Even though Tenant has breached this Lease and abandoned the
Premises, this Lease shall continue in effect for so long as Landlord does
not terminate Tenant's right to possession, and Landlord may enforce all its
rights and remedies under this Lease, including the right to recover rent as
it becomes due. This remedy is intended to be the remedy described in
California Civil Code Section 1951.4, and the following provision from such
Civil Code Section is hereby repeated: "The Lessor has the remedy described
in California Civil Code Section 1951.4 (lessor may continue lease in effect
after lessee's breach and abandonment and recover rent as it becomes due, if
lessee has right to sublet or assign, subject only to reasonable
limitations)." Any such payments due Landlord shall be made upon demand
therefor from time to time and Tenant agrees that Landlord may file suit to
recover any sums falling due from time to time. Notwithstanding any such
reletting without termination, Landlord may at any time thereafter elect in
writing to terminate this Lease for such previous breach.
Exercise by Landlord of any one or more remedies hereunder
granted or otherwise available shall not be deemed to be an acceptance of
surrender of the Premises and/or a termination of this Lease by Landlord,
whether by agreement or by operation of law, it being understood that such
surrender and/or termination can be effected only by the written agreement of
Landlord and Tenant. Any law, usage, or custom to the contrary notwithstanding,
Landlord shall have the right at all times to enforce the provisions of this
Lease in strict accordance with the terms hereof; and the failure of Landlord at
any time to enforce its rights under this Lease strictly in accordance with same
shall not be construed as having created a custom in any way or manner contrary
to the specific terms, provisions, and covenants of this Lease or as having
modified the same. Tenant and Landlord further agree that forbearance or waiver
by Landlord to enforce its rights pursuant to this Lease or at law or in equity,
shall not be a waiver of Landlord's right to enforce one or more of its rights
in connection with any subsequent default. A receipt by Landlord of rent or
other payment with knowledge of the breach of any covenant hereof shall not be
deemed a waiver of such breach, and no waiver by Landlord of any provision of
this Lease shall be deemed to have been made unless expressed in writing and
signed by Landlord. To the greatest extent permitted by law, Tenant waives the
service of notice of Landlord's intention to re-enter as provided for in any
statute, or to institute legal proceedings to that end, and also waives all
right of redemption in case Tenant shall be dispossessed by a judgment or by
warrant of any court or judge. The terms "enter," "re-enter," "entry" or
"re-entry," as used in this Lease, are not restricted to their technical legal
meanings. Any reletting of the Premises shall be on such terms and conditions as
Landlord in its sole discretion may determine (including without limitation a
term different than the remaining Lease Term, rental concessions, alterations
and repair of the Premises, lease of less than the entire Premises to any tenant
and leasing any or all other portions of the Project before reletting the
Premises). Landlord shall not be liable, nor shall Tenant's obligations
hereunder be diminished, because of Landlord's failure to relet the Premises or
collect rent due in respect of such reletting.
25 TENANT'S REMEDIES/LIMITATION OF LIABILITY. Landlord shall not be in
default hereunder unless Landlord fails to perform any of its obligations
hereunder within 30 days after written notice from Tenant specifying such
failure (unless such performance will, due to the nature of the obligation,
require a period of time in excess of 30 days, then after such period of time as
is reasonably necessary). All obligations of Landlord hereunder shall be
construed as covenants, not conditions; and, except as may be otherwise
expressly provided in this Lease, Tenant may not terminate this Lease for breach
of Landlord's obligations hereunder. All obligations of Landlord under this
Lease will be binding upon Landlord only during the period of its ownership of
the Premises and not thereafter. The term "Landlord" in this Lease shall mean
only the owner, for the time being of the Premises, and in the event of the
transfer by such owner of its interest in the Premises, such owner shall
thereupon be released and discharged from all obligations of Landlord thereafter
accruing, but such obligations shall be binding during the Lease Term upon each
new owner for the duration of such owner's ownership. Any liability of Landlord
under this Lease shall be limited solely to its interest in the Project, and in
no event shall any personal liability be asserted against Landlord in connection
with this Lease nor shall any recourse be had to any other property or assets of
Landlord.
26 WAIVER OF JURY TRIAL. TENANT AND LANDLORD WAIVE ANY RIGHT TO TRIAL
BY JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING
IN CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING OUT OF THIS
LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.
27 SUBORDINATION. This Lease and Tenant's interest and rights hereunder
are and shall be subject and subordinate at all times to the lien of any first
mortgage, now existing or hereafter created on or against the Project or the
Premises, and all amendments, restatements, renewals, modifications,
consolidations, refinancing, assignments and extensions thereof, without the
necessity of any further instrument or act on the part of Tenant. Tenant agrees,
at the election of the holder of any such mortgage, to attorn to any such
holder. Tenant agrees upon demand to execute, acknowledge and deliver such
instruments, confirming such subordination and such instruments of attornment as
shall be requested by any such holder. Tenant hereby appoints Landlord attorney
in fact for Tenant irrevocably (such power of attorney being coupled with an
interest) to execute, acknowledge and deliver any such instrument and
instruments for and in the name of the Tenant and to cause any such instrument
to be recorded. Notwithstanding the foregoing, any such holder may at any time
subordinate its mortgage to this Lease, without Tenant's consent, by notice in
writing to Tenant, and thereupon this Lease shall be deemed prior to such
mortgage without regard to their respective dates of execution, delivery or
recording and in that event such holder shall have the same rights with respect
to this Lease as though this Lease had been executed prior to the execution,
delivery and recording of such mortgage and had been assigned to such holder.
The term "mortgage" whenever used in this Lease shall be deemed to include deeds
of trust, security assignments and any other encumbrances, and any reference to
the "holder" of a mortgage shall be deemed to include the beneficiary under a
deed of trust.
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28 MECHANIC'S LIENS. Tenant has no express or implied authority to
create or place any lien or encumbrance of any kind upon, or in any manner to
bind the interest of Landlord or Tenant in, the Premises or to charge the
rentals payable hereunder for any claim in favor of any person dealing with
Tenant, including those who may furnish materials or perform labor for any
construction or repairs. Tenant covenants and agrees that it will pay or cause
to be paid all sums legally due and payable by it on account of any labor
performed or materials furnished in connection with any work performed on the
Premises and that it will save and hold Landlord harmless from all loss, cost or
expense based on or arising out of asserted claims or liens against the
leasehold estate or against the interest of Landlord in the Premises or under
this Lease. Tenant shall give Landlord immediate written notice of the placing
of any lien or encumbrance against the Premises and cause such lien or
encumbrance to be discharged within 30 days of the filing or recording thereof;
provided, however, Tenant may contest such liens or encumbrances as long as such
contest prevents foreclosure of the lien or encumbrance and Tenant causes such
lien or encumbrance to be bonded or insured over in a manner satisfactory to
Landlord within such 30 day period.
29 ESTOPPEL CERTIFICATES. Tenant agrees, from time to time, within 10
business days after request of Landlord, to execute and deliver to Landlord, or
Landlord's designee, any estoppel certificate requested by Landlord, stating
that this Lease is in full force and effect, the date to which rent has been
paid, that Landlord is not in default hereunder (or specifying in detail the
nature of Landlord's default), the termination date of this Lease and such other
matters pertaining to this Lease as may be reasonably requested by Landlord.
Tenant's obligation to furnish each estoppel certificate in a timely fashion is
a material inducement for Landlord's execution of this Lease. No cure or grace
period provided in this Lease shall apply to Tenant's obligations to timely
deliver an estoppel certificate.
30 ENVIRONMENTAL REQUIREMENTS. Except for Hazardous Material contained
in products used by Tenant in de minimis quantities for ordinary cleaning and
office purposes, Tenant shall not permit or cause any party to bring any
Hazardous Material upon the Premises or transport, store, use, generate,
manufacture or release any Hazardous Material in or about the Premises without
Landlord's prior written consent. Tenant, at its sole cost and expense, shall
operate its business in the Premises in strict compliance with all Environmental
Requirements and shall remediate in manner satisfactory to Landlord any
Hazardous Materials released on or from the Project by Tenant, its agents,
employees, contractors, subtenants or invitees. Tenant shall complete and
certify to disclosure statements as requested by Landlord from time to time
relating to Tenant's transportation, storage, use, generation, manufacture, or
release of Hazardous Materials on the Premises. The term "Environmental
Requirements" means all applicable present and future statutes, regulations,
ordinances, rules, codes, judgments, orders or other similar enactments of any
governmental authority or agency regulating or relating to health, safety, or
environmental conditions on, under, or about the Premises or the environment,
including without limitation, the following: the Comprehensive Environmental
Response, Compensation and Liability Act; the Resource Conservation and Recovery
Act; and all state and local counterparts thereto, and any regulations or
policies promulgated or issued thereunder. The term "Hazardous Materials" means
and includes any substance, material, waste, pollutant, or contaminant listed or
defined as hazardous or toxic, under any Environmental Requirements, asbestos
and petroleum, including crude oil or any fraction thereof, natural gas, or
synthetic gas usable for fuel (or mixtures of natural gas and such synthetic
gas). As defined in Environmental Requirements, Tenant is and shall be deemed to
be the "operator" of Tenant's "facility" and the "owner" of all Hazardous
Materials brought on the Premises by Tenant, its agents, employees, contractors
or invitees, and the wastes, by-products, or residues generated, resulting, or
produced therefrom.
Tenant shall indemnify, defend, and hold Landlord harmless from
and against any and all losses (including, without limitation, diminution in
value of the Premises or the Project and loss of rental income from the
Project), claims, demands, actions, suits, damages (including, without
limitation, punitive damages), expenses (including, without limitation,
remediation, removal, repair, corrective action, or cleanup expenses), and
costs (including, without limitation, actual attorneys' fees, consultant fees
or expert fees and including, without limitation, removal or management of
any asbestos brought into the Premises or disturbed in breach of the
requirements of this Paragraph 30, regardless of whether such removal or
management is required by law) which are brought or recoverable against, or
suffered or incurred by Landlord as a result of any release of Hazardous
Materials for which Tenant is obligated to remediate as provided above or any
other breach of the requirements under this Paragraph 30 by Tenant, its
agents, employees, contractors, subtenants, assignees or invitees, regardless
of whether Tenant had knowledge of such noncompliance. The obligations of
Tenant and Landlord under this Paragraph 30 shall survive any termination of
this Lease.
Notwithstanding anything to the contrary contained in this
Lease, Tenant shall have no liability of any kind to Landlord as to the
presence on or release of Hazardous materials on or from the Premises prior
to the Commencement Date or otherwise caused by: (i) Landlord, its agents,
employees, contractors or invitees; or (ii) any other tenants in the Project
or their agents, employees, contractors, subtenants, assignees or invitees;
or (iii) any other person or entity located outside the Premises or the
Project.
Landlord shall have access to, and a right to perform
inspections and tests of, the Premises to determine Tenant's compliance with
Environmental Requirements, its obligations under this Paragraph 30, or the
environmental condition of the Premises. Access shall be granted to Landlord
upon Landlord's prior notice to Tenant and at such times so as to minimize,
so far as may be reasonable under the circumstances, any disturbance to
Tenant's operations. Such inspections and tests shall be conducted at
Landlord's expense, unless such inspections or tests reveal that Tenant has
not complied with any Environmental Requirement, in which case Tenant shall
reimburse Landlord
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<PAGE>
for the reasonable cost of such inspection and tests. Landlord's receipt of or
satisfaction with any environmental assessment in no way waives any rights that
Landlord holds against Tenant.
31 RULES AND REGULATIONS. Tenant shall, at all times during the Lease
Term and any extension thereof, comply with all reasonable rules and regulations
at any time or from time to time established by Landlord covering use of the
Premises and the Project. The current rules and regulations are attached hereto.
In the event of any conflict between said rules and regulations and other
provisions of this Lease, the other terms and provisions of this Lease shall
control. Landlord shall not have any liability or obligation for the breach of
any rules or regulations by other tenants in the Project.
32 SECURITY SERVICE. Tenant acknowledges and agrees that, while
Landlord may patrol the Project, Landlord is not providing any security services
with respect to the Premises and that Landlord shall not be liable to Tenant
for, and Tenant waives any claim against Landlord with respect to, any loss by
theft or any other damage suffered or incurred by Tenant in connection with any
unauthorized entry into the Premises or any other breach of security with
respect to the Premises.
33 FORCE MAJEURE. Landlord and Tenant shall not be held responsible for
delays in the performance of its obligations hereunder when caused by strikes,
lockouts, labor disputes, acts of God, inability to obtain labor or materials or
reasonable substitutes therefor, governmental restrictions, governmental
regulations, governmental controls, delay in issuance of permits, enemy or
hostile governmental action, civil commotion, fire or other casualty, and other
causes beyond the reasonable control of Landlord or Tenant ("Force Majeure").
34 ENTIRE AGREEMENT. This Lease constitutes the complete agreement of
Landlord and Tenant with respect to the subject matter hereof. No
representations, inducements, promises or agreements, oral or written, have been
made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant,
which are not contained herein, and any prior agreements, promises,
negotiations, or representations are superseded by this Lease. This Lease may
not be amended except by an instrument in writing signed by both parties hereto.
35 SEVERABILITY. If any clause or provision of this Lease is illegal,
invalid or unenforceable under present or future laws, then and in that event,
it is the intention of the parties hereto that the remainder of this Lease shall
not be affected thereby. It is also the intention of the parties to this Lease
that in lieu of each clause or provision of this Lease that is illegal, invalid
or unenforceable, there be added, as a part of this Lease, a clause or provision
as similar in terms to such illegal, invalid or unenforceable clause or
provision as may be possible and be legal, valid and enforceable.
36 BROKERS. Landlord and Tenant represents and warrants that it has
dealt with no broker, agent or other person in connection with this transaction
and that no broker, agent or other person brought about this transaction, other
than the broker, if any, set forth on the first page of this Lease, and Tenant
agrees to indemnify and hold Landlord harmless from and against any claims by
any other broker, agent or other person claiming a commission or other form of
compensation by virtue of having dealt with Tenant with regard to this leasing
transaction.
37 MISCELLANEOUS. (a) Any payments or charges due from Tenant to
Landlord hereunder shall be considered rent for all purposes of this Lease.
(b) If and when included within the term "Tenant," as used in this
instrument, there is more than one person, firm or corporation, each shall be
jointly and severally liable for the obligations of Tenant.
(c) All notices required or permitted to be given under this Lease
shall be in writing and shall be sent by registered or certified mail, return
receipt requested, or by a reputable national overnight courier service, postage
prepaid, or by hand delivery addressed to the parties at their addresses below,
and with a copy sent to Landlord at 14100 EAST 35TH PLACE, AURORA, COLORADO
80011. Either party may by notice given aforesaid change its address for all
subsequent notices. Except where otherwise expressly provided to the contrary,
notice shall be deemed given upon delivery.
(d) Except as otherwise expressly provided in this Lease or as
otherwise required by law, Landlord retains the right to withhold any consent or
approval.
(e) At Landlord's request from time to time Tenant shall furnish
Landlord with true and complete copies of its most recent annual and quarterly
financial statements prepared by Tenant or Tenant's accountants and any other
financial information or summaries that Tenant typically provides to its lenders
or shareholders.
(f) Neither this Lease nor a memorandum of lease shall be filed by or
on behalf of Tenant in any public record. Landlord may prepare and file, and
upon request by Landlord Tenant will execute, a memorandum of lease.
(g) The normal rule of construction to the effect that any ambiguities
are to be resolved against the drafting party shall not be employed in the
interpretation of this Lease or any exhibits or amendments hereto.
(h) The submission by Landlord to Tenant of this Lease shall have no
binding force or effect, shall not constitute an option for the leasing of the
Premises, nor confer any right or impose any obligations upon either party until
execution of this Lease by both parties.
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<PAGE>
(i) Words of any gender used in this Lease shall be held and construed
to include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires. The captions inserted
in this Lease are for convenience only and in no way define, limit or otherwise
describe the scope or intent of this Lease, or any provision hereof, or in any
way affect the interpretation of this Lease.
(j) Any amount not paid by Tenant within 5 days after its due date in
accordance with the terms of this Lease shall bear interest from such due date
until paid in full at the lesser of the highest rate permitted by applicable law
or 15 percent per year. It is expressly the intent of Landlord and Tenant at all
times to comply with applicable law governing the maximum rate or amount of any
interest payable on or in connection with this Lease. If applicable law is ever
judicially interpreted so as to render usurious any interest called for under
this Lease, or contracted for, charged, taken , reserved, or received with
respect to this Lease, then it is Landlord's and Tenant's express intent that
all excess amounts theretofore collected by Landlord be credited on the
applicable obligation (or, if the obligation has been or would thereby be paid
in full, refunded to Tenant), and the provisions of this Lease immediately shall
be deemed reformed and the amounts thereafter collectible hereunder reduced,
without the necessity of the execution of any new document, so as to comply with
the applicable law, but so as to permit the recovery of the fullest amount
otherwise called for hereunder.
(k) Construction and interpretation of this Lease shall be governed by
the laws of the state in which the Project is located, excluding any principles
of conflicts of laws.
(l) Time is of the essence as to the performance of Tenant's
obligations under this Lease.
(m) All exhibits and addenda attached hereto are hereby incorporated
into this Lease and made a part hereof. In the event of any conflict between
such exhibits or addenda and the terms of this Lease, such exhibits or addenda
shall control.
38
39 LIMITATION OF LIABILITY OF TRUSTEES, SHAREHOLDERS, AND OFFICERS OF
PROLOGIS TRUST. Any obligation or liability whatsoever of ProLogis Trust, a
Maryland real estate investment trust, which may arise at any time under this
Lease or any obligation or liability which may be incurred by it pursuant to any
other instrument, transaction, or undertaking contemplated hereby shall not be
personally binding upon, nor shall resort for the enforcement thereof be had to
the property of, its trustees, directors, shareholders, officers, employees or
agents, regardless of whether such obligation or liability is in the nature of
contract, tort, or otherwise.
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<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the day and year first above written.
TENANT: LANDLORD:
Gatefield Corporation, a ProLogis Limited Partnership-I,
Delaware Corporation a Delaware Limited Partnership
By: ProLogis Trust, a Maryland real
estate investment trust,
General Partner
By: /s/ James B. Boyd By: /s/ Ned K. Anderson
Title: Chief Accounting Officer Title: Managing Director
Address: Address:
47100 Bayside Parkway
47775 Fremont Boulevard
Fremont, CA 94538
Fremont, CA 94538
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<PAGE>
Exhibit 21.1
Set forth below are the subsidiaries of the Registrant: As of the date of this
10-K the Company has no plans for these subsidiaries.
GateField G.m.b.H.
(Shell company only with no assets, employees or activities of any kind)
GateField Japan KK
(Shell company only with no assets, employees or activities of any kind)
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements No.
333-84015, No. 333-42363 and No. 333-60417 of GateField Corporation on Form S-8,
and No. 333-08089 and No. 333-27283 on Form S-3 of our reports dated March 14,
2000, appearing in this Annual Report on Form 10-K of GateField Corporation for
the year ended December 31, 1999.
Deloitte & Touche LLP
San Jose, California
March 14, 2000
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