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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______TO______
COMMISSION FILE NUMBER: 000-22671
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QUICKLOGIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0188504
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1277 ORLEANS DRIVE
SUNNYVALE, CA 94089
(address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (408) 990-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $0.001
par value
(Title of Class)
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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. /X/
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 28, 2001 was $131,594,983.00 based upon the last sales
price reported for such date on The Nasdaq National Market. For purposes of this
disclosure, shares of Common Stock held by persons who hold more than 5% of the
outstanding shares of Common Stock and shares held by officers and directors of
the registrant, have been excluded in that such persons may be deemed to be
affiliates. This determination is not necessarily conclusive.
At February 28, 2001 Registrant had outstanding 20,245,382 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form 10-K
portions of its Proxy Statement for Registrant's Annual Meeting of Stockholders
to be held on or about April 24, 2001.
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EXPLANATORY NOTE
STATEMENTS IN THIS BUSINESS SECTION, AND ELSEWHERE IN THIS ANNUAL REPORT ON
FORM 10-K, WHICH EXPRESS THAT THE COMPANY "BELIEVES", "ANTICIPATES" OR "PLANS
TO....", AS WELL AS OTHER STATEMENTS WHICH ARE NOT HISTORICAL FACT, ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY AS
A RESULT OF THE RISKS AND UNCERTAINTIES DESCRIBED HEREIN AND ELSEWHERE
INCLUDING, IN PARTICULAR, THOSE FACTORS DESCRIBED UNDER "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "FACTORS
AFFECTING FUTURE RESULTS."
PART I
ITEM 1. BUSINESS
OVERVIEW
QuickLogic Corporation develops, markets and supports advanced Field
Programmable Gate Array, or FPGA, and Embedded Standard Product, or ESP,
semiconductors and the software tools that enable design engineers to use our
products. We introduced ESPs, a new class of semiconductor devices, in 1998, to
address the design community's rapidly increasing demand for a solution that
bridges the gap between existing Application Specific Integrated Circuit, or
ASIC, options and the long-sought goal of System-on-a-Chip. Specifically, our
ESP devices provide engineers with the ease-of-use, guaranteed functionality and
high-performance of standard products, combined with the flexibility of
programmable logic. Our ESP and FPGA products target complex, high-performance
systems in rapidly changing markets where system manufacturers seek to minimize
time-to-market and maximize product differentiation and functionality. Examples
of markets we sell to include telecommunications and data communications;
video/audio, graphics and imaging; instrumentation and test; high-performance
computing; and military systems.
PRODUCT TECHNOLOGY
The key components of our ESP and FPGA product families are our ViaLink
programmable metal technology, our user-programmable platform and the associated
software tools used for product design. Our ViaLink technology allows us to
create smaller devices than competitors' comparable products, thereby minimizing
silicon area and cost. In addition, our ViaLink technology has lower electrical
resistance and capacitance than other programmable technologies and,
consequently, supports higher signal speed. Our user-programmable platform
facilitates full utilization of a device's logic cells and Input/Output pins.
These logic cells have been optimized to efficiently implement a wide range of
logic functions at high speed, thereby enabling greater usable device density
and design flexibility. Our architecture uses our ViaLink technology to maximize
interconnects at every routing wire intersection. The abundance of interconnect
resources allows more paths between logic cells. As a consequence, system
designers are able to use QuickLogic devices with smaller gate counts than
competing FPGAs to implement their designs. These smaller gate-count devices
require less silicon area and as a result are able to be offered at a lower
price. Finally, our software enables our customers to efficiently implement
their designs using our products.
INDUSTRY BACKGROUND
Competitive pressures are forcing manufacturers of electronic systems to
rapidly bring to market products with improved functionality, higher performance
and greater reliability, all at lower cost. Providers of systems requiring
high-speed data transmission and processing such as communications equipment,
digital image products, test and instrumentation and storage subsystems face
intense time-to-market pressures. These market forces have driven the evolution
of logic semiconductors, which
2
are used in complex electronic systems to coordinate the functions of other
semiconductors, such as microprocessors or memory. There are three types of
advanced logic semiconductors:
- Application Specific Integrated Circuits, or ASICs, are special purpose
devices designed for a particular manufacturer's electronic system. These
devices are customized during wafer manufacturing;
- Application Specific Standard Products, or ASSPs, are fixed-function
devices designed to comply with industry standards that can be used by a
variety of electronic systems manufacturers. Their functions are fixed
prior to wafer fabrication; and
- Programmable Logic Devices, or PLDs, are general-purpose devices which can
be used by a variety of electronic systems manufacturers, and are
customized after purchase for a specific application. Field Programmable
Gate Arrays, or FPGAs, are types of PLDs used for complex functions.
Systems manufacturers have relied heavily on ASICs to implement the advanced
logic required for their products. ASICs provide high performance due to
customized circuit design. However, because ASICs are design-specific devices,
they require long development and manufacturing cycles, delaying product
introductions. In addition, because of the expense associated with the design of
ASICs, they are cost effective only if they can be manufactured in high volumes.
Finally, once ASICs are manufactured, their functionality cannot be changed to
respond to evolving market demands.
ASSPs have become widely utilized as industry standards have developed to
address increasing system complexity and the need for communication between
systems and system components. These standards include:
- Peripheral Component Interconnect, or PCI, a standard developed to provide
a high performance, reliable and cost-effective method of connecting
high-speed devices within a system;
- Synchronous Optical Network, or SONET, a fiber-optic transmission standard
for high-speed digital traffic, employed mainly by telephone companies and
other network service providers;
- Ethernet, a widely-used local area network, or LAN, transport standard
which controls the interconnection between servers and computers; and
- Fibre Channel Interconnect Protocol, an industry networking standard for
storage area networks, or SANs, which controls the interconnection between
servers and storage devices.
Compared to ASICs, ASSPs offer the systems designer shorter development
time, lower risk and reduced development cost. However, ASSPs generally cannot
be used by systems manufacturers to differentiate their products. To address
markets where industry standards do not exist or are changing and time-to-market
is important, FPGAs are often used. FPGAs provide systems manufacturers with the
flexibility to customize and thereby differentiate their systems, unlike ASSPs.
FPGAs also enable systems manufacturers to change the logic functionality of
their systems after product introduction without the expense and time of
redesigning an ASIC. However, most FPGAs are more expensive than ASSPs and even
ASICs of equivalent functionality because they require more silicon area. In
addition, most FPGAs offer lower performance than nonprogrammable solutions,
such as ASSPs and ASICs.
INDUSTRY FUTURE: SYSTEM-ON-A-CHIP
Over the past few years, semiconductor manufacturers have migrated to
smaller process geometries. These smaller process geometries enable more logic
elements to be incorporated in a single chip using less silicon area. More
recently, advances have been made in the integration of logic and memory on a
single chip, which had been difficult previously due to incompatible process
technologies.
3
The industry "holy grail" is to have the three basic components of all
electronic circuit boards; logic, memory and a microprocessor, on the same chip.
Advantages of the single-chip approach to systems manufacturers include:
- simplified system development;
- reduced time-to-market;
- elimination of delays associated with the transfer of data between chips;
- smaller physical size;
- lower power dissipation;
- greater reliability; and
- lower cost.
However, as levels of logic integration have increased, devices have become
more specific to a particular application. This fact limits their use and
potential market size.
QUICKLOGIC'S ESP SOLUTION
QuickLogic has leveraged its unique ViaLink technology and user-programmable
platform to address the limitations inherent in current system-on-a-chip
approaches. The result is embedded standard products, or ESPs, that deliver the
advantages offered by both FPGAs and ASSPs. In its simplest form, an ESP
contains four basic parts: a programmable logic array, an embedded standard
function, an optional programmable read-only memory to configure the embedded
function, and an interface that allows communication between the standard
function and programmable logic array. Our ESP products combine the system-level
functionality of ASSPs with the flexibility of FPGAs. We believe ESPs offer the
following specific advantages:
- Increased Performance. In a typical design, data must travel between an
ASSP and an FPGA across a printed circuit board. The limited number of
connections available and the distance between the devices can degrade the
system's overall performance. Our ESP solution allows all data to be
processed on a single chip;
- Decreased Cost. Because our ESP is a single chip solution, it requires
less silicon area, and therefore is less expensive to produce.
Additionally, this single chip approach lowers the component, assembly and
test cost for the system manufacturer;
- Increased Reliability. ESP designs are more reliable because single chip
solutions contain fewer components and circuit board connections that are
subject to failure; and
- Shorter Development Time. With a multiple chip design, systems designers
must solve complex routing and timing issues between devices. A single
chip ESP solution eliminates the timing issues between devices and
simplifies software simulation, leading to shorter development time.
We have introduced five ESP product lines since 1998. These include the
QuickSD, QuickFC and QuickPCI families--products aimed at the high-speed
interconnect section of the fast-growing communications market. In addition we
have introduced QuickDSP and QuickRAM, for high-performance Digital Signal
Processing, or DSP, applications and applications that require embedded memory.
All of these families are designed for performance-driven applications.
QUICKLOGIC'S FPGA SOLUTION
QuickLogic's FPGAs offer higher performance at lower overall systems cost
than competing FPGA solutions, in addition to offering the advantages typically
associated with FPGAs. Specifically, our
4
products provide greater design flexibility than standard FPGAs and enable
designers of complex systems to achieve rapid time-to-market with highly
differentiated products. Our products are based on our ViaLink technology and
user-programmable platform, and our associated QuickWorks and QuickTools design
software.
During 2000, we introduced a new FPGA family called Eclipse--devices that
offer a host of new system-level features that are ideal for the
telecommunications, networking, computer and test applications that require a
combination of high-performance, high density and embedded random access memory,
or RAM. In addition, we continue to sell our three families of pASIC FPGAs.
THE QUICKLOGIC STRATEGY
Our objective is to be the indispensable provider of high-speed, flexible,
cost-effective ESPs. We feel we can achieve this objective by offering systems
manufacturers the ability to accelerate design cycles to satisfy demanding
time-to-market requirements. To achieve our objective, we have adopted the
following strategies:
EXTEND TECHNOLOGY LEADERSHIP
Our ViaLink technology, user-programmable platform and proprietary software
design tools enable us to offer flexible, high-performance ESP products. We
intend to continue to invest in the development of these technologies and to
utilize such developments in future innovations of our ESP products. We also
intend to focus our resources on building critical systems-level expertise to
introduce new ESP products and enhance existing ESP product families. We target
applications that are:
- high performance and high complexity;
- broadly used and growing quickly; and
- difficult or impossible to implement in traditional FPGAs.
Specifically, we will continue to focus our design and marketing efforts on
systems manufacturers who sell complex systems within our target applications.
These include:
- data communications and telecommunications;
- video/audio and graphics and imaging;
- instrumentation and test;
- high-performance computing; and
- military.
PROVIDE COMPLETE SYSTEM SOLUTIONS
Our focus on a more targeted set of applications areas will allow us to
provide a complete solution to systems manufacturers. This includes not only the
device and software, but software drivers, reference designs, test boards and
complementary intellectual property, or IP, functions. We focus ESP development
efforts on three strategic applications areas:
- embedded high performance digital signal processing, or DSP;
- embedded high-performance interconnect; and
- embedded high-performance processing.
5
STRATEGIC ALLIANCES
During 2000, we engaged in key strategic partnerships with MIPS
Technologies, Finisar, UTMC, Conexant Systems, and Tower Semiconductor. In
addition, we continue to sell through a network of industry sales
representatives and distributors. These alliances will be an essential element
of our ESP strategy and strength going forward. By leveraging the expertise of
our partners in IP development, wafer fabrication and sales, we can devote our
effort to the development of targeted, complete ESP products.
CREATE INNOVATIVE, INDUSTRY-LEADING CUSTOMER SERVICES
We continue to develop and implement innovative ways to serve and
communicate with our customers. For example, our WebASIC service allows
customers to use our development software to design a circuit, transmit design
information over the Internet and receive a QuickLogic ESP or FPGA device
programmed with their design (within one business day in North America and
Europe or within two business days in Asia). In addition, our ProChannel
web-based system allows our customers to obtain promotional material, receive
quotations, place orders for our products and view their order status over the
Internet. This system complements the Electronic Data Interchange systems that
we have used for the past several years with our largest customers.
6
CUSTOMERS AND MARKETS
The following chart provides a representative list by industry of our
current customers and the markets in which they do business:
INDUSTRY CUSTOMER APPLICATION
- -------- -------- -----------
Data Communications and Alcatel Fiber optic transmission
Telecommunications equipment
IBM Data encryption, network
servers
NEC PBX electronics, wireless
base stations
Video/Audio, Graphics and Digidesign PC-based audio editing
Imaging Honeywell Aircraft navigation and
flight controls
Mitsubishi Large screen displays
NEC Solid state video cameras
Sony Industrial video cameras
Instrumentation and Test ABB Industrial power management
systems
LTX Semiconductor test equipment
National Instruments PC-based instrumentation
boards
Teradyne Semiconductor test equipment
Ando Semiconductor test equipment
High-Performance Computing Compaq Computer Alpha processor motherboards
IBM RAID controller, ThinkPad
display controls
Mitsubishi Mobile PC pen-input display
controllers
Military Systems B.F. Goodrich Launch vehicle for Delta Four
rockets
DY-4 VME-based computer systems
Hamilton Standard Flight computers
Hughes Aircraft Helicopter motor controls and
radar
McDonnell Douglas C-17 flight controllers
Raytheon Tornado missile
SALES AND TECHNICAL SUPPORT
We sell our products through a network of sales managers, independent sales
representatives and electronics distributors in North America, Europe and Asia.
In addition to our corporate headquarters in Sunnyvale, we have regional sales
operations in Los Angeles, Dallas, Boston, Raleigh, London, Munich,
Shin-Yokohama, Shanghai and Hong Kong. Our direct sales personnel and
independent sales representatives generally focus on major strategic accounts.
Our distributors generally focus on small and medium-sized customers, as well as
demand creation and fulfillment to the larger accounts.
Currently in the United States, our three distributors include Avnet
Electronics, Future Electronics and Impact Technologies. A network of
distributors throughout Europe and Asia supports the
7
company's international business. These firms are responsible for creating
customer demand, providing customer support and other value-added services, as
well as filling customers orders. From time-to-time, we add or delete certain
distributors and sales representatives, as appropriate in comparison to the
level of business the company generates.
We provide systems manufacturers with comprehensive technical support, which
we believe is critical to remaining competitive in the markets we serve. Our
factory-based and distributor applications support organizations provide
pre-sales and on-site technical support to customers. In 1998, we established a
design center to develop new embedded functions for ESPs, and to provide
in-depth, system-level technical support to our customers.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
constant technological change, rapid rates of product obsolescence and price
erosion. Our existing competitors include suppliers of conventional standard
products, such as PLX Technology and Applied Micro Circuits Corporation, or
AMCC; suppliers of complex programmable logic devices, or CPLDs, including
Lattice Semiconductor and Altera; and suppliers of FPGAs, particularly Xilinx
and Actel. Xilinx and Altera dominate the PLD market, which together control
over 60% of the market, according to inSearch Research, a semiconductor market
research firm. Xilinx dominates the FPGA segment of the market while Altera
dominates the CPLD segment of the market. We also face competition from
companies that offer standard gate arrays, which can be obtained at a lower cost
for high volumes and may have gate densities and performance equal or superior
to our products. As we introduce additional ESPs, we will also face competition
from standard product manufacturers who are already servicing or who may decide
to enter the markets addressed by these new ESP devices. In addition, we expect
significant competition in the future from major domestic and international
semiconductor suppliers. We also may face competition from suppliers of products
based on new or emerging technologies.
We believe that important competitive factors in our market are length of
development cycle, price, performance, installed base of development systems,
adaptability of products to specific applications, ease of use and functionality
of development system software, reliability, technical service and support,
wafer fabrication capacity and sources of raw materials, and protection of
products by effective utilization of intellectual property laws.
RESEARCH AND DEVELOPMENT
Our future success will depend to a large extent on our ability to rapidly
develop and introduce new products and enhancements to our existing products
that meet emerging industry standards and satisfy changing customer
requirements. We have made and expect to continue to make substantial
investments in research and development and to participate in the development of
new and existing industry standards.
As of February 28, 2001, the research and development staff consisted of 48
employees. Our research and development efforts are focused on standard function
development and integration, device architecture, development tools and foundry
process development. Our standard function development and integration personnel
create circuit designs for inclusion in our ESP products. They also evaluate
circuit designs by third parties for inclusion in our ESP products and integrate
those circuit designs with our FPGA technology. Our device architecture
personnel develop new and improved architectures for our FPGA and ESP products
to better serve the needs of our customers. Our software engineering group
develops place and route tools, which fit the design into specific logic cell
elements within a device and determine the necessary interconnections. They also
develop delay modeling tools, which estimate the timing of all the circuit paths
for accurate simulation. The software group incorporates third-party software
tools into the QuickWorks design software suite, and develops the design
libraries
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needed for the QuickWorks and QuickTools products to integrate with third-party
design environments. Our process engineering group maintains our proprietary
wafer manufacturing processes, oversees product manufacturing and process
development with our third-party foundries, and is involved in ongoing process
improvements to increase yields and optimize device characteristics.
Our research and development expense for 1998, 1999 and 2000 were $6.3
million, $7.4 million and $9.3 million, respectively. We anticipate that we will
continue to commit substantial resources to research and development in the
future.
MANUFACTURING
We have established close relationships with third-party manufacturers for
our wafer fabrication, package assembly, test and programming requirements in an
effort to ensure stability in the supply of our products and minimize the risk
of localized capacity constraints.
We currently outsource all of our wafer manufacturing to Cypress
Semiconductor Corporation at its Round Rock, Texas facility and to Taiwan
Semiconductor Manufacturing Company at its Taiwan facilities. Cypress
manufactures our pASIC1 and pASIC2 product families using a three-layer metal,
0.65 micron CMOS process on six-inch wafers. TSMC manufactures our pASIC3,
QuickRAM and QuickPCI product families using a four-layer metal, 0.35 micron
CMOS process. TSMC also manufactures our Eclipse and other ESP products using a
five-layer metal, 0.25 micron process on eight-inch wafers. Our Cypress
agreement provides a guaranteed capacity availability. We purchase products from
TSMC on a purchase order basis. Under this arrangement, we and TSMC have
mutually agreed that we are not required to purchase a predetermined amount of
product, and TSMC is not required to guarantee capacity availability. See
"Factors Affecting Future Results--None of our products is currently
manufactured by more than one manufacturer..."
On December 12, 2000 we entered into a Share Purchase Agreement (the
"Agreement") with Tower Semiconductor Ltd. under which we will make a $25
million strategic investment in Tower as part of Tower's plan to build a new
wafer fabrication facility. The new fabrication facility will produce 200-mm
wafers in geometries of 0.18 micron and below, using advanced CMOS technology
from Toshiba. In return for our investment, we will receive equity and committed
production capacity in the advanced fabrication facility that Tower is building.
Under the terms of the Agreement, our investment will be made in several stages
over an approximately 22-month period, against satisfactory completion of key
milestones for the construction, equipping and commencement of production at the
new wafer fabrication facility. Tower will develop manufacturing capability for
our proprietary ViaLink technology, and supply us with a guaranteed portion of
the new fabrication facility's available wafer capacity at competitive pricing,
with first production expected in 2002. Per the terms of the Agreement, we paid
Tower $6.7 million on January 22, 2001.
We outsource our product packaging, test and programming to Amkor and
ChipPAC at their South Korea facilities and to Advanced Semiconductor
Engineering at its Taiwan facility, among others.
EMPLOYEES
As of February 28, 2001, we had a total of 178 employees worldwide, with 47
people in operations, 48 people in research and development, 21 people in sales,
24 people in marketing, 34 people in administration and four people in
management information systems. We believe that our future success will depend
in part on our continued ability to attract, hire and retain qualified
personnel. None of our employees is represented by a labor union, and we believe
our employee relations are good.
9
INTELLECTUAL PROPERTY
Our future success and competitive position depend upon our ability to
obtain and maintain the proprietary technology used in our principal products.
We hold 80 U.S. patents and have 9 pending applications for additional U.S.
patents containing claims covering various aspects of programmable integrated
circuits, programmable interconnect structures and programmable metal devices.
In addition, we have three patent applications pending in Japan. Our issued
patents expire between 2009 and 2019. We have also registered six of our
trademarks in the U.S. with applications to register an additional two
trademarks now pending.
Because it is critical to our success that we are able to prevent
competitors from copying our innovations, we intend to continue to seek patent
protection for our products. The process of seeking patent protection can be
long and expensive, and we cannot be certain that any currently pending or
future applications will actually result in issued patents, or that, even if
patents are issued, they will be of sufficient scope or strength to provide
meaningful protection or any commercial advantage to us. Furthermore, others may
develop technologies that are similar or superior to our technology or design
around the patents we own.
We also rely on trade secret protection for our technology, in part through
confidentiality agreements with our employees, consultants and third parties.
However, employees may breach these agreements, and we may not have adequate
remedies for any breach. In any case, others may come to know about or determine
our trade secrets through a variety of methods. In addition, the laws of certain
territories in which we develop, manufacture or sell our products may not
protect our intellectual property rights to the same extent as do the laws of
the United States.
In March 1997, we entered into a patent cross-license agreement with
Cypress, whereby we granted Cypress a nonexclusive license to our patents and
intellectual property rights in exchange for Cypress' nonexclusive license to
their programmable logic technology patents. In August 1998, we also entered
into a patent cross-license agreement with Actel pursuant to which we have each
granted the other a nonexclusive license to certain of our respective
programmable logic device technology patents. We anticipate that we will
continue to enter into licensing arrangements in the future; however, it is
possible that desirable licenses will not be available to us on commercially
reasonable terms. If we lose existing licenses to key technology, or are unable
to enter into new licenses which we deem important, it could materially harm our
business.
During 2000, we entered into technology license agreements with several
third parties. In April 2000, we signed a license agreement with MIPS
Technologies, Inc. This agreement enables the development of an embedded,
MIPS-based(TM) processor with high-performance programmable logic and on-chip
dual-port SRAM, laying the foundation for a whole new class of system-level ESP
product families. In May 2000, we announced an agreement with Finisar
Corporation to use their gigabit-rate technology. Designed for use in
conjunction with industry-standard SERDES transmitter-receiver chips, this
product supports standard Fibre Channel performance rates of up to 2.5 Gb/s
throughput. In October 2000, we signed a license agreement with Conexant
Systems, Inc. to use their SkyRail 3.1 Gb/s scalable transceivers. This
technology allows us to provide device data throughput of up to 37.5 Gb/s in
high-speed serial bus architectures.
In October 2000, we licensed our technology to Aeroflex UTMC, a wholly owned
subsidiary of Aeroflex Incorporated. Aeroflex UTMC will benefit from the use of
our ViaLink metal-to-metal interconnect technology in supplying their products
to the commercial and military satellite markets.
From time to time, we receive letters alleging patent infringement or
inviting us to take a license to other parties' patents. We evaluate these
letters on a case-by-case basis. In September 1999, we received an offer to
license a patent related to field programmable gate array architecture. We have
not
10
yet determined whether this license would be necessary or useful and obtainable
at a reasonable price. Offers such as these may lead to litigation if we reject
the opportunity to obtain the license.
In March 2000, Unisys Corporation filed a patent infringement lawsuit
against us alleging that we infringed three of their patents. We believe that we
have strong defenses and that the resolution of this lawsuit will not have a
material effect on our financial condition or results of operations. No
assurance can be given, however, that these matters will be resolved without the
Company becoming obligated to make payments or to pay other costs to the
opposing party, with the potential for an adverse effect on the Company's
financial position or its results of operations.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning our current
executive officers and directors as of February 28, 2001:
NAME AGE POSITION
- ---- --- --------
E. Thomas Hart.......................... 59 President, Chief Executive Officer and
Director
John M. Birkner......................... 57 Vice President, Chief Technical Officer
Michael R. Brown........................ 51 Vice President, Worldwide Sales
Andrew K. Chan.......................... 50 Vice President, Research and Development
Hua-Thye Chua........................... 65 Vice President, Process Technology and
Director
Peter G. Feist.......................... 46 Vice President, Worldwide Marketing
Reynold W Simpson....................... 52 Senior Vice President, Chief Operating
Officer
Arthur O. Whipple....................... 53 Vice President, Finance, Chief Financial
Officer and Secretary
Ronald D. Zimmerman..................... 52 Vice President, Administration
Irwin Federman.......................... 65 Chairman of the Board of Directors
Donald P. Beadle........................ 65 Director
Robert J. Boehlke....................... 59 Director
Michael J. Callahan..................... 65 Director
E. THOMAS HART has served as our President, Chief Executive Officer and a
member of our board of directors since June 1994. Prior to joining QuickLogic,
Mr. Hart was Vice President and General Manager of the Advanced Networks
Division at National Semiconductor, a semiconductor manufacturing company, where
he worked from September 1992 to June 1994. Prior to joining National
Semiconductor, Mr. Hart was a private consultant from February 1986 to September
1992 with Hart Weston International, a technology based management consulting
firm. Mr. Hart holds a B.S.E.E. from the University of Washington.
JOHN M. BIRKNER, a co-founder of QuickLogic, has served with us since April
1988, serving as Vice President, Chief Technical Officer since 1993. From
September 1975 to June 1986, Mr. Birkner was a fellow at Monolithic Memories, a
semiconductor manufacturing company. Mr. Birkner holds a B.S.E.E. from the
University of California, Berkeley and an M.S.E.E. from the University of Akron.
MICHAEL R. BROWN has served as our Vice President, Worldwide Sales since
January 1999. From 1984 until January 1999, he was employed by Hitachi America,
a semiconductor manufacturing company, in a variety of sales management
positions, most recently as the Vice President of Sales for the Americas. Mr.
Brown holds a B.A. in Kinesiology/Psychology from California State University,
Northridge and attended the U.S. Navy Aviation Electronics School. Mr. Brown
holds a certificate in Advanced Management from Stanford University.
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ANDREW K. CHAN, a co-founder of QuickLogic, has served with us since April
1988, most recently as Vice President, Research and Development. Prior to
joining QuickLogic, Mr. Chan was a design engineering manager at Monolithic
Memories. Mr. Chan holds a B.S.E.E. in Electrical Engineering from Washington
State University and an M.S.E.C. in Electrical Sciences from the University of
New York, Stonybrook.
HUA-THYE CHUA, a co-founder of QuickLogic, has served as a member of our
board of directors since QuickLogic's inception in April 1988. Since December
1996, Mr. Chua has served as our Vice President, Process Technology. He served
as our Vice President of Technology Development from April 1989 to December
1996. During the prior 25 years, Mr. Chua worked at semiconductor manufacturing
companies, including Fairchild Semiconductor, Intel and Monolithic Memories. Mr.
Chua holds a B.S.E.E. from Ohio University and an M.S.E.E. from the University
of California, Berkeley.
PETER G. FEIST has served with us since June 2000, most recently as our
Vice President, Worldwide Marketing. From January 1997 to April 2000, Mr. Feist
was with GateField, a semiconductor manufacturing company, where he was most
recently Senior Vice President, Marketing. From January 1995 to September 1996,
he served as Regional Manager, Europe for Hyundai Corporation, Digital Media
Division. From April 1985 to December 1994, he worked for LSI Logic, a
semiconductor manufacturing company, most recently as Director Strategic
Marketing. He holds a Diplom Ingenieur (M.S.E.E.-equivalent) from the University
of Dortmund.
REYNOLD W. SIMPSON has served with us since August 1997, most recently as
Senior Vice President and Chief Operating Officer. From February 1996 to July
1997, Mr. Simpson was Vice President of Manufacturing at GateField, a
semiconductor manufacturing company. Prior to joining GateField, Mr. Simpson was
Operations Manager at LSI Logic, a semiconductor manufacturing company, from
March 1990 to February 1996 and Quality Director from February 1989 to March
1990. Mr. Simpson holds a Mechanical Engineering Certificate from the Coatbridge
Polytechnic Institute in Scotland, a degree in Technical Horology (Mechanical
Engineering) from the Barmulloch Polytechnic Institute in Scotland and studied
for a degree in Electronic Engineering at the Kingsway Polytechnic Institute in
Scotland.
ARTHUR O. WHIPPLE has served as our Vice President, Finance, Chief
Financial Officer and Secretary since April 1998. From April 1994 to
April 1998, Mr. Whipple was employed by ILC Technology, a manufacturer of high
performance lighting products, as its Vice President of Engineering and by its
subsidiary, Precision Lamp, a manufacturer of high-performance lighting
products, as its Vice President of Finance and Operations. From February 1990 to
April 1994, Mr. Whipple served as the President of Aqua Design, a privately-held
provider of water treatment services and equipment. Mr. Whipple holds a B.S.E.E.
from the University of Washington and an M.B.A. from Santa Clara University.
RONALD D. ZIMMERMAN has served as our Vice President, Administration since
October 1996. From August 1988 to October 1996, Mr. Zimmerman was Human
Resources Director of the Analog Products Group at National Semiconductor, as
well as group human resources director of the corporate technology and
quality/reliability organizations and the human resources director of corporate
administration. Mr. Zimmerman holds a B.A. in Sociology and Psychology and an
M.A. in Psychology from San Jose State University.
IRWIN FEDERMAN has served as chairman of our board of directors since
September 1989. Mr. Federman has been a general partner of U.S. Venture
Partners, a venture capital company, since 1990. From 1988 to 1990, he was a
Managing Director of Dillon Read & Co., an investment banking firm, and a
general partner in its venture capital affiliate, Concord Partners.
Mr. Federman serves on the boards of directors of the following public
companies: SanDisk, a semiconductor company; Komag,
12
a thin film media manufacturer; Centillium Communications, a communications
semiconductor company; Netro, a wireless systems company and Check Point
Software Technologies, a network security software company. Mr. Federman holds a
B.S. in Economics from Brooklyn College and has been awarded an honorary
Doctorate of Engineering Science from Santa Clara University.
DONALD P. BEADLE has served as a member of our board of directors since
July 1997. Since June 1994, Mr. Beadle has been President of Beadle Associates,
a consulting firm. From May 1997 to July 1997, Mr. Beadle was a consultant at
Interwave Communications, a developer of microcell systems, where he served as
Acting Vice President of Sales and Sales Operations. From October 1994 to
December 1996, he was a consultant for Asian business development at National
Semiconductor. At National Semiconductor, he was Managing Director, Southeast
Asia from 1993 until June 1994, Vice President of Worldwide Marketing and Sales,
International Business Group from 1987 until 1993, and Managing Director, Europe
from 1982 to 1986. Mr. Beadle was employed by National Semiconductor in
executive sales and marketing positions for 34 years until June 1994, at which
time he was Executive Vice President, Worldwide Sales and Marketing. Mr. Beadle
serves on the board of directors of one public company, Komag, a thin film media
manufacturer. He received his technical education at the University of
Connecticut and the Bridgeport Institute of Engineering.
ROBERT J. BOEHLKE has served as a member of our board of directors since
December 2000. Mr. Boehlke was most recently Executive Vice President and Chief
Financial Officer of KLA-Tencor, a position he held until his retirement in June
2000. He joined KLA Instruments in 1983 and served as the general manager of
various operating groups through 1990 when he became Chief Financial Officer. He
was a partner at the investment banking firm of Kidder, Peabody & Company from
1971 until 1983. Mr. Boehlke serves on the boards of LTX, a test equipment
manufacturer, and Entegris, a manufacturer of materials management products for
the semiconductor industry. He holds a bachelor's degree in engineering from the
U.S. Military Academy at West Point and an M.B.A. from Harvard University.
MICHAEL J. CALLAHAN has served as a member of our board of directors since
July 1997. From March 1990 through his retirement in September 2000, Mr.
Callahan served as Chairman of the Board, President and Chief Executive Officer
of Waferscale Integration, a producer of peripheral integrated circuits. From
1987 to March 1990, Mr. Callahan was President of Monolithic Memories, now a
subsidiary of Advanced Micro Devices, a semiconductor manufacturing company. He
was Senior Vice President of Programmable Products at Advanced Micro Devices.
From 1978 to 1987, Mr. Callahan held a number of positions at Monolithic
Memories including Vice President of Operations and Chief Operating Officer.
Prior to joining Monolithic Memories, he worked at Motorola Semiconductor, a
semiconductor manufacturing company, for 16 years where he was Director of
Research and Development as well as Director of Linear Operations. Mr. Callahan
holds a B.S.E.E. from the Massachusetts Institute of Technology.
EXECUTIVE OFFICERS
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors and
officers.
BOARD OF DIRECTORS
We currently have authorized six directors. Our directors consist of
Messrs. Beadle, Boehlke, Callahan, Chua, Federman and Hart. All directors hold
office until the next annual meeting of stockholders or until their successors
are duly qualified and elected. Our certificate of incorporation provides that
our board of directors will be divided into three classes, each with staggered
three-year terms. As a result, only one class of directors will be elected at
each annual meeting of our stockholders, with the other classes continuing for
the remainder of their respective three-year terms.
13
Messrs. Beadle and Callahan have been designated as Class I directors, whose
term expires at the 2003 annual meeting of stockholders; Messrs. Chua and
Federman have been designated as Class II directors, whose term expires at the
2001 annual meeting of stockholders; and Mr. Hart and Mr. Boehlke have been
designated as Class III directors, whose terms expire at the 2002 annual meeting
of stockholders. Mr. Federman will not stand for reelection at the 2001 annual
meeting of stockholders.
BOARD COMMITTEES
Our board of directors has an audit committee and a compensation committee.
AUDIT COMMITTEE. The audit committee was formed in June 1995 and currently
consists of Messrs. Beadle, Callahan and Federman. The audit committee reviews
the results and scope of the annual audit and other services provided by our
independent accountants, reviews and evaluates our internal control functions
and monitors financial transactions between us and our employees, officers and
directors.
COMPENSATION COMMITTEE. The compensation committee was formed in June 1995
and currently consists of Messrs. Beadle, Callahan and Federman. The
compensation committee administers the 1989 stock option plan, 1999 stock plan
and 1999 employee stock purchase plan, and reviews the compensation and benefits
for our executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
member of the compensation committee or executive officer of QuickLogic has a
relationship that would constitute an interlocking relationship with executive
officers or directors of another entity.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, research and development and
final testing facility is located in a building of approximately 42,624 square
feet in Sunnyvale, California. This facility is leased through 2003 with an
option to renew through 2006. In addition, we lease sales offices near London
and in Hong Kong and engineering offices in Hillsborough, Oregon and La Palma,
California. The London office is leased through September 2004, and the Hong
Kong office is leased through September 2001. The Hillsborough office is leased
through December 2001 and the La Palma office is leased through January 2004. We
believe that our existing facilities are adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
On March 29, 2000, Unisys Corporation filed a patent infringement lawsuit
against the Company alleging that the Company infringed three of Unisys'
patents. The Company does not believe that the resolution of this lawsuit will
have a material adverse impact on the Company's financial condition or results
of operations. No assurance can be given, however, that these matters will be
resolved without the Company becoming obligated to make payments or to pay other
costs to the opposing party, with the potential for an adverse effect on the
Company's financial position or its results of operations.
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 the fiscal year covered by this report.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock has been traded on The Nasdaq Stock Market's National
Market under the symbol "QUIK" since October 15, 1999, the date of our initial
public offering. The following table sets forth for the periods indicated the
high and low closing prices for the Common Stock, as reported on The Nasdaq
Stock Market's National Market:
HIGH LOW
-------- --------
FISCAL YEAR ENDING DECEMBER 31, 1999
Fourth Quarter (from October 15, 1999).................... $19.563 $12.938
FISCAL YEAR ENDING DECEMBER 31, 2000
First Quarter (through March 31, 2000).................... $39.500 $13.750
Second Quarter (through June 30, 2000).................... $32.938 $20.250
Third Quarter (through September 29, 2000)................ $27.781 $14.063
Fourth Quarter (through December 29, 2000)................ $17.625 $ 5.000
The last reported sale price of our Common Stock on The Nasdaq Stock
Market's National Market was $6.50 per share on February 28, 2001. As of
February 28, 2001, there were 20,245,382 shares of Common Stock outstanding that
were held of record by approximately 346 stockholders.
We commenced our initial public offering on October 15, 1999 pursuant to a
Registration Statement on Form S-1 (File No. 333-28833) which was declared
effective by the Securities and Exchange Commission on October 14, 1999. The
Company sold an aggregate of 3,770,635 shares of Common Stock in our initial
public offering at an initial price to the public of $10.00 per share. In
addition, a selling stockholder sold 3,896,415 shares of Common Stock in our
initial public offering at an initial price to the public of $10.00 per share.
Our initial public offering has terminated and all shares have been sold. The
managing underwriters of our initial public offering were Robertson Stephens,
Bear, Stearns & Co. Inc. and SoundView Technology Group. Aggregate proceeds from
our initial public offering were $76,670,500, which includes $10,000,500 in
aggregate proceeds due to the exercise of the underwriters' option to purchase
shares to cover over-allotments.
We paid underwriters' discounts and commissions of $2,639,444.50 and no
additional offering expenses in connection with our initial public offering. The
total expenses we paid in our initial public offering were $1,190,000, and the
net proceeds to us of our initial public offering were $33.9 million.
The Company completed a follow-on public offering of its common stock on
April 12, 2000. The underwriters' over-allotment option was exercised and
QuickLogic sold a total of 1,629,269 common shares at $23.50 per share.
Proceeds, net of underwriting discounts and commissions and related offering
expenses, of $35.5 million were received.
From October 14, 1999, the effective date of the Registration Statement, to
December 31, 2000, the ending date of the reporting period, the approximate
amount of net offering proceeds used were $20.0 million for general business
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
15
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue....................................... $23,758 $ 28,460 $30,007 $39,785 $53,342
Cost of revenue............................... 11,158 16,855 14,303 17,103 21,068
------- -------- ------- ------- -------
Gross profit.................................. 12,600 11,605 15,704 22,682 32,274
Operating expenses:
Research and development.................... 4,642 6,235 6,294 7,355 9,300
Selling, general and administrative......... 7,730 10,981 9,368 12,618 17,137
Contract termination and legal(1)........... 4,125 28,309 -- -- --
------- -------- ------- ------- -------
Net operating income (loss)............... (3,897) (33,920) 42 2,709 5,837
Interest expense.............................. (60) (162) (161) (97) (49)
Interest income and other, net................ 360 434 364 549 3,842
------- -------- ------- ------- -------
Net income (loss)............................. $(3,597) $(33,648) $ 245 3,161 9,630
======= ======== ======= ======= =======
Net income (loss) per share:
Basic....................................... $ (4.66) $ (10.41) $ 0.06 $ 0.42 $ 0.49
Diluted..................................... $ (4.66) $ (10.41) $ 0.02 $ 0.19 $ 0.45
Weighted average shares:
Basic....................................... 772 3,232 4,231 7,615 19,486
Diluted..................................... 772 3,232 14,645 16,400 21,614
DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash.......................................... $10,336 $ 7,331 $ 7,595 $34,558 $ 70,210
Working capital (deficit)..................... 10,650 2,395 (3,319) 32,568 75,539
Total assets.................................. 22,577 19,951 16,168 50,482 100,307
Long-term obligations(2)...................... 602 7,724 591 128 1,121
Total stockholders' equity (deficit).......... 11,799 (1,756) (975) 37,005 85,734
- ------------------------
(1) Contract termination and legal expenses include a charge of $23.0 million in
the year ended December 31, 1997 for termination of an agreement with
Cypress Semiconductor Corporation, and charges of $4.1 million and $5.3
million in the years ended December 31, 1996 and 1997, respectively, for the
legal and settlement costs associated with the Actel Corporation litigation.
See note 12 of notes to consolidated financial statements.
(2) Long term obligations at December 31, 1997 include obligations under the
Actel litigation settlement. At December 31, 1998, this obligation is
classified as a current liability. We paid all of our remaining obligations
under the settlement on November 3, 1999. See note 12 of notes to
consolidated financial statements.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXPLANATORY NOTE
STATEMENTS IN THIS SECTION, AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM
10-K, WHICH EXPRESS THAT THE COMPANY "BELIEVES", "ANTICIPATES" OR "PLANS TO...",
AS WELL AS OTHER STATEMENTS WHICH ARE NOT HISTORICAL FACT, ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY AS A RESULT OF THE RISKS
AND UNCERTAINTIES DESCRIBED HEREIN AND ELSEWHERE INCLUDING, IN PARTICULAR, THOSE
FACTORS DESCRIBED UNDER "FACTORS AFFECTING FUTURE RESULTS."
OVERVIEW
We design and sell field programmable gate arrays, embedded standard
products associated software and programming hardware. From our inception in
April 1988 through the third quarter of 1991, we were primarily engaged in
product development. In 1991, we introduced our first line of field programmable
gate array products, or FPGAs, based upon our ViaLink technology. FPGAs have
accounted for substantially all of our product revenue to date. We currently
have four FPGA product families: pASIC 1, introduced in 1991; pASIC 2,
introduced in 1996; and pASIC 3, introduced in 1997. We introduced our Eclipse
family of FPGAs in 2000. The newer product families generally contain greater
logic capacity, but do not necessarily replace sales of older generation
products.
In September 1998, we introduced QuickRAM, our first line of embedded
standard products, or ESPs. Our ESPs are based on our FPGA technology. In April
1999, we introduced QuickPCI, our second line of ESPs. Revenue for our QuickRAM
and QuickPCI products together accounted for approximately 12% of our total
revenue in 2000. During 2000, we introduced the QuickFC, QuickDSP, QuickSD and
QuickMIPS families of ESPs. We also license our QuickWorks and QuickTools design
software and sell our programming hardware, which together have typically
accounted for less than 5% of total revenue.
We sell our products through two channels. We sell the majority of our
products through distributors who have contractual rights to earn a negotiated
margin on the sale of our products. We refer to these distributors as
point-of-sale distributors. We defer recognition of revenue for sales of
unprogrammed products to these point-of-sale distributors until after they have
sold these products to systems manufacturers. We recognize revenue on programmed
products at the time of shipment. More than half of our products sold by
point-of-sale distributors are programmed by us and are not returnable by these
point-of-sale distributors. We also sell our products directly to systems
manufacturers and recognize revenue at the time of shipment. The percentage of
sales derived through each of these channels in 1999 was 80% and 20%,
respectively, and 69% and 31% in 2000, respectively.
Four distributors accounted for 24%, 11%, 10% and 6% of sales, respectively,
in 1999 and five distributors accounted for approximately 20%, 8%, 7%, 6% and 6%
of sales, respectively, in 2000. Two customers each accounted for 6% of sales in
2000. No other distributor or direct customer accounted for more than 5% of
sales in 1999 or 2000. We expect that a limited number of distributors will
continue to account for a significant portion of our total sales.
Our international sales were 47%, 48% and 38% of our total sales for 1998,
1999 and 2000, respectively. We expect that revenue derived from sales to
international customers will continue to represent a significant and growing
portion of our total revenue. All of our sales are denominated in U.S. dollars.
Average selling prices for our products typically decline rapidly during the
first six to 12 months after their introduction, then decline less rapidly as
the products mature. We attempt to maintain gross margins even as average
selling prices decline through the introduction of new products with higher
17
margins and through manufacturing efficiencies and cost reductions. However, the
markets in which we operate are highly competitive, and there can be no
assurance that we will be able to successfully maintain gross margins. Any
significant decline in our gross margins will materially harm our business.
We outsource the wafer manufacturing, assembly and test of all of our
products. We rely upon TSMC and Cypress to manufacture our products, and we rely
primarily upon Amkor and ChipPAC to assemble and test our products. Under our
arrangements with these manufacturers, we are obligated to provide forecasts and
enter into binding obligations for anticipated purchases. This limits our
ability to react to fluctuations in demand for our products, which could lead to
excesses or shortages of wafers for a particular product.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenue for certain items
in our statements of operations for the periods indicated:
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
-------- -------- --------
Revenue........................................... 100.0% 100.0% 100.0%
Cost of revenue................................... 47.7% 43.0% 39.5%
----- ----- -----
Gross profit...................................... 52.3% 57.0% 60.5%
Operating Expenses:
Research and development........................ 21.0% 18.5% 17.4%
Selling, general and administrative............. 31.2% 31.7% 32.2%
----- ----- -----
Net operating income.............................. 0.1% 6.8% 10.9%
Interest expense.................................. (0.5)% (0.2)% (0.1)%
Interest income and other, net.................... 1.2% 1.4% 7.3%
----- ----- -----
Net income........................................ 0.8% 8.0% 18.1%
===== ===== =====
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
REVENUE. Our revenue for 1998, 1999 and 2000 was $30.0 million, $39.8
million and $53.3 million, respectively, representing growth of 32.6% from 1998
to 1999 and 34.1% from 1999 to 2000. The majority of the 1999 increase in
revenue, as compared with 1998, was due to growth in sales of our pASIC 3
products, the third generation of our FPGAs. Our pASIC 3 revenue increased in
1999 by approximately $4.4 million. In 1999, our pASIC 1 and pASIC 2 revenues
together increased by approximately $3.0 million and revenue from our QuickRAM
products, introduced in September 1998, increased by approximately
$2.4 million. The majority of the 2000 increase in revenue, as compared with
1999, was due to continued growth in sales of our pASIC 3 products. Our pASIC 3
revenue increased in 2000 by approximately $6.5 million. In 2000, our pASIC 1
and pASIC 2 revenues together increased by approximately $3.0 million and
revenue from our ESP products increased by approximately $4.0 million. In
aggregate, unit sales increased in both 1999 and 2000. The 2000 increase was the
result of higher unit sales and slightly higher average selling prices.
GROSS PROFIT. Gross profit was $15.7 million, $22.7 million and $32.3
million in 1998, 1999 and 2000, respectively, which was 52.3%, 57.0% and 60.5%
of revenue for those periods. The increase in 1999, as compared with 1998, was
primarily due to the continued growth in sales and the introduction of
higher-margin QuickRAM products. The 1999 increase was partially offset by a
slight decrease in the average selling price of the older pASIC 1 and pASIC 2
product families. The increase in 2000, as compared with 1999, was primarily due
to the continued growth in sales and the introduction of higher-
18
margin ESP products. The 2000 increase was partially offset by a slight decrease
in the average selling price of the older pASIC 1 and pASIC 2 product families.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was $6.3
million, $7.4 million and $9.3 million in 1998, 1999 and 2000 respectively,
which was 21.0%, 18.5% and 17.4% of revenue for those periods. The increase in
research and development spending in 1999 and 2000 were primarily due to an
increase in the number of employees involved in research and development as we
accelerated the introduction of new products, particularly our ESPs. We believe
that continued investments in process technology and product development are
essential for us to remain competitive in the markets we serve. Specifically in
regard to our ESPs, we expect to continue to increase research and development
spending.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense was $9.4 million, $12.6 million and $17.1 million in
1998, 1999 and 2000, respectively, which was 31.2%, 31.7% and 32.2% of revenue
for those periods. The increases in 1999 and 2000 were primarily due to hiring
of additional sales and marketing personnel and increased sales commissions. We
anticipate that selling, general and administrative expense will continue to
increase in absolute dollars as we invest in our business and seek to find new
customers for our products.
DEFERRED COMPENSATION. With respect to the grant of stock options to
employees, we recorded aggregate deferred compensation of $204,000 and $908,000
in 1998 and 1999, respectively. There was no deferred compensation recorded in
2000. The amount of deferred compensation is presented as a reduction of
stockholders' equity and amortized ratably over the vesting period of the
applicable options, generally four years. We amortized $426,000, $512,000, and
$589,000 in 1998, 1999 and 2000, respectively. The amortization of deferred
compensation is recorded as research and development and selling, general and
administrative expenses, depending on the related employees' activities.
INTEREST AND OTHER INCOME, NET. Interest and other income, net of expense,
was $203,000, $452,000 and $3,793,000 in 1998, 1999 and 2000, respectively.
Interest and other income decreased in 1998 as interest income on increased cash
balances was offset by interest expense incurred as a result of new equipment
financing arrangements. The increase in 1999 and 2000 interest income was due
mainly to our investment of proceeds from the October 1999 initial public
offering and April 2000 follow-on offering.
PROVISION FOR INCOME TAXES
No provision for income taxes was recorded for the years ended December 31,
1998, 1999 and 2000, as we were able to utilize a portion of our state and
federal net operating loss carryforwards and other tax attributes. At
December 31, 2000, we had net operating loss carryforwards for federal and state
tax purposes of approximately $37 million and $7 million, respectively. These
carryforwards, if not utilized to offset future taxable income and income taxes
payable, will continue to expire through 2018.
LIQUIDITY AND CAPITAL RESOURCES
We have been profitable since the third quarter of 1998. On October 15,
1999, we completed an initial public offering of our common stock in which we
sold a total of 3,770,635 shares at $10.00 per share for total proceeds of
$33.9 million, net of underwriting discounts, commissions and issuance costs. On
April 12, 2000, we completed a follow-on public offering in which we sold
1,629,629 shares at $23.50 per share for total net proceeds of $35.5 million,
net of underwriting discounts, commissions and issuance costs. At December 31,
2000, we had $70.2 million in cash and cash equivalents, an increase of
$35.7 million from cash and cash equivalents held at December 31, 1999. This
increase was due primarily to money received as part of our follow-on public
offering. As of December 31, 2000, we had an accumulated deficit of $48.4
million.
19
We have an equipment financing line with a commercial bank. At December 31,
2000, we had obligations of $142,000 outstanding under this equipment line with
no remaining available balance. The outstanding obligations under the equipment
line are due over the next one to three years. The interest rate on these
borrowings is at the bank's prime interest rate plus 0.25%.
Net cash provided by (used for) operating activities was $2.3 million,
$(3.2) million and $4.2 million in 1998, 1999 and 2000, respectively. Inventory
reductions were the primary source of cash in 1998. In 1999, we paid our
remaining obligations to Actel per the August 1998 settlement agreement. Net
income and an increase in accounts payable were the primary sources of cash in
1999. Net income and an increase in depreciation were the primary sources of
cash in 2000. These increases were partially offset by increases in inventories
and prepaid expenses. Our operating cash flow activities are affected by changes
in our accounts receivable and related allowances. At December 31, 1998, 1999
and 2000 we had allowances for doubtful accounts totaling $245,000, $194,000 and
$294,000, respectively. We have not had any material collection issues to date.
Net cash used for investing activities was $679,000, $3.3 million and $6.6
million in 1998, 1999 and 2000, respectively. All of this cash was used for the
acquisition of property and equipment. We intend to purchase approximately $7.0
million of additional capital assets and make an investment of approximately
$14.0 million in Tower Semiconductor during 2001.
Net cash provided by (used for) financing activities was $(1.4) million,
$33.4 million and $38.0 million in 1998, 1999 and 2000, respectively. In 1999
and 2000 the primary source of cash was our initial public offering and our
follow-on offering. Cash was used to repay bank debt of $1.5 million, $1.2
million and $470,000 in 1998, 1999 and 2000, respectively.
We require substantial working capital to fund our business, particularly to
finance inventories and accounts receivable. Our future capital requirements
will depend on many factors, including the rate of sales growth, market
acceptance of our existing and new products, the amount and timing of research
and development expenditures, the timing of the introduction of new products and
expansion of sales and marketing efforts. There can be no assurance that
additional equity or debt financing, if required, will be available on
satisfactory terms. We believe the net proceeds of our offerings combined with
existing capital resources and cash generated from operations will be sufficient
to meet our needs for the next 12 months, although we could seek to raise
additional capital during that period. After the next 12 months, our capital and
operating requirements will depend on many factors, including the levels at
which we maintain inventory and accounts receivable, costs of securing access to
adequate manufacturing capacity and increases in our operating expenses.
INFLATION
The impact of inflation on our business has not been material for the fiscal
years ended December 31, 1998, 1999 and 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25." This interpretation has
provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that became effective July 1, 2000. The adoption of
this interpretation did not have a material impact on the financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition
20
in financial statements. We have adopted SAB 101 effective the first quarter of
fiscal year 2000. The adoption of SAB 101 did not have a material impact on the
Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the statement
of operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. We have adopted SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of Effective Date of FASB Statement No. 133," effective
January 1, 2001. We do not currently, nor do we plan to, enter into forward
exchange contracts to hedge exposures denominated in foreign currencies or any
other derivative financial instruments for trading or speculative purposes.
FACTORS AFFECTING FUTURE RESULTS
OUR FUTURE OPERATING RESULTS ARE LIKELY TO FLUCTUATE AND THEREFORE MAY FAIL
TO MEET EXPECTATIONS WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE
Our operating results have varied widely in the past and are likely to do so
in the future. In addition, our operating results may not follow any past
trends. Our future operating results will depend on many factors and may fail to
meet our expectations for a number of reasons, including those set forth in
these risk factors. Any failure to meet expectations could cause our stock price
to significantly fluctuate or decline.
Factors that could cause our operating results to fluctuate that relate to
our internal operations include:
- the need for continual, rapid new product introductions;
- changes in our product mix; and
- our inability to adjust our fixed costs in the face of any declines in
sales.
Factors that could cause our operating results to fluctuate that depend upon
our suppliers and customers include:
- the timing of significant product orders, order cancellations and
reschedulings;
- the availability of production capacity and fluctuations in the
manufacturing yields at the facilities that manufacture our devices; and
- the cost of raw materials and manufacturing services from our suppliers.
Factors that could cause our operating results to fluctuate that are
industry risks include:
- intense competitive pricing pressures;
- introductions of or enhancements to our competitors' products; and
- the cyclical nature of the semiconductor industry.
Our day-to-day business decisions are made with these factors in mind.
Although certain of these factors are out of our immediate control, unless we
can anticipate, and be prepared with contingency plans that respond to these
factors, we will be unsuccessful in carrying out our business plan.
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WE CANNOT ASSURE YOU THAT WE WILL REMAIN PROFITABLE BECAUSE WE HAVE A
HISTORY OF LOSSES AND HAVE ONLY RECENTLY BECOME PROFITABLE
We incurred significant losses from our inception in 1988 through 1997. Our
accumulated deficit as of December 31, 2000 was $48.4 million. We had net income
of $9.6 million in 2000. We cannot assure you that we will be profitable in any
future periods and you should not rely on the historical growth of our revenue
and our recent profitability as any indication of our future operating results
or prospects.
IF WE FAIL TO SUCCESSFULLY DEVELOP, INTRODUCE AND SELL NEW PRODUCTS, WE MAY
BE UNABLE TO COMPETE EFFECTIVELY IN THE FUTURE
We operate in a highly competitive, quickly changing environment marked by
rapid obsolescence of existing products. Our future success depends on our
ability to develop, introduce and successfully market new products, including
embedded standard products, or ESPs. We introduced our ESPs in September 1998.
To date, we have been selling our ESPs in limited quantities, and revenue from
our ESPs has been very small. If any of the following occur, our business will
be materially harmed:
- we fail to complete and introduce new product designs in a timely manner;
- we are unable to have these new products manufactured according to design
specifications;
- our customers do not successfully introduce new systems or products
incorporating our products;
- our sales force and independent distributors do not create adequate demand
for our products; or
- market demand for our new products, such as ESPs, does not develop as
anticipated.
WE HAVE ONLY RECENTLY INTRODUCED OUR EMBEDDED STANDARD PRODUCTS; THEREFORE,
WE CANNOT ACCURATELY PREDICT THEIR FUTURE LEVEL OF ACCEPTANCE BY OUR
CUSTOMERS, AND WE MAY NOT BE ABLE TO GENERATE ANTICIPATED REVENUE FROM
THESE PRODUCTS
We have only recently started selling embedded standard products. In 2000,
ESPs accounted for approximately 12% of our revenue. We do not know the extent
to which systems manufacturers will purchase or utilize our ESPs. Since we
anticipate that ESPs will become an increasingly larger component of our
business, their failure to gain acceptance with our customers would materially
harm our business. We cannot assure you that our ESPs will be commercially
successful or that these products will result in significant additional revenues
or improved operating margins in future periods.
IF THE MARKET IN WHICH WE SELL OUR EMBEDDED STANDARD PRODUCTS DOES NOT GROW
AS WE ANTICIPATE, IT WILL MATERIALLY AND ADVERSELY AFFECT OUR ANTICIPATED
REVENUE
The market for embedded standard products is relatively new and still
emerging. If this market does not grow at the rate we anticipate, our business
will be materially harmed. One of the reasons that this market might not grow as
we anticipate is that many systems manufacturers are not yet fully aware of the
benefits provided by embedded standard products, in general, or the benefits of
our ESPs, specifically. Additionally, systems manufacturers may use existing
technologies other than embedded standard products or yet to be introduced
technologies to satisfy their needs. Although we have devoted and intend to
continue to devote significant resources promoting market awareness of the
benefits of embedded standard products, our efforts may be unsuccessful or
insufficient.
WE EXPEND SUBSTANTIAL RESOURCES IN DEVELOPING AND SELLING OUR PRODUCTS, AND
WE MAY BE UNABLE TO GENERATE SIGNIFICANT REVENUE AS A RESULT OF THESE
EFFORTS
To establish market acceptance of our products, we must dedicate significant
resources to research and development, production and sales and marketing. We
experience a long delay between the time
22
when we expend these resources and the time when we begin to generate revenue,
if any, from these expenditures. Typically, this delay is one year or more. We
record as expenses the costs related to the development of new semiconductor
products and software as these expenses are incurred. As a result, our
profitability from quarter to quarter and from year to year may be materially
and adversely affected by the number and timing of our new product introductions
in any period and the level of acceptance gained by these products.
OUR CUSTOMERS MAY CANCEL OR CHANGE THEIR PRODUCT PLANS AFTER WE HAVE
EXPENDED SUBSTANTIAL TIME AND RESOURCES IN THE DESIGN OF THEIR PRODUCTS
If one of our potential customers cancels, reduces or delays product orders
from us or chooses not to release equipment that incorporates our products after
we have spent substantial time and resources in designing a product, our
business could be materially harmed. Our customers often evaluate our products
for six to twelve months or more before designing them into their systems, and
they may not commence volume shipments for up to an additional six to twelve
months, if at all. During this lengthy sales cycle, our potential customers may
also cancel or change their product plans. Even when customers incorporate one
or more of our products into their systems, they may ultimately discontinue the
shipment of their systems that incorporate our products. Customers whose
products achieve high volume production may choose to replace our products with
lower cost customized semiconductors.
WE WILL BE UNABLE TO COMPETE EFFECTIVELY IF WE FAIL TO ANTICIPATE PRODUCT
OPPORTUNITIES BASED UPON EMERGING TECHNOLOGIES AND STANDARDS AND FAIL TO
DEVELOP PRODUCTS THAT INCORPORATE THESE TECHNOLOGIES AND STANDARDS
We may spend significant time and money on research and development to
design and develop products around an emerging technology or industry standard.
To date, we have introduced only one product family, QuickPCI, that is designed
to support a specific industry standard. If an emerging technology or industry
standard that we have identified fails to achieve broad market acceptance in our
target markets, we may be unable to generate significant revenue from our
research and development efforts. Moreover, even if we are able to develop
products using adopted standards, our products may not be accepted in our target
markets. As a result, our business would be materially harmed.
We have limited experience in designing and developing products that support
industry standards. If systems manufacturers move away from the use of industry
standards that we support with our products and adopt alternative standards, we
may be unable to design and develop new products that conform to these new
standards. The expertise required is unique to each industry standard, and we
would have to either hire individuals with the required expertise or acquire
such expertise through a licensing arrangement or by other means. The demand for
individuals with the necessary expertise to develop a product relating to a
particular industry standard is generally high, and we may not be able to hire
such individuals. The cost to acquire such expertise through licensing or other
means may be high and such arrangements may not be possible in a timely manner,
if at all.
WE MAY ENCOUNTER PERIODS OF INDUSTRY-WIDE SEMICONDUCTOR OVERSUPPLY,
RESULTING IN PRICING PRESSURE AND UNDERUTILIZATION OF MANUFACTURING
CAPACITY, AS WELL AS UNDERSUPPLY, RESULTING IN A RISK THAT WE COULD BE
UNABLE TO FULFILL OUR CUSTOMERS' REQUIREMENTS
The semiconductor industry has historically been characterized by wide
fluctuations in the demand for, and supply of, its products. These fluctuations
have resulted in circumstances when supply and demand for the industry's
products have been widely out of balance. Our operating results may be
materially harmed by industry-wide semiconductor oversupply, which could result
in severe pricing pressure and underutilization of our manufacturing capacity.
In a market with undersupply, we would have to compete with larger foundry
customers for limited manufacturing capacity. In such an environment, we may be
unable to have our products manufactured in a timely manner or in quantities
23
necessary to meet our requirements. Since we outsource all of our manufacturing,
we are particularly vulnerable to such supply shortages. As a result, we may be
unable to fulfill orders and may lose customers. Any future industry-wide
oversupply or undersupply of semiconductors would materially harm our business.
NONE OF OUR PRODUCTS IS CURRENTLY MANUFACTURED BY MORE THAN ONE
MANUFACTURER, WHICH EXPOSES US TO THE RISK OF HAVING TO IDENTIFY AND
QUALIFY ONE OR MORE SUBSTITUTE SUPPLIERS
We depend upon independent third parties to manufacture, assemble and test
our semiconductor products. None of our products is currently manufactured by
more than one manufacturer. We have contractual arrangements with two of our
foundry manufacturers of semiconductors, Tower Semiconductor Ltd. and Cypress
Semiconductor Corporation, to provide us with specified manufacturing capacity.
The Tower facility is not yet operational. We entered into a manufacturing
agreement with TSMC in 1997. That agreement provided us access to guaranteed
capacity but required us to commit to purchase a specific number of wafers each
year. In July 2000, TSMC notified us that the agreement had expired, and
although we do not agree with TSMC, we are currently negotiating a new contract
with TSMC. Since July 2000, TSMC has not committed guaranteed capacity to us and
we have not been required to purchase specific numbers of wafers. We have
purchased product from TSMC on a purchase order basis since that date. Our
assembly and test work is also done on a purchase order basis. If we are unable
to secure adequate manufacturing capacity from Tower, TSMC, Cypress or other
suppliers to meet our supply requirements, our business will be materially
harmed. Processes used to manufacture our products are complex, customized to
our specifications and can only be performed by a limited number of
manufacturing facilities. If our current manufacturing suppliers are unable or
unwilling to provide us with adequate manufacturing capacity, we would have to
identify and qualify one or more substitute suppliers for a substantial majority
of our products. Our manufacturers may experience unanticipated events, like the
September 1999 Taiwan earthquake, that could inhibit their abilities to provide
us with adequate manufacturing capacity on a timely basis, or at all.
Introducing new products or transferring existing products to a new third party
manufacturer would require significant development time to adapt our designs to
their manufacturing processes and could cause product shipment delays. In
addition, the costs associated with manufacturing our products may increase if
we are required to use a new third party manufacturer. If we fail to satisfy our
manufacturing requirements, our business would be materially harmed.
IF WE FAIL TO ADEQUATELY FORECAST DEMAND FOR OUR PRODUCTS, WE MAY INCUR
PRODUCT SHORTAGES OR EXCESS PRODUCT INVENTORY.
Our agreements with third-party manufacturers require us to provide
forecasts of our anticipated manufacturing orders, and place binding
manufacturing orders in advance of receiving purchase orders from our customers.
This may result in product shortages or excess product inventory because we are
not permitted to increase or decrease our rolling forecasts under such
agreements. Obtaining additional supply in the face of product shortages may be
costly or not possible, especially in the short term. Our failure to adequately
forecast demand for our products would materially harm our business.
FLUCTUATIONS IN OUR PRODUCT YIELDS, ESPECIALLY OUR NEW PRODUCTS, MAY
INCREASE THE COSTS OF OUR MANUFACTURING PROCESS.
Difficulties in the complex semiconductor manufacturing process can render a
substantial percentage of semiconductor wafers nonfunctional. We have, in the
past, experienced manufacturing runs that have contained substantially reduced
or no functioning devices. Varying degrees of these yield reductions occur
frequently in our manufacturing process. These yield reductions, which can occur
without warning, may result in substantially higher manufacturing costs and
inventory shortages to us. We may experience yield problems in the future which
may materially harm our business. In addition,
24
yield problems may take a significant period of time to analyze and correct. Our
reliance on third party suppliers may extend the period of time required to
analyze and correct these problems. As a result, if we are unable to respond
rapidly to market demand, our business would suffer.
Yield reductions frequently occur in connection with the manufacture of
newly introduced products. Newly introduced products, such as our QuickPCI
family of ESPs, are often more complex and more difficult to produce, increasing
the risk of manufacturing-related defects. While we test our products, these
products may still contain errors or defects that we find only after we have
commenced commercial production. Our customers may not place new orders for our
products if the products have reliability problems, which would materially harm
our business.
WE MAY BE UNABLE TO GROW OUR BUSINESS IF THE MARKETS IN WHICH OUR CUSTOMERS
SELL THEIR PRODUCTS DO NOT GROW
Our success depends in large part on the continued growth of various markets
that use our products. Any decline in the demand for our products in the
following markets could materially harm our business:
- telecommunications and data communications;
- video/audio, graphics and imaging;
- instrumentation and test;
- high-performance computing; or
- military systems.
Slower growth in any of the other markets in which our products are sold may
also materially harm our business. Many of these markets are characterized by
rapid technological change and intense competition. As a result, systems sold by
our customers that use our products may face severe price competition, become
obsolete over a short time period, or fail to gain market acceptance. Any of
these occurrences would materially harm our business.
IN ORDER TO REMAIN PROFITABLE, WE WILL NEED TO OFFSET THE GENERAL PATTERN OF
DECLINES AND FLUCTUATIONS IN THE PRICES OF OUR PRODUCTS
The average selling prices of our products historically have declined during
the products' lives by, on average, approximately 7% per year, and we expect
this trend to continue. If we are unable to achieve cost reductions, increase
unit demand or introduce new higher-margin products in a timely manner to offset
these price declines, our business would be materially harmed.
In addition, the selling prices for our products fluctuate significantly
with real and perceived changes in the balance of supply and demand for our
products and comparable products. The growth in the worldwide supply of field
programmable gate arrays in recent periods has added to the decrease in the
average selling prices for our products. In addition, we expect our competitors
to invest in new manufacturing process technologies and achieve significant
manufacturing yield improvements in the future. These developments could
increase the worldwide supply of field programmable gate arrays and alternate
products and create additional downward pressure on pricing. If the worldwide
supply of field programmable gate arrays grows faster than the demand for such
products in the future, the price for which we can sell such products may
decline, which would materially harm our business.
25
WE DEPEND UPON THIRD PARTY DISTRIBUTORS TO MARKET AND SELL OUR PRODUCTS, AND
THEY MAY DISCONTINUE SALE OF OUR PRODUCTS, FAIL TO GIVE OUR PRODUCTS
PRIORITY OR BE UNABLE TO SUCCESSFULLY MARKET, SELL AND SUPPORT OUR PRODUCTS
We employ independent, third-party distributors to market and sell a
significant portion of our products. During 2000, approximately 69% of our sales
were made through our distributors. Two distributors together accounted for
approximately 24% of our sales. No other distributor accounted for more than 10%
of our sales. Although we have contracts with our distributors, any of them may
terminate their relationship with us on short notice. The loss of one or more of
our principal distributors, or our inability to attract new distributors, would
materially harm our business. We may lose distributors in the future and we may
be unable to recruit additional or replacement distributors. As a result, our
future performance will depend in part on our ability to retain our existing
distributors and attract new distributors that will be able to market, sell and
support our products effectively.
Many of our distributors, including our principal distributors, market and
sell products for other companies, and many of these products may compete
directly or indirectly with our products. We generally are not one of the
principal suppliers of products to our distributors. If our distributors give
higher priority or greater attention to the products of other companies,
including products that compete with our products, our business would be
materially harmed.
WE MAY BE UNABLE TO ACCURATELY PREDICT QUARTERLY RESULTS IF DISTRIBUTORS ARE
INACCURATE OR UNTIMELY IN PROVIDING US WITH THEIR RESALE REPORTS, WHICH
COULD ADVERSELY AFFECT THE TRADING PRICE OF OUR STOCK
Since we generally recognize revenue from sales to our distributors only
when these distributors make sales to customers, we are highly dependent on the
accuracy and timeliness of their resale reports. Inaccurate resale reports
contribute to our difficulty in predicting and reporting our quarterly revenue
and results of operations, particularly in the last month of the quarter. If we
fail to accurately predict our revenue and results of operations on a quarterly
basis, our stock price could materially fluctuate. Distributors occasionally
increase their inventories of our products in anticipation of growth in the
demand for our products. If this growth does not occur, distributors will
decrease their orders for our products in subsequent periods, and our business
would be materially harmed.
CUSTOMERS MAY CANCEL OR DEFER SIGNIFICANT PURCHASE ORDERS OR OUR
DISTRIBUTORS MAY RETURN OUR PRODUCTS, WHICH WOULD CAUSE OUR INVENTORY
LEVELS TO INCREASE AND OUR REVENUES TO DECLINE
We sell our products on a purchase order basis through our distributors and
direct sales channels, and our distributors or customers may cancel purchase
orders at any time with little or no penalty. In addition, our distributor
agreements generally permit our distributors to return unprogrammed products to
us. Contractually, our distributors are permitted to return up to 10%, by value,
of the products they purchase from us every six months. In early 1998, for
example, a distributor cancelled a significant purchase order as a result of a
customer switching from a product we supply to a competitor's product. The
distributor also returned a significant amount of inventory of the product to
us, which took approximately 18 months for us to resell. If our customers cancel
or defer significant purchase orders or our distributors return our products,
our inventories would increase, which would materially harm our business.
MANY SYSTEMS MANUFACTURERS MAY BE UNWILLING TO SWITCH TO OUR PRODUCTS
BECAUSE OF THEIR FAMILIARITY WITH THE PRODUCTS OFFERED BY OUR DIRECT
COMPETITORS SUCH AS XILINX AND ALTERA, WHICH DOMINATE THE PROGRAMMABLE
LOGIC MARKET
The semiconductor industry is intensely competitive and characterized by:
- erosion of selling prices over product lives;
26
- rapid technological change;
- short product life cycles; and
- strong domestic and foreign competition.
If we are not able to compete successfully in this, environment, our
business will be materially harmed. A primary cause of this highly competitive
environment is the strengths of our competitors. Our industry consists of major
domestic and international semiconductor companies, many of which have
substantially greater financial, technical, marketing, distribution and other
resources than we do. Our current direct competitors include suppliers of
complex programmable logic devices and field programmable gate arrays, such as
Xilinx, Altera, Actel, Lattice Semiconductor and Lucent. Xilinx and Altera
together have a majority share of the programmable logic market. Many systems
manufacturers may be unwilling or unable to switch to our products due to their
familiarity with competitors' products or other inhibiting factors.
We also face competition from companies that offer application specific
integrated circuits, which may be obtained at lower costs for higher volumes and
typically have greater logic capacity, additional features and higher
performance than those of our products. We may also face competition from
suppliers of products based on new or emerging technologies, including ESPs. Our
inability to successfully compete in any of the following areas could materially
harm our business:
- the development of new products and manufacturing technologies;
- the quality and price of products and devices;
- the diversity of product lines; or
- the cost effectiveness of design, development, manufacturing and marketing
efforts.
WE MAY BE UNABLE TO SUCCESSFULLY MANAGE OUR GROWTH IF WE FAIL TO COMPETE
EFFECTIVELY WITH OTHERS TO ATTRACT AND RETAIN KEY PERSONNEL
We believe our future success will depend upon our ability to successfully
manage our growth, including attracting and retaining engineers and other highly
skilled personnel. Our employees are at-will and not subject to employment
contracts. Hiring qualified sales and technical personnel will be difficult due
to the limited number of qualified professionals. Competition for these types of
employees is intense. We have in the past experienced difficulty in recruiting
and retaining qualified sales and technical personnel. For example, in the past
18 months, one of our executive officers resigned to pursue other opportunities.
Failure to attract and retain personnel, particularly sales and technical
personnel, would materially harm our business.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND
MAY FACE SIGNIFICANT EXPENSES AS A RESULT OF FUTURE LITIGATION
Protection of intellectual property rights is crucial to our business, since
that is how we keep others from copying the innovations which are central to our
existing and future products. From time to time, we receive letters alleging
patent infringement or inviting us to take a license to other parties' patents.
We evaluate these letters on a case-by-case basis. In September 1999, we
received an offer to license a patent related to field programmable gate array
architecture. We have not yet determined whether this license would be necessary
or useful, or whether a license would be obtainable at a reasonable price.
Offers such as these may lead to litigation if we reject the opportunity to
obtain the license. We have in the past and may again become involved in
litigation relating to alleged infringement by us of others' patents or other
intellectual property rights. This kind of litigation is expensive to all
parties and consumes large amounts of management's time and attention. For
example, we incurred substantial costs associated with the litigation and
settlement of our dispute with Actel Corporation, which
27
materially harmed our business. In addition, if the September 1999 letter or
other similar matters result in litigation that we lose, a court could order us
to pay substantial damages and/or royalties, and prohibit us from making, using,
selling or importing essential technologies. For these and other reasons, this
kind of litigation would materially harm our business. Also, although we may
seek to obtain a license under a third party's intellectual property rights in
order to bring an end to certain claims or actions asserted against us, we may
not be able to obtain such a license on reasonable terms or at all.
We have entered into technology license agreements with third parties which
give those parties the right to use patents and other technology developed by
us, and which give us the right to use patents and other technology developed by
them. We anticipate that we will continue to enter into these kinds of licensing
arrangements in the future; however, it is possible that desirable licenses will
not be available to us on commercially reasonable terms. If we lose existing
licenses to key technology, or are unable to enter into new licenses which we
deem important, it could materially harm our business, and materially and
adversely affect our business.
Because it is critical to our success that we are able to prevent
competitors from copying our innovations, we intend to continue to seek patent
and trade secret protection for our products. The process of seeking patent
protection can be long and expensive, and we cannot be certain that any
currently pending or future applications will actually result in issued patents,
or that, even if patents are issued, they will be of sufficient scope or
strength to provide meaningful protection or any commercial advantage to us.
Furthermore, others may develop technologies that are similar or superior to our
technology or design around the patents we own. We also rely on trade secret
protection for our technology, in part through confidentiality agreements with
our employees, consultants and third parties. However, employees may breach
these agreements, and we may not have adequate remedies for any breach. In any
case, others may come to know about or determine our trade secrets through a
variety of methods. In addition, the laws of certain territories in which we
develop, manufacture or sell our products may not protect our intellectual
property rights to the same extent as do the laws of the United States.
PROBLEMS ASSOCIATED WITH INTERNATIONAL BUSINESS OPERATIONS COULD AFFECT OUR
ABILITY TO MANUFACTURE AND SELL OUR PRODUCTS
Most of our products are manufactured outside of the United States at
manufacturing facilities operated by our suppliers in Taiwan, South Korea and
the Philippines. As a result, our manufacturing operations are subject to risks
of political instability, including the risk of conflict between Taiwan and the
People's Republic of China and conflict between North Korea and South Korea.
Moreover, the majority of available manufacturing capacity for our products is
located in Taiwan and South Korea.
Sales to customers located outside the United States accounted for 47%, 48%
and 35% of our total sales in 1998, 1999 and 2000, respectively. We anticipate
that sales to customers located outside the United States will continue to
represent a significant portion of our total sales in future periods and the
trend of foreign customers accounting for an increasing portion of our total
sales may continue. In addition, most of our domestic customers sell their
products outside of North America, thereby indirectly exposing us to risks
associated with foreign commerce. Asian economic instability could also
materially and adversely affect our business, particularly to the extent that
this instability impacts the sales of products manufactured by our customers.
Accordingly, our operations and revenues are subject to a number of risks
associated with foreign commerce, including the following:
- managing foreign distributors;
- staffing and managing foreign branch offices;
- political and economic instability;
- foreign currency exchange fluctuations;
28
- changes in tax laws, tariffs and freight rates;
- timing and availability of export licenses;
- inadequate protection of intellectual property rights in some countries;
and
- obtaining governmental approvals for certain products.
In the past we have denominated sales of our products in foreign countries
exclusively in U.S. dollars. As a result, any increase in the value of the U.S.
dollar relative to the local currency of a foreign country will increase the
price of our products in that country so that our products become relatively
more expensive to customers in the local currency of that foreign country. As a
result, sales of our products in that foreign country may decline. To the extent
any such risks materialize, our business would be materially harmed.
OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER AND MAY VOTE FOR
ACTIONS THAT MAY NOT BE IN THE BEST INTERESTS OF OUR STOCKHOLDERS
Our officers, directors and principal stockholders together control
approximately 55.67% of our outstanding common stock. As a result, these
stockholders, if they act together, will be able to significantly influence the
management and affairs of QuickLogic and all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying or preventing a change in control and might affect the market price of
our common stock. This concentration of ownership may not be in the best
interest of our other stockholders.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE LAW CONTAIN
PROVISIONS THAT COULD DISCOURAGE A TAKEOVER
Our basic corporate documents and Delaware law contain provisions that might
enable our management to resist a takeover. These provisions might discourage,
delay or prevent a change in the control of QuickLogic or a change in our
management. Our certificate of incorporation provides that we will have a
classified board of directors, with each class of directors subject to
re-election every three years. This classified board when implemented will have
the effect of making it more difficult for third parties to insert their
representatives on our board of directors and gain control of QuickLogic. These
provisions could also discourage proxy contests and make it more difficult for
you and other stockholders to elect directors and take other corporate actions.
The existence of these provisions could limit the price that investors might be
willing to pay in the future for shares of the common stock.
Our certificate of incorporation also provides that our board of directors
may, without further action by the stockholders, issue shares of preferred stock
in one or more series and fix the rights, preferences, privileges and
restrictions thereof. The issuance of preferred stock could adversely affect the
voting power of holders of common stock and the likelihood that such holders
will receive dividend payments and payments upon liquidation. In addition, the
issuance of preferred stock could have the effect of delaying, deferring or
preventing a change in control of QuickLogic. We have no present plan to issue
any shares of preferred stock.
A SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE
PRICE OF OUR COMMON STOCK TO DECLINE
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, the market price of our
common stock could fall. Such sales also might make it more difficult for us to
sell equity or equity-related securities in the future at a time and price that
we deem appropriate.
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OUR COMMON STOCK HAS ONLY BEEN PUBLICLY TRADED FOR A SHORT TIME, AND WE
EXPECT THE PRICE OF OUR COMMON STOCK WILL FLUCTUATE SUBSTANTIALLY
Prior to our initial public offering on October 15, 1999, there was no
public market for shares of our common stock. The market price for our common
stock may be affected by a number of factors, including:
- the announcement of new products or product enhancements by us or our
competitors;
- quarterly variations in our or our competitors' results of operations;
- changes in earnings estimates or recommendations by securities analysts;
developments in our industry; and
- general market conditions and other factors, including factors unrelated
to our operating performance or the operating performance of our
competitors.
In addition, stock prices for many companies in the technology and emerging
growth sectors have experienced wide fluctuations that have often been unrelated
to the operating performance of such companies. Such factors and fluctuations
may materially and adversely affect the market price of our common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We do not use derivative financial instruments in our investment portfolio.
Our investment portfolio is generally comprised of commercial paper. We place
investments in instruments that meet high credit quality standards. These
securities are subject to interest rate risk, and could decline in value if
interest rates fluctuate. Due to the short duration and conservative nature of
our investment portfolio, we do not expect any material loss with respect to our
investment portfolio. A 10% move in interest rates as of December 31, 2000 would
have an immaterial effect on our pretax earnings and the carrying value of its
investments over the next fiscal year.
FOREIGN CURRENCY EXCHANGE RATE RISK
All of the Company's sales, cost of manufacturing and marketing are
transacted in U.S. dollars. Accordingly, our results of operations are not
subject to foreign exchange rate fluctuations.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Accountants........................... 32
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... 33
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1999 and 2000.......................... 34
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1998, 1999 and 2000...... 35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000.......................... 36
Notes to Consolidated Financial Statements.................. 37
31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
QuickLogic Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
QuickLogic Corporation and its subsidiary at December 31, 1999 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the consolidated financial statement schedules listed in the index appearing
under item 14(a)2 present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Jose, California
January 23, 2001,
except as to Note 13, which
is as of March 1, 2001.
32
QUICKLOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNT)
YEARS ENDED DECEMBER 31,
-------------------------
1999 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................... $34,558 $ 70,210
Accounts receivable, net of allowances for doubtful
accounts of $194 and $294............................... 5,543 6,578
Inventory................................................. 4,349 10,327
Other current assets...................................... 1,467 1,876
------- --------
Total current assets.................................... 45,917 88,991
Property and equipment, net................................. 4,510 8,976
Other assets................................................ 55 2,340
------- --------
$50,482 $100,307
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Trade payables.............................................. $ 5,202 $ 5,821
Accrued liabilities......................................... 2,405 2,934
Deferred income on shipments to distributors................ 5,026 4,386
Current portion of long-term obligations.................... 716 311
------- --------
Total current liabilities............................... 13,349 13,452
Long-term obligations....................................... 128 1,121
------- --------
13,477 14,573
Commitments and contingencies (Notes 11 and 12)
Stockholders' equity
Common stock, $0.001 par value; 100,000 shares authorized,
18,102 and 20,209 shares issued and outstanding,
respectively............................................ 18 20
Additional paid-in capital................................ 96,599 134,970
Stockholder note receivable............................... (121) 0
Deferred compensation..................................... (1,480) (875)
Accumulated deficit....................................... (58,011) (48,381)
------- --------
Total stockholders' equity.............................. 37,005 85,734
------- --------
$50,482 $100,307
======= ========
The accompanying notes form an integral part of these Consolidated Financial
Statements
33
QUICKLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Revenue..................................................... $30,007 $39,785 $53,342
Cost of revenue............................................. 14,303 17,103 21,068
------- ------- -------
Gross profit................................................ 15,704 22,682 32,274
Operating expenses:
Research and development.................................. 6,294 7,355 9,300
Selling, general and administrative....................... 9,368 12,618 17,137
------- ------- -------
Income from operations.................................. 42 2,709 5,837
Interest expense.......................................... (161) (97) (49)
Interest income and other, net............................ 364 549 3,842
------- ------- -------
Net income.................................................. $ 245 $ 3,161 $ 9,630
======= ======= =======
Net income per share:
Basic..................................................... $ 0.06 $ 0.42 $ 0.49
Diluted................................................... $ 0.02 $ 0.19 $ 0.45
Weighted average shares:
Basic..................................................... 4,231 7,615 19,486
Diluted................................................... 14,645 16,400 21,614
The accompanying notes form an integral part of these Consolidated Financial
Statements
34
QUICKLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
COMMON STOCK
CONVERTIBLE COMMON STOCK TO
PREFERRED STOCK AT PAR VALUE BE ISSUED ADDITIONAL STOCKHOLDER
------------------- ------------------- ------------------- PAID-IN NOTE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE
-------- -------- -------- -------- -------- -------- ---------- -----------
Balance at December 1997.......... 9,912 10 1,159 1 3,038 18,409 43,435 (121)
Common stock issued under stock
option plan, net of
repurchases................... -- -- 82 -- -- -- 110 --
Common stock issued in exchange
for contract termination...... -- -- 3,038 3 (3,038) (18,409) 18,406 --
Deferred compensation, net of
terminations.................. -- -- -- -- -- -- (563) --
Amortization of deferred
compensation.................. -- -- -- -- -- -- -- --
Net income...................... -- -- -- -- -- -- -- --
------- ---- ------ --- ------ -------- -------- -----
Balance at December 31, 1998...... 9,912 10 4,279 4 -- -- 61,388 (121)
Common stock issued under stock
option plan, net of
repurchases................... -- -- 140 -- -- -- 431 --
Deferred compensation, net of
terminations.................. -- -- -- -- -- -- 908 --
Amortization of deferred
compensation.................. -- -- -- -- -- -- -- --
Conversion from preferred stock
to common stock............... (9,912) (10) 9,912 10 -- -- -- --
Issuance of shares in connection
with initial public offering,
net of expenses of $1,190..... -- -- 3,771 4 -- -- 33,872 --
Net income...................... -- -- -- -- -- -- -- --
------- ---- ------ --- ------ -------- -------- -----
Balance at December 31, 1999...... -- $ -- 18,102 $18 -- $ -- $ 96,599 $(121)
Common stock issued under stock
option plan, net of
repurchases................... -- -- 478 -- -- -- 2,846 --
Amortization of deferred
compensation, net of
terminations.................. -- -- -- -- -- -- (16) --
Issuance of shares in connection
with public offering, net of
expenses of $741.............. -- -- 1,629 2 -- -- 35,541 --
Note receivable from
stockholder................... -- -- -- -- -- -- -- 121
Net income...................... -- -- -- -- -- -- -- --
------- ---- ------ --- ------ -------- -------- -----
Balance at December 31, 2000...... -- $ -- 20,209 $20 -- $ -- $134,970 $ --
======= ==== ====== === ====== ======== ======== =====
TOTAL
STOCKHOLDERS'
DEFERRED ACCUMULATED EQUITY
COMPENSATION DEFICIT (DEFICIT)
------------- ------------ -------------
Balance at December 1997.......... (2,073) (61,417) (1,756)
Common stock issued under stock
option plan, net of
repurchases................... -- -- 110
Common stock issued in exchange
for contract termination...... -- -- --
Deferred compensation, net of
terminations.................. 563 -- --
Amortization of deferred
compensation.................. 426 -- 426
Net income...................... -- 245 245
------- -------- -------
Balance at December 31, 1998...... (1,084) (61,172) (975)
Common stock issued under stock
option plan, net of
repurchases................... -- -- 431
Deferred compensation, net of
terminations.................. (908) -- --
Amortization of deferred
compensation.................. 512 -- 512
Conversion from preferred stock
to common stock............... -- -- --
Issuance of shares in connection
with initial public offering,
net of expenses of $1,190..... -- -- 33,876
Net income...................... -- 3,161 3,161
------- -------- -------
Balance at December 31, 1999...... $(1,480) $(58,011) $37,005
Common stock issued under stock
option plan, net of
repurchases................... -- -- 2,846
Amortization of deferred
compensation, net of
terminations.................. 605 -- 589
Issuance of shares in connection
with public offering, net of
expenses of $741.............. -- -- 35,543
Note receivable from
stockholder................... -- -- 121
Net income...................... -- 9,630 9,630
------- -------- -------
Balance at December 31, 2000...... $ (875) $(48,381) 85,734
======= ======== =======
35
QUICKLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Cash flows from operating activities:
Net income................................................ $ 245 $ 3,161 $ 9,630
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and other non-cash charges................. 1,322 1,636 2,350
Amortization of deferred compensation................... 426 512 589
Gain on disposal of assets.............................. (5) -- (116)
Changes in assets and liabilities:
Accounts receivable................................... 861 (3,512) (1,035)
Inventory............................................. 2,992 (1,472) (5,978)
Other assets.......................................... (444) (749) (2,386)
Accounts payable...................................... (597) 2,998 619
Accrued liabilities and other obligations............. (2,477) (5,731) 639
------- ------- -------
Net cash provided by (used for) operating
activities.......................................... 2,323 (3,157) 4,312
------- ------- -------
Cash flows from investing activities:
Capital expenditures for property and equipment, net of
dispositions............................................ (679) (3,254) (6,700)
------- ------- -------
Cash flows from financing activities:
Payment of long-term obligations.......................... (1,490) (1,183) (470)
Proceeds from issuance of common stock, net............... 110 34,307 38,389
Note receivable from stockholder.......................... -- -- 121
Proceeds from bank borrowings............................. -- 250 --
------- ------- -------
Net cash provided by (used for) financing
activities.......................................... (1,380) 33,374 38,040
------- ------- -------
Net increase in cash........................................ 264 26,963 35,652
Cash at beginning of period................................. 7,331 7,595 34,558
------- ------- -------
Cash at end of period....................................... $ 7,595 $34,558 $70,210
======= ======= =======
Supplemental Disclosures of cash flow information:
Interest paid............................................. $ 160 $ 89 $ 49
Income taxes paid......................................... $ 2 $ 2 $ 1
The accompanying notes form an integral part of these Consolidated Financial
Statements
36
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND BASIS OF PRESENTATION
QuickLogic Corporation ("QuickLogic" or "the Company"), founded in 1988,
operates in a single industry segment where it designs, develops, markets and
supports advanced field programmable gate array semiconductors ("FPGAs"),
embedded standard products ("ESPs") and associated software tools.
Our fiscal year ends on the Sunday closest to December 31. For presentation
purposes, the financial statements and notes have been presented as ending on
the last day of the nearest calendar month.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of QuickLogic
Corporation and its wholly-owned subsidiary, QuickLogic International, Inc. and
QuickLogic GmbH. All significant intercompany accounts and transactions are
eliminated in consolidation.
USES OF ESTIMATES
The preparation of these 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 as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from those estimates, particularly
in relation to sales returns and allowances, and product obsolescence.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly-liquid investments purchased with a remaining maturity of three
months or less are considered cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments are determined by using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret and analyze the available data
and to develop estimates. Accordingly, estimates could differ significantly from
the amounts we would realize in a current market exchange. The estimated fair
value of all financial instruments at December 31, 1998, 1999 and 2000,
approximate the amounts presented in the balance sheets, due primarily to the
short-term nature of these instruments.
FOREIGN CURRENCY TRANSACTIONS
We exclusively use the U.S. dollar as our functional currency. Foreign
currency transaction gains and losses are included in income as they occur. The
effect of foreign currency exchange rate fluctuations has not been significant
to date. We do not use derivative financial instruments.
INVENTORY
Inventory is stated at the lower of cost or market, cost being determined
under the first-in, first-out method.
37
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated on a straight-line basis over the asset's estimated
useful life of two to seven years. Amortization of leasehold improvements is
computed on a straight-line basis over the shorter of the facility lease term or
the estimated useful lives of the improvements.
LONG-LIVED ASSETS
We review the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition
is less than its carrying amount. No such impairment losses have been
identified.
REVENUE RECOGNITION
Our FPGAs and ESPs may be programmed by the Company, the distributor or the
end customer. We sell to certain distributors under agreements which, in the
case of unprogrammed parts, allow certain rights of return and price adjustments
on unsold inventory. Amounts billed to such distributors for shipments are
included as accounts receivable, inventory is relieved, and the related revenue
and cost of revenue are deferred and the resultant gross profit is recorded as a
current liability, deferred income on shipments to distributors, until the
inventory is resold by the distributor. Reserves for estimated returns and
distributor price adjustments are provided against accounts receivable. Revenue
for programmed parts, which do not have similar return rights, as well as for
all non-distributor customers is recognized upon shipment. Software revenue is
recognized when persuasive evidence of an agreement exists, delivery of the
software has occurred, no significant Company obligations with regard to
implementation or integration exist, the fee is fixed or determinable and
collectibility is probable. Software revenues typically amount to less than 5%
of total revenues.
STOCK-BASED COMPENSATION
We have elected to measure stock-based compensation costs using the
intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and to comply with the pro forma disclosure requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject us to concentrations of
credit risk consist principally of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are maintained with high quality
institutions. Our accounts receivable are derived primarily from sales to
customers located in North America, Europe, Japan and Korea. We perform ongoing
credit evaluations of our customers and generally do not require collateral. Bad
debt write-offs to date have been immaterial.
At December 31, 2000, three customers, two of which were distributors of our
products, account for 14%, 13% and 12% of accounts receivable. At December 31,
1999, accounts receivable from the same three customers represented 2%, 16% and
3% respectively, of accounts receivable.
38
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred prior to the establishment of
technological feasibility are included in research and development and are
expensed as incurred. Development costs incurred subsequent to the establishment
of technological feasibility through the period of general market availability
are capitalized, if material. To date, all software development costs have been
expensed as incurred due to the insignificant development costs incurred during
the short time period between the establishment of technological feasibility and
general availability.
OTHER COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, we adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting comprehensive income (loss)
and its components in financial statements. Comprehensive income (loss) as
defined, includes all changes in equity (net assets) during a period from
nonowner sources. No items were included in other comprehensive income (loss)
during 1998, 1999 and 2000.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25." This interpretation has
provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that became effective July 1, 2000. The adoption of
this interpretation did not have a material impact on the financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
We have adopted SAB 101 effective the first quarter of fiscal year 2000. The
adoption of SAB 101 did not have a material impact on the Company's financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the statement
of operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. We have adopted SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of Effective Date of FASB Statement No. 133," effective
January 1, 2001. We do not currently, nor do we plan to, enter into forward
exchange contracts to hedge exposures denominated in foreign currencies or any
other derivative financial instruments for trading or speculative purposes.
NOTE 3--NET INCOME PER SHARE
Basic earnings per share (EPS) is computed by dividing net income available
to common stockholders (numerator) by the weighted average number of common
shares outstanding (denominator) during the period. Diluted EPS is computed
using the weighted average number of
39
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--NET INCOME PER SHARE (CONTINUED)
common shares and dilutive potential common shares outstanding during the
period. In computing diluted EPS, the average stock price for the period is used
in determining the number of shares assumed to be purchased from the exercise of
stock options. A reconciliation of the numerators and denominators of the basic
and diluted per share computations is as follows (in thousands, except per share
amounts):
DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Numerator:
Net income................................................ $ 245 $3,161 $9,630
Denominator:
Common stock.............................................. 3,490 7,618 19,487
Common stock to be issued................................. 759 -- --
Less: Unvested common stock option exercises.............. (18) (3) (1)
------ ------ ------
Weighted average shares outstanding for basic............. 4,231 7,615 19,486
------ ------ ------
Convertible preferred stock............................... 9,912 7,434 --
Stock options and warrants................................ 484 1,348 2,127
Unvested common stock option exercises.................... 18 3 1
------ ------ ------
Weighted average shares outstanding for diluted........... 14,645 16,400 21,614
====== ====== ======
Net income per share
Basic................................................... $ 0.06 $ 0.42 $ 0.49
====== ====== ======
Diluted..................................................... $ 0.02 $ 0.19 $ 0.45
====== ====== ======
For fiscal years 1998, 1999 and 2000, all potential common shares have been
included in the calculation of diluted EPS.
40
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--BALANCE SHEET COMPONENTS
DECEMBER 31,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
Inventory:
Raw materials............................................. $ 183 $ 353
Work-in-process........................................... 3,642 8,911
Finished goods............................................ 524 1,063
------ -------
$4,349 $10,327
====== =======
Property and equipment:
Equipment................................................. $6,271 $10,200
Software.................................................. 1,795 3,861
Furniture and fixtures.................................... 757 774
Leasehold improvements.................................... 563 575
9,386 15,410
Accumulated depreciation.................................... (4,876) (6,434)
------ -------
$4,510 $ 8,976
====== =======
Accrued liabilities:
Accrued employee compensation............................. $1,356 $ 1,663
Other liabilities......................................... 1,049 1,271
------ -------
$2,405 $ 2,934
====== =======
NOTE 5--LONG-TERM OBLIGATIONS
DECEMBER 31,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
Installment notes payable to bank........................... $561 $ 142
Deferred compensation....................................... -- 308
Prepaid royalty............................................. -- 750
Other....................................................... 283 232
---- ------
844 1,432
Current portion of long-term obligations.................... (716) (311)
---- ------
Long-term obligations....................................... $128 $1,121
==== ======
NOTES PAYABLE TO BANK
At December 31, 1999 and 2000, we had outstanding bank installment notes
totaling $561,000 and $142,000, respectively. The notes bear interest at prime
plus 0.25% (8.75% as of December 31, 2000), and are secured by the specific
equipment financed. Principal payments are due in equal monthly
41
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--LONG-TERM OBLIGATIONS (CONTINUED)
installments over the term of the notes which mature in 2001 and 2002. In the
quarter ended June 30, 1999, we entered into an extension to borrow up to
$250,000 using bank installment notes which are secured by the specific
equipment financed. At December 31, 2000, we had borrowed $250,000 under this
facility. These notes mature in 2002. At December 31, 2000, we were in
compliance with its covenants.
PREPAID ROYALTY
In October 2000, we entered into a technology license agreement with
Aeroflex UTMC. Under the terms of the technology agreement, we received $750,000
of prepaid royalty from Aeroflex UTMC which will be recognized as revenue as
products with the licensed technology are sold by Aeroflex UTMC.
DEFERRED COMPENSATION PLAN
The Company has a non-qualified deferred compensation plan, known as a rabbi
trust, whereby certain key executives may defer a portion of their compensation
to be included in the trust, the assets of which are available to satisfy the
claims of general creditors in the event of bankruptcy of the Company. The
participants are allowed to diversify the assets, and the deferred compensation
obligation is adjusted to reflect gains or losses on the assets in the trust.
The assets are classified as trading assets and are reported as other assets and
as long term obligations on the balance sheet. These trading assets (classified
with other assets) and related obligations (classified with long term
obligations) aggregated $308,000 at December 31, 2000.
NOTE 6--INCOME TAXES
No provision for federal or state income taxes has been recorded for the
years ended December 31, 1998, 1999 and 2000, as the Company had the ability to
utilize federal and state net operating loss carryforwards.
A rate reconciliation between income tax provisions at the US federal
statutory rate and the effective rate reflected in the Consolidated Statement of
Operations is as follows:
YEAR ENDED
DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Provision at statutory rate................................. (34)% 34 34
Utilization of operating loss and credit carryforwards...... -- (34) (34)
Future benefit of deferred tax assets not recognized........ 34 -- --
--- --- ---
--% --% --%
=== === ===
The Company did not have any significant foreign tax liability during the
periods presented.
42
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAXES (CONTINUED)
Deferred tax balances are comprised of the following:
DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Deferred tax assets:
Net operating loss carryforward........................ $15,728 $15,396 $13,131
Accruals and reserves.................................. 5,970 4,725 1,659
Credit carryforward.................................... 2,351 3,245 4,299
Capitalized research and development................... 633 559 959
------- ------- -------
24,682 23,925 20,048
Valuation allowances..................................... (24,682) (23,925) (20,048)
------- ------- -------
Deferred tax asset....................................... $ -- $ -- $ --
======= ======= =======
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include the Company's history of losses, that the market in which
the Company competes is intensely competitive and characterized by rapidly
changing technology, the lack of carryback capacity to realize deferred tax
assets, and uncertainty regarding market acceptance of the Company's products.
The Company will continue to assess the realizability of the deferred tax assets
in future periods.
At December 31, 2000, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $37 million and $7
million, respectively. These carryforwards, if not utilized to offset future
taxable income and income taxes payable, will expire in the years 2001 through
2018.
Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in certain
circumstances. Events which may cause changes in the Company's tax carryovers
include, but are not limited to, a cumulative ownership change of more than 50%
over the three year period. Since inception, the Company believes cumulative
changes in ownership have invoked the loss carryforward deduction limitation
under IRC Section 382. However, the Company believes that such limitations will
not have a material effect on the future utilization of the losses.
NOTE 7--STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
At December 31, 1998, the Company had 9,912,000 shares of Series A, B, C, D,
E and F preferred stock outstanding. The holders of the outstanding Series A, B,
C, D, E and F preferred stock were entitled to certain dividend and liquidation
preference rights. No dividends were declared or paid related to preferred
stock. Each share of preferred stock was convertible at the option of the
holder, or upon the Company's completion of a qualifying public offering of
common stock. Upon completion of the Company's initial public offering on
October 15, 1999, each share of Series A, B, C, D, E and F preferred stock was
converted into one share of the Company's common stock.
43
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
The Company was originally incorporated in California in April 1988. In
October 1999 the Company reincorporated in Delaware and, in conjunction with
that reincorporation, effected a 1-for-6 stock split (the "Reverse Stock Split")
of its stock. All references to the number of shares of common stock and per
share amounts have been retroactively restated in the accompanying financial
statements to reflect the effect of the Reverse Stock Split. The Board of
Directors also approved a recapitalization that authorized 100 million shares of
common stock and ten million shares of undesignated preferred stock.
The Company completed an initial public offering of its common stock on
October 15, 1999. The underwriters' over-allotment option was exercised and
QuickLogic sold a total of 3,770,635 common shares at $10.00. Proceeds, net of
underwriting discounts and commissions and related offering expenses, of $33.9
million were received.
The Company completed a public offering of its common stock on April 12,
2000. The underwriters' over-allotment option was exercised and QuickLogic sold
a total of 1,629,269 common shares at $23.50 per share. Proceeds, net of
underwriting discounts and commissions and related offering expenses, of $35.5
million were received.
EMPLOYEE STOCK OPTION PLANS
1989 STOCK OPTION PLAN
In July 1996, the 1989 Stock Plan (the "1989 Plan") was amended to allow
options to be exercised prior to vesting. Unvested shares are deposited to an
escrow agent and the Company has a right to repurchase unvested shares at the
original issuance price if the employee is terminated prior to the lapsing of
the Company's repurchase right.. In April 1999, an additional 1,333,000 shares
were authorized for issuance. The 1989 Plan provides for the issuance of
incentive and nonqualified options for the purchase of up to 4,617,000 shares of
Common Stock. Options may be granted to employees, directors and consultants to
the Company. The fair value of the Company's common stock was determined by the
Board of Directors considering operating results, current legal developments,
product life cycle, general market conditions, independent valuations and other
relevant factors. Options granted under the 1989 Plan may have a term of up to
10 years. Options typically vest at a rate of 25% of the total grant per year
over a four-year period. However, the Company may, at its discretion implement a
different vesting schedule with respect to any new stock option grant. In
September 1999, the Company adopted the 1999 Stock Option Plan and all
subsequent stock option grants are made under this later plan.
1999 STOCK OPTION PLAN
The 1999 Stock Plan (the "1999 Plan") was adopted by the Board of Directors
in August 1999 and was approved by the stockholders in September 1999. The total
number of shares of common stock reserved for issuance under this plan was
5,000,000 shares of common stock. In addition, commencing January 2000, an
annual increase will be added to the 1999 stock plan equal to the lesser of
5,000,000 shares or 5% of the outstanding shares on such date. Options granted
under the 1999 Plan may have a term of up to 10 years. Options typically vest at
a rate of 25% of total grants per year over a four-year
44
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
period. However, the Company may, at its discretion, implement a different
vesting schedule with respect to any new stock option grant.
The following table summarizes all of our stock option activity under the
1989 Plan and the 1999 Plan and related weighted average exercise price for the
years ended December 31, 1998, 1999 and 2000:
WEIGHTED
AVERAGE
OPTIONS EXERCISE
OUTSTANDING PRICE
-------------- --------
(IN THOUSANDS)
Balance at December 31, 1997................................ 2,006 $ 2.49
Granted................................................... 1,151 4.50
Canceled.................................................. (703) 3.26
Exercised................................................. (89) 1.30
----- ------
Balance at December 31, 1998................................ 2,365 3.26
Granted................................................... 1,624 8.60
Canceled.................................................. (482) 5.10
Exercised................................................. (142) 3.06
----- ------
Balance at December 31, 1999................................ 3,365 5.64
Granted................................................... 2,258 15.89
Canceled.................................................. (308) 11.46
Exercised................................................. (199) 3.08
----- ------
Balance at December 31, 2000................................ 5,116 $ 9.87
===== ======
As of December 31, 2000, 4,224,802 shares were available for grant, 208
unvested shares had been exercised and remain subject to our buyback rights and
options to purchase 3,122,000 shares were vested. At December 31, 1999 and 1998,
options to purchase 2,834,000 and 1,601,000 shares, respectively, were vested.
Related weighted average exercise price and contractual life information at
December 31, 2000 are as follows:
WEIGHTED AVERAGE
OPTIONS OUTSTANDING AS WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICE
RANGE OF OF REMAINING EXERCISE PRICE OPTIONS DECEMBER 31,
EXERCISE PRICES DECEMBER 31, 2000 CONTRACTUAL LIFE EXERCISABLE AS OF VESTED AND 2000
- --------------- ---------------------- ---------------- ----------------- -------------- ----------------
(IN THOUSANDS) (IN YEARS) (IN THOUSANDS)
$0.60-$4.50 1,703 6.2 $ 3.20 1,335 $ 2.86
4.86-7.00 1,100 8.9 6.33 256 6.04
9.94-13.62 1,113 9.3 11.69 155 13.62
15.94-34.56 1,200 9.3 20.89 -- 18.00
----- -----
5,116 8.2 1,746
===== =====
45
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
The weighted average estimated grant date fair values, as defined by SFAS
123, for options granted during 1998, 1999 and 2000 was $1.02, $3.80 and $9.79
per option, respectively. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model. The
Black-Scholes model, as well as other currently accepted option valuation
models, was developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from our stock option awards.
The following weighted average assumptions are included in the estimated
grant date fair value calculations for stock option grants in 1998, 1999 and
2000:
DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Expected life (years)....................................... 5.3 5.3 5.3
Risk-free interest rate..................................... 4.99% 4.99% 6.00%
Volatility.................................................. -- 65 % 65 %
Dividend yield.............................................. -- -- --
EMPLOYEE STOCK PURCHASE PLAN
The 1999 Employee Stock Purchase Plan ("ESPP") was adopted by the Board of
Directors in August 1999 and was approved by the stockholders in
September 1999. The total number of shares of common stock reserved for issuance
under this plan is 2,000,000 plus annual increases equal to the lesser of
1,500,000 shares or 4% of the outstanding shares on such date. The ESPP contains
consecutive, overlapping, twenty-four month offering periods. Each offering
period includes four six-month purchase periods. The ESPP permits participants
to purchase shares through payroll deductions of up to 20% of an employee's
total compensation (maximum of 20,000 shares) at 85% of the lower of the fair
market value of the common stock at the beginning or end of a purchase period.
As of December 31, 2000, 2,524,113 shares were available for issuance.
The following weighted average assumptions are included in the estimated
grant date fair value calculations for rights to purchase stock under ESPP:
DECEMBER 31,
---------------------
1999 2000
--------- ---------
Expected life............................................... 6 months 6 months
Risk-free interest rate..................................... 5.00% 5.00%
Volatility.................................................. 65% --
Dividend yield.............................................. -- --
The weighted average estimated grant date fair value of rights to purchase
common stock under the ESPP was $4.03 in 1999 and $7.62 in 2000.
46
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
Had the Company recorded compensation cost based on the estimated grant date
fair value, as defined by SFAS 123, for awards granted under its stock option
and employee stock purchase plans, its pro forma net loss would have been as
follows for the years ended December 31, 1998, 1999 and 2000:
DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Pro forma net income (loss)................................. $ (663) $1,650 $3,138
Pro forma net income (loss) per share:
Basic..................................................... $(0.16) $ 0.22 $ 0.16
Diluted................................................... $(0.16) $ 0.11 $ 0.14
DEFERRED STOCK COMPENSATION
During the years ended December 31, 1998 and 1999, the Company granted
options to purchase 139,000 and 866,000 shares of common stock, respectively, at
a price less than the fair market value of its common stock at the time of the
grant and recorded related deferred stock compensation of $204,000 and $908,000,
respectively, net of reversals associated with unvested shares of terminated
employees. There was no deferred stock compensation recorded during the year
ended December 31, 2000. Such deferred stock compensation is being amortized
ratably over the vesting period of the options. During the years ended
December 31, 1998, 1999, and 2000, the Company amortized $426,000, $512,000 and
$589,000, respectively, of deferred stock compensation.
NOTE 8--RELATED PARTY TRANSACTIONS
On April 1, 1998, the Company issued 3,037,786 shares of common stock to
Cypress Semiconductor Corporation ("Cypress") in connection with the termination
of a Technical Transfer, Joint Development License and Foundry Supply Agreement
with Cypress. The Company granted certain contractual right as to the shares of
the Company's stock held by Cypress, including the right to sell shares in an
initial public offering. Additionally, the Company entered into a new foundry
agreement and a cross-licensing agreement with Cypress.
In conjunction with the Company's initial public offering in October 1999,
Cypress sold its entire holding in the Company's common stock.
NOTES RECEIVABLE FROM STOCKHOLDER
As of December 31, 1999, we had $121,000 of demand promissory notes due from
a stockholder. The notes bear interest at rates ranging from 6.7% to 8.5% per
annum and are secured by shares of our common stock held by the stockholder. The
notes were paid in full in September 2000.
NOTE 9--MANUFACTURING AGREEMENT
In July 1997, the Company entered into a manufacturing agreement with Taiwan
Semiconductor Manufacturing Company, Ltd. ("TSMC") for a term of three years. In
July 2000, TSMC notified the Company that the agreement had expired, and
although the Company does not agree with TSMC, it is negotiating a new contract
with TSMC. The Company currently buys product from TSMC on a
47
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--MANUFACTURING AGREEMENT (CONTINUED)
purchase order basis. Under this arrangement, the Company is not required to pay
for a predetermined volume of product, and TSMC is not required to guarantee
capacity availability. Purchases from TSMC totaled $1.0 million, $2.1 million
and $7.1 in 1998, 1999 and 2000, respectively.
NOTE 10--INFORMATION CONCERNING BUSINESS SEGMENTS AND MAJOR CUSTOMERS
INFORMATION ABOUT GEOGRAPHIC AREAS
All of our sales originate in the United States. Shipments to some of our
distributors are made to centralized purchasing and distributing locations,
which in turn sell through to other locations. As a result of these factors, we
believe that sales to certain geographic locations might be higher or lower,
though accurate data is difficult to obtain.
The following is a breakdown of revenues by shipment destination for the
years ended 1998, 1999 and 2000:
DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
United States............................................ $15,784 $20,681 $33,275
Japan.................................................... 3,162 5,033 6,341
Europe................................................... 4,752 4,871 9,519
Rest of world............................................ 6,309 9,200 4,207
------- ------- -------
$30,007 $39,785 $53,342
======= ======= =======
The countries comprising "Rest of world" category include Canada, the UK,
Korea and other countries in Asia, none of which individually comprise more than
10% of our sales.
One customer, a distributor of our products, accounted for approximately 20%
of revenue in 2000. Three customers, distributors of our products, accounted for
approximately 24%, 11% and 10% of revenues in 1999. Three customers,
distributors of our products, accounted for approximately 27%, 10% and 10% of
revenues in 1998. All sales are made from the United States and are denominated
in U.S. dollars.
Less than 10% of our long-lived assets, including property and equipment and
other assets, were located outside the United States.
NOTE 11--COMMITMENTS
On December 12, 2000 we entered into a Share Purchase Agreement (the
"Agreement") with Tower Semiconductor Ltd. under which we will make a $25
million strategic investment in Tower as part of Tower's plan to build a new
wafer fabrication facility. The new fabrication facility will produce 200-mm
wafers in geometries of 0.18 micron and below, using advanced CMOS technology
from Toshiba. In return for our investment, we will receive equity and committed
production capacity in the advanced fabrication facility that Tower is building.
Under the terms of the Agreement, our investment will be made in several stages
over an approximately 22-month period, against satisfactory completion of key
milestones for the construction, equipping and commencement of production at the
new wafer fabrication facility. Tower will develop manufacturing capability for
our proprietary ViaLink technology,
48
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS (CONTINUED)
and supply us with a guaranteed portion of the new fabrication facility's
available wafer capacity at competitive pricing, with first production expected
in 2002. Per the terms of the Agreement, we paid Tower $6.7 million on
January 22, 2001.
We lease our primary facility under a noncancelable operating lease which
expires in 2003, and includes an option to renew through 2006. Rent expense for
the years ended December 31, 1998, 1999 and 2000 was approximately $531,000,
$628,000, and $620,000 respectively.
Assets acquired under capital leases and included in plant and equipment at
December 31, 1998, 1999 and 2000, were $232,000, $198,000 and $153,000
respectively. Depreciation expense on leased assets in 1998, 1999 and 2000 were
$182,000, $284,000 and $388,000 respectively.
Future minimum lease commitments, excluding property taxes and insurance,
are as follows:
OPERATING CAPITAL
LEASES LEASES
--------- --------
(IN THOUSANDS)
Year Ending December 31,
2001...................................................... $ 681 $ 67
2002...................................................... 794 67
2003...................................................... 717 47
2004...................................................... 54 --
2005 and thereafter....................................... 0 --
------ ----
$2,246 181
======
Less amount representing interest......................... (28)
----
Present value of capital lease obligations................ 153
Less current portions..................................... (51)
----
Long-term portion of capital lease obligations.......... $102
====
NOTE 12--LITIGATION
On March 29, 2000, Unisys Corporation filed a patent infringement lawsuit
against the Company alleging that the Company infringed upon three of Unisys'
patents. The Company believes that the lawsuit has no merit and accordingly has
not recorded any liability in the financial statements associated with this
lawsuit. No assurance can be given, however, that these matters will be resolved
without the Company becoming obligated to make payments or to pay other costs to
the opposing party, with the potential for an adverse effect on the Company's
financial position or its results of operations.
The semiconductor industry has experienced a substantial amount of
litigation regarding patent and other intellectual property rights. From time to
time, we have received and may receive in the future, communications alleging
that our products or our processes may infringe on product or process technology
rights held by others. We may in the future be involved in litigation with
respect to alleged infringement by us of another party's patents. In the future,
we may be involved with litigation to:
- Enforce our patents or other intellectual property rights;
49
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--LITIGATION (CONTINUED)
- Protect our trade secrets and know-how;
- Determine the validity or scope of the proprietary rights of others; and
- Defend against claims of infringement or invalidity.
Such litigation has in the past and could in the future result in
substantial costs and diversion of management resources. Such litigation could
also result in payment of substantial damages and/or royalties or prohibitions
against utilization of essential technologies, and could have a material adverse
effect on our business, financial condition and results of operations.
LITIGATION SETTLEMENT
During 1994, Actel Corporation ("Actel"), a competitor of the Company, filed
a lawsuit seeking unspecified damages and alleging that our products infringe
upon its patents. We countersued alleging that Actel's products infringed on our
patents. During 1995 and 1996, Actel's suit was amended to include a trade
misappropriation claim and additional patent infringement claims. Actel and the
Company settled their litigation in August 1998. The Company and Actel have
granted each other non-exclusive, royalty free, worldwide, perpetual cross
licenses of their existing technology, excluding only certain SRAM technology
owned by Actel. We have made quarterly payments to Actel since the settlement
date. The remainder of the settlement was paid to Actel immediately after our
initial public offering. We paid all of our remaining obligation under the
settlement on November 3, 1999.
NOTE 13--SUBSEQUENT EVENT
On March 1, 2001, we made a payment to Tower Semiconductor in the amount of
$3.7 million representing the second installment payment pursuant to the
Agreement.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
50
PART III
Certain information required by Part III is omitted from this Report in that
the registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY
Certain information regarding the directors and officers of the Company is
contained herein under Item 1, "Executive Officers and Directors of the
Company."
Information regarding directors appearing under the caption "Election of
Directors-Directors and Nominees for Director" in the Proxy Statement is hereby
incorporated by reference.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is hereby incorporated herein by reference
from the section entitled "Election of Directors-Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is set forth under the caption,
"Executive Compensation" in our Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is set forth under the caption "Security
Ownership" in our Proxy Statement, which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is set forth under the captions
"Compensation Committee Interlocks and Insider Participation" and "Related Party
Transactions" in our Proxy Statement, which information is incorporated herein
by reference.
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Financial Statement
Reference is made to page 26 for a list of all financial statements and
schedule filed as a part of this report.
2. Financial Statement Schedules
QUICKLOGIC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------- ----------
Allowance for Doubtful Accounts
Year ended December 31, 2000........... $ 194 209 (109) $ 294
Year ended December 31, 1999........... $ 245 -- -- (51) $ 194
Year ended December 31, 1998........... $ 226 29 -- (10) $ 245
All other schedules not listed above have been omitted because the
information required to be set forth therein is not applicable or is shown in
the financial statements or notes hereto.
3. Exhibits
The exhibits listed under Item 14(c) hereof are filed as part of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
(c) Exhibits
The following exhibits are filed with this report:
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(1) Bylaws of the Registrant.
4.1(1) Specimen Common Stock certificate of the Registrant.
10.1(1) Form of Indemnification Agreement for directors and
executive officers.
10.2(1) 1999 Stock Plan and form of Option Agreement thereunder.
10.3(1) 1999 Employee Stock Purchase Plan.
10.4(1) 1989 Stock Option Plan.
10.5(1) Series F Preferred Stock Purchase Agreement dated
November 27, 1996 and January 24, 1997 by and among the
Registrant and the Purchasers named therein.
10.6(1) Termination Agreement dated March 29, 1997 between the
Registrant and Cypress Semiconductor Corporation.
52
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
10.7(1) Cross License Agreement dated March 29, 1997 between the
Registrant and Cypress Semiconductor Corporation.
10.8(1) Wafer Fabrication Agreement March 29, 1997 between the
Registrant and Cypress Semiconductor Corporation.
10.9(1) Sixth Amended and Restated Shareholder Agreement dated
March 29, 1997 by and among the Registrant, Cypress
Semiconductor Corporation and certain stockholders.
10.10(1) Sixth Amended and Restated Registration Rights Agreement
dated March 29, 1997 by and among the Registrant, Cypress
and certain stockholders.
10.11(1) Technical Transfer, Joint Development License and Foundry
Supply Agreement, dated October 2, 1992, between the
Registrant and Cypress.
10.12(1) Lease dated June 17, 1995, as amended, between Kairos, LLC
and Moffet Orchard Investors as Landlord and the Registrant
for the Registrant's facility located in Sunnyvale,
California.
10.13(1) Business Loan Agreement dated August 9, 1995 between the
Registrant and Silicon Valley Bank, as amended.
10.14(1) Loan and Security Agreement dated August 8, 1996 between the
Registrant and Silicon Valley Bank, as amended.
10.15(1) Export-import Bank Loan and Security Agreement dated
August 8, 1996 between the Registrant and Silicon Valley
Bank.
10.16(1) First Amended and Restated Common Stock Purchase Agreement
dated June 13, 1997 between the Registrant and Cypress.
10.17(1) Take or Pay Agreement dated July 21, 1997 between the
Registrant and Taiwan Semiconductor Manufacturing
Company, Ltd.
10.18(1) Patent Cross License Agreement, dated August 25, 1998,
between the Registrant and Actel Corporation.
10.19+ Share Purchase Agreement dated December 11, 2000 between the
Company and Tower Semiconductor Ltd.
10.20+ Foundry Agreement dated December 11, 2000 between the
Company and Tower Semiconductor Ltd.
10.21 Registration Rights Agreement dated January 18, 2001 among,
inter alia, the Company and Tower Semiconductor Ltd.
16.1(1) Letter of Deloitte & Touche LLP, Independent Accountants,
dated July 28, 1997 regarding change in certifying
accountant.
21.1(1) Subsidiary of the Registrant.
23.1 Consent of Independent Accountants
24.1 Power of Attorney-See page II-5.
- ------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 declared effective October 14, 1999 (Commission File No. 333-28833).
+ The Company has requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with
the Commission.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1933, as amended, the Registrant has duly caused report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 23rd day of March,
2000.
QUICKLOGIC CORPORATION, INC.
By: /s/ E. THOMAS HART
-----------------------------------------------
E. Thomas Hart
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints E. Thomas Hart and Arthur O. Whipple and each of
them singly, as true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign this Annual Report on Form 10-K filed herewith
and any or all amendments to said report, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission granting unto said attorneys-in-fact and
agents the full power and authority to do and perform each and every act and the
thing requisite and necessary to be done in and about the foregoing, as to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or his
substitute, may lawfully do or cause to be done by virtue hereof.
54
Pursuant to the requirements of the Securities Act of 1933, as amended, this
report has been signed by the following persons in the capacities and on the
dates indicated below.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
--------- ------------------------ ----
/s/ E. THOMAS HART
--------------------------------- President, Chief Executive Officer and March 23, 2000
E. Thomas Hart Director (Principal Executive Officer)
Vice President, Finance, Chief Financial
/s/ ARTHUR O. WHIPPLE Officer and Secretary (Principal
--------------------------------- Financial Officer and Chief Accounting March 23, 2000
Arthur O. Whipple Officer)
/s/ IRWIN B. FEDERMAN
--------------------------------- Chairman of the Board March 23, 2000
Irwin B. Federman
/s/ DONALD P. BEADLE
--------------------------------- Director March 23, 2000
Donald P. Beadle
/s/ ROBERT J. BOEHLKE
--------------------------------- Director March 23, 2000
Robert J. Boehlke
/s/ MICHAEL J. CALLAHAN
--------------------------------- Director March 23, 2000
Michael J. Callahan
/s/ HUA-THYE CHUA
--------------------------------- Director March 23, 2000
Hua-Thye Chua
55
SUPPLEMENTARY FINANCIAL DATA
QUARTERLY DATA (UNAUDITED)
QUARTER ENDED
----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
STATEMENT OF OPERATIONS
Revenue........................ $8,597 $9,828 $10,278 $11,082 $12,216 $14,059 $14,864 $12,203
Cost of revenue................ 3,722 4,236 4,378 4,767 5,015 5,703 5,846 4,504
Gross profit................... 4,875 5,592 5,900 6,315 7,201 8,356 9,018 7,699
Operating expenses:
Research and development..... 1,780 1,787 1,849 1,939 2,153 2,367 2,398 2,382
Selling, general and
administrative............. 2,856 3,144 3,222 3,396 3,738 4,227 4,629 4,543
Net operating income (loss).... 239 661 829 980 1,310 1,762 1,991 774
Interest expense............... (26) (23) (27) (21) (17) (13) (11) (8)
Interest income and other,
net.......................... 69 67 48 365 453 967 1,271 1,151
Net income (loss).............. $ 282 $ 705 $ 850 $ 1,324 $ 1,746 $ 2,716 $ 3,251 $ 1,917
57