UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1999 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______ .
COMMISSION FILE NUMBER 000-22671
QUICKLOGIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
77-0188504
(I.R.S. Employer Identification No.)
1277 ORLEANS DRIVE SUNNYVALE, CA 94089 (Address of
principal executive offices, including Zip Code)
(408) 990-4000
(Registrant's telephone number, including area code)
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 requirements
for the past 90 days.
YES [ ] NO [ X ]
As of November 10, 1999, 17,642,570 shares of the Registrant's Common stock were
outstanding.
1
QUICK LOGIC CORPORATION
PART I. FINANCIAL INFORMATION PAGE
- ----------------------------------- ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
1999 (unaudited) and December 31, 1998...................................... 3
Condensed Consolidated Statements of Operations for the Three
and Nine month periods ended September 30, 1999 and 1998 (unaudited)........ 4
Condensed Consolidated Statements of Cash Flows for the
Nine month periods ended September 30, 1999 and 1998 (unaudited)............ 5
Notes to Condensed Consolidated Financial Statements (unaudited)............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................... 9
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K.................................... 23
Signatures.................................................................. 24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUICKLOGIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share amounts)
Sept. 30, Dec. 31,
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 5,610 $ 7,595
Accounts receivable, net 5,105 2,031
Inventories 3,781 2,877
Other current assets 1,265 730
------- --------
Total current assets 15,761 13,233
Property and equipment, net 3,368 2,892
Other assets 43 43
-------- --------
TOTAL ASSETS $ 19,172 $ 16,168
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables $ 3,169 $ 2,204
Accrued liabilities 2,108 2,425
Deferred income on shipments to distributors 5,589 4,737
Current portion of long-term obligations 6,265 7,186
-------- --------
Total current liabilities 17,131 16,552
Long-term obligations 509 591
Stockholders' equity (deficit):
Preferred stock, $.001 par value 10 10
Common stock, $.001 par value 4 4
Additional paid-in capital 62,624 61,388
Stockholder note receivable (121) (121)
Deferred compensation (1,650) (1,084)
Accumulated deficit (59,335) (61,172)
-------- --------
Total stockholders' equity 1,532 (975)
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 19,172 $ 16,168
======== ========
(See accompanying Notes to unaudited Condensed Consolidated Financial
Statements.)
3
QUICKLOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- ------- -------- --------
Revenue $ 10,278 $ 7,883 $ 28,703 $ 21,961
Cost of revenue 4,378 3,825 12,336 10,628
-------- -------- -------- --------
Gross profit 5,900 4,058 16,367 11,333
Research and development 1,799 1,530 5,216 4,342
Sales, general and administrative 3,196 2,256 9,111 6,803
Stock compensation expense 76 102 311 323
-------- -------- -------- --------
Operating expenses 5,071 3,888 14,638 11,468
-------- -------- -------- --------
Operating income 829 170 1,729 (135)
Interest income and other, net 21 37 108 153
------- ------- -------- --------
Net income $ 850 $ 207 $ 1,837 $ 18
======= ======= ======== ========
Net income per share:
Basic $0.20 $0.05 $0.43 $0.01
Diluted $0.06 $0.01 $0.12 $0.00
Shares used in per share calculations:
Basic 4,306 4,238 4,296 4,216
Diluted 15,177 14,644 15,087 14,644
(See accompanying Notes to unaudited Condensed Consolidated Financial
Statements.)
4
QUICKLOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands, except per share amounts)
Nine Months Ended
September 30,
1999 1998
-------- -------
Cash flows from operating activities:
Net income $ 1,837 $ 18
Adjustments to reconcile net
income to net cash used
for operating activities:
Depreciation and other non-cash charges 1,194 941
Provision for doubtful accounts and sales
returns 5,219 3,802
Amortization of deferred compensation 311 323
Gain on disposal of assets - (5)
Changes in assets and liabilities:
Accounts receivable (8,293) (2,535)
Inventory (904) 1,740
Prepaid and other assets (535) (442)
Accounts payable 965 (105)
Accrued liabilities and other 285 (2,070)
-------- --------
Net cash provided by operating activities 79 1,667
Cash flows from investing activities:
Capital expenditures for property and equipment,
net of dispositions (1,670) (492)
-------- --------
Net cash used for investing activities (1,670) (492)
Cash flows from financing activities:
Payment of debt obligations (1,003) (1,210)
Proceeds from issuance of common stock, net 359 99
Borrowings from bank 250 -
-------- --------
Net cash used for financing activities (394) (1,111)
Net increase (decrease) in cash (1,985) 64
Cash at beginning of period 7,595 7,331
-------- --------
Cash at end of period $ 5,610 $ 7,395
======== ========
(See accompanying Notes to unaudited Condensed Consolidated Financial
Statements.)
5
QUICKLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
We reincorporated in Delaware and completed our initial public offering of
our common stock on October 15, 1999. Stockholders' equity has been adjusted
for the associated 1-for-6 stock split of our common stock. The effect of
this transaction has been reflected in the accompanying unaudited statements
as if the conversion had occurred on December 31, 1997.
Our fiscal year ends on the Sunday closest to December 31. The nine month
periods end on the Sunday closest to September 30. For presentation purposes,
the financial statements and notes have been presented as ending on the last day
of the nearest calendar month.
The accompanying interim financial statements are unaudited. In the opinion of
management, these statements have been prepared in accordance with generally
accepted accounting principles and include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the results
of the interim periods. While the our management believes that the disclosures
are adequate to make the financial information not misleading, it is suggested
that these financial statements be read in conjunction with our Registration
Statement on Form S-1 dated October 12, 1999. Operating results for the nine
months ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the full year.
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 was not
significant. We do not use derivative financial instruments.
During the three months ended September 30, 1999, two distributors of our
products accounted for 15% and 12% of total sales. During the nine months ended
September 30, 1999, two distributors of our products accounted for 10% and 17 of
total sales. No end customer of our products accounted for more than 10% of
total sales.
NOTE 2. NET INCOME PER SHARE
Basic 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 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):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- ------- -------- --------
Numerator:
Net income $ 850 $ 207 $ 1,837 $ 18
======= ======= ======= ========
Denominator:
Common stock 4,311 4,262 4,301 3,227
Common stock to be issued - - - 1,013
Unvested common stock option exercises (5) (24) (5) (24)
-------- ------- -------- --------
Weighted average shares outstanding
for basic 4,306 4,238 4,296 4,216
Convertible preferred stock 9,912 9,912 9,912 9,912
Stock options and warrants 954 470 874 492
Unvested common stock option exercises 5 24 5 24
-------- ------- -------- --------
Weighted average shares outstanding
for diluted 15,177 14,644 15,087 14,644
======= ======= ======= ========
Net income per share
Basic $ 0.20 $ 0.05 $ 0.43 $ 0.01
======= ======= ======= ========
Diluted $ 0.06 $ 0.01 $ 0.12 $ 0.00
======= ======= ======= ========
6
NOTE 3. Income Taxes
We account for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, deferred tax liabilities and assets are determined based on the
differences between the financial statements and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse.
NOTE 4. BALANCE SHEET COMPONENTS
>
(in thousands) Sept. 30, Dec. 31,
1999 1998
Inventory:
Raw materials $ 209 $ 56
Work-in-process 3,293 2,611
Finished goods 279 210
-------- --------
Total inventory $ 3,781 $ 2,877
======== ========
NOTE 5. LONG-TERM OBLIGATIONS
In the quarter ended June 30, 1999, we entered into an extension of our
existing bank facility to borrow up to $250,000 using bank installment notes
which are secured by the specific equipment financed. At September 30, 1999,
we had borrowed the entire facility. The related notes mature in 2002. At
September 30, 1999, we were in compliance with our covenants.
NOTE 6 DEFERRED COMPENSATION
During the three and nine months ended September 30, 1999, we have granted
options and recorded related deferred compensation of $612,000 and $944,000,
respectively, net of reversals associated with invested shares of terminated
employees. Such deferred compensation is being amortized notably over the
vesting period of the options.
NOTE 7. COMPREHENSIVE INCOME
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 and its components in financial statements. Comprehensive income as
defined, includes all changes in equity during a period from nonowner
sources. No items were included in other comprehensive income during the
three months ended September 30, 1999 and 1998 and the nine months ended
September 30, 1999 and 1998.
NOTE 8. NEW ACCOUNTING PRONOUNCEMENTS
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 supercedes 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. 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," is effective for all fiscal
quarters and years beginning after June 15, 2000. 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 9. LITIGATION
We have no pending or threatened litigation.
The semiconductor industry has experienced a substantial amount of litigation
regarding patent and other intellectual property rights. From time to time,
we have has 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.
Protect our trade secrets and know-how.
Determine the validity or scope of the proprietary rights of others.
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.
7
NOTE 10. SUBSEQUENT EVENTS
In October 1999 we reincorporated in Delaware and, in conjunction with that
reincorporation, effected a 1-for-6 stock split (the "Reverse Stock Split")
of our preferred stock and common stock. All references to the number of
shares of preferred stock, 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 1999 Stock 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 is 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. The 1999 Employee Stock Purchase Plan was also
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.
We completed an initial public offering of our 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 of $35.1 million have been received.
We settled our patent litigation with Actel Corporation in August 1998. We
paid our remaining obligation of $5,750,000 on November 3, 1999.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with our
audited financial statements and notes thereto for the fiscal year ended
December 31, 1998, found in our Registration Statement on Form S-1 filed
October 12, 1999.
The information set forth below contains forward-looking statements
(designated by an*), and our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks set forth below under "Factors That May Affect Future
Results."
Overview
We design and sell field programmable gate arrays, embedded standard products
and 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 three FPGA product families: pASIC1, introduced in 1991; pASIC2, introduced
in 1996; and pASIC3, introduced in 1997. 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. 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 three channels. First, we sell the majority of
our products through distributors who have contractual rights to earn a
negotiated margin on the sale of our products and who have limited rights to
return unsold product. We refer to these distributors as point-of-sale
distributors. We defer recognition of revenue for sales to these
point-of-sale distributors until after they have sold our products to systems
manufacturers. Second, we sell our products through certain foreign
distributors who have no contractual rights to earn a negotiated margin and
who may only return defective products to us. We recognize revenue from sales
to these distributors at the time of shipment. Finally, we sell our products
directly to systems manufacturers and recognize revenue at the time of
shipment to these systems manufacturers.
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
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.
Under certain of 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 data has been derived from unaudited financial statements that, in
our opinion, include all adjustments necessary for a fair presentation of the
information. Our quarterly results have been in the past, and in the future may
be, subject to fluctuations. As a result, we believe that results of operations
for the interim periods are not necessarily indicative of results for any future
period.
The following table sets forth the percentage of revenue for certain items in
our statements of operations for the periods indicated:
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- ------- -------- --------
Revenue 100% 100% 100% 100%
Cost of revenue 43 49 43 48
-------- -------- -------- --------
Gross profit 57 51 57 52
Research and development 17 19 18 20
Sales, general and administrative 31 29 32 31
Stock Compensation expense 1 1 1 2
-------- -------- -------- --------
Operating expenses 49 49 51 53
-------- -------- -------- --------
Operating income (loss) 8 2 6 (1)
Interest income and other, net - 1 - 1
------- ------- ------- --------
Net income 8% 3% 6% -%
======= ======= ======= ========
Three months and Nine Months Ended September 30, 1998 and September 30, 1999
9
Revenue. Revenue increased 31% from $22.0 million for the nine months ended
September 30, 1998 to $28.7 million for the nine months ended September 30,
1999. Revenue increased 30% from $7.9 million for the three months ended
September 30, 1998 to $10.3 million for the three months ended September 30,
1999. These increases in revenue resulted primarily from increased sales of
our mature products including pASIC1 and pASIC2 and our new products
including pASIC3 and ESPs, Sales of new products represented 5% of sales for
the nine months in 1998 and 20% in the nine months of 1999. ESP revenue was
insignificant in 1998 and grew to 5% of sales in the nine months of 1999.
Sales of new products represented 10% of sales for the three months in 1998
and 23% in the three months of 1999. ESP revenue was insignificant in the
three months 1998 and grew to 6% of sales in the three months 1999. We expect
this trend in product mix change to continue.*
Gross Profit. Gross profit increased 44% from $11.3 million for the nine months
ended September 30, 1998 to $16.4 million for the nine months ended September
30, 1999. Gross margin improved between those periods from 52% to 57%. Gross
profit increased 45% from $4.1 million for the three months ended September 30,
1998 to $5.9 million for the three months ended September 30, 1999. Gross margin
improved between those periods from 52% to 57%. This increase in gross profit
was primarily due to higher revenue. The gross margin improvement was primarily
due to increased sales of our higher margin pASIC2 and pASIC3 products and
higher revenue over relatively fixed production costs.
Research and Development Expense. Research and development expense includes
personnel and other costs associated with the development of product designs,
process technology, software and programming hardware. Research and
development expense increased from $4.5 million for the nine months ended
September 30, 1998 to $5.4 million for the nine months ended September 30,
1999. As a percentage of revenue, research and development expense declined
from 20% to 18% for the same periods. Research and development expense
increased from $1.6 million for the three months ended September 30, 1998 to
$1.8 million for the three months ended September 30, 1999. As a percentage
of revenue, research and development expense declined from 19% to 17% for the
same periods. The increase in dollars spent on research and development was
primarily due to investments in the development of our new ESP products.
These efforts required the use of consultants and the hiring of additional
personnel, which increased costs. 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 expense consists
primarily of personnel, commissions and other costs associated with the
marketing and sale of our products. General and administrative expense
consists primarily of personnel and other costs associated with the
management of our business. Selling, general and administrative expense
increased from $7.0 million for the nine months ended September 30, 1998 to
$9.2 million for the nine months ended September 30, 1999. Selling, general
and administrative expense as a percentage of revenue increased from 31% to
32% for the first nine months of 1998 and 1999, respectively. Selling,
general and administrative expense increased from $2.3 million for the three
months ended September 30, 1998 to $3.2
10
million for the three months ended September 30, 1999. Selling, general and
administrative expense increased as a percentage of revenue from 29% for the
three months of 1998 to 31% for the three months of 1999. The increases were
primarily due to increased advertising expense related to the introduction of
our ESPs and to hiring of additional sales, marketing, finance and
administrative personnel. 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.*
Interest and Other Income, Net. Interest income, interest expense and other
income, net was $153,000 in the nine months ended September 30, 1998 compared to
$108,000 for the nine months ended September 30, 1999. Interest income, interest
expense and other income, net was $37,000 in the three months ended September
30, 1998 compared to $21,000 for the three months ended September 30, 1999. A
gain on the disposal of fixed assets of $5,000 was recorded in 1998.
Deferred Compensation. We grant incentive stock options to hire, motivate
and retain employees. With respect to the grant of stock options to
employees, we recorded aggregate deferred compensation of approximately
$944,000 and $612,000 for the nine months and three months ended September
30, 1999, respectively.
Provision for Income Taxes. No provision for income taxes was recorded for the
periods presented due to our ability to utilize a portion of our state and
federal net operating loss carryforwards.
Liquidity and Capital Resources
We have been profitable since the third quarter of 1998. At September 30,
1999, we had $5.6 million in cash, a decrease of $2.0 million from cash held
at December 31, 1998. As of September 30, 1999, we had an accumulated deficit
of $59.3 million. On October 15, 1999 we completed an initial public offering
of our common stock. Proceeds of $35.1 million have been received.
We have an equipment financing line with a commercial bank. At September 30,
1999, we had obligations of $730,000 outstanding under this equipment line. 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 0.5%.
Net cash provided by operating activities was $79,000 and $1.7 million the
first nine months of 1999 and 1998, respectively. The decrease in cash in
1999 was primarily attributable to increases in working capital, particularly
accounts receivable and inventory. Reductions of inventory and accounts
receivable were the primary source of cash in 1998.
Net cash used for investing activities was $(1.7) million, and $(492,000) for
the first nine months of 1999 and 1998, respectively. The increases in
property and equipment were comprised primarily of computers, purchased
software and networking equipment.
Net cash used for financing activities was $(394,000) and $(1.1) million in
the first nine months of 1999 and 1998, respectively. The 1999 amount
includes net debt repayments of $753,000 partially offset by $359,000
received from the exercise of stock options. The 1998 decrease included $1.2
million in debt repayment partially offset by $99,000 received for stock
option exercises.
Inflation
11
The impact of inflation on our business has not been material for the three and
nine month periods presented.
Year 2000 Readiness Disclosure
State of Readiness. We utilize a number of computer software programs and
operating systems across our entire organization, including applications used in
financial business systems and various administrative functions. We have a team
of eight employees representing each of our major departments, led by our
manager of information systems, to identify and correct non-compliant systems.
To the extent that any of our software applications had source code unable to
appropriately interpret the upcoming Year 2000 and beyond, we have completed
modification or replacement of such applications. We have recently replaced
certain computer hardware in connection with our Year 2000 readiness program.
We are highly dependent on semiconductor foundry companies to produce our FPGA
and ESP products. We have contacted these suppliers and have received assurances
that Year 2000 issues will not affect their ability to deliver product.* We are
also dependent upon third party software for the functioning of our software
design tools, QuickWorks and QuickTools, that support our FPGA and ESP products.
QuickWorks operates on Microsoft Windows while QuickTools runs on UNIX
platforms. Our software products integrate software tools that have been
developed and are maintained by third party vendors. We have contacted these
vendors and have confirmed that such software products are Year 2000 compliant.
We have also tested these products and found them to be Year 2000 compliant.
However, any failure of Windows, UNIX or the integrated third party software
tools due to Year 2000 problems, will adversely impact the performance of our
software design tools, and our business could be materially harmed.
Costs Of Addressing Year 2000 Issues. Given the information known at this
time about our non-compliant systems, coupled with our ongoing process of
monitoring our third party suppliers and vendors for Year 2000 compliance, as
well as implementing contingency plans, we do not expect Year 2000 compliance
costs to have any material adverse impact on our business. We estimate that
total costs for the Year 2000 compliance assessment and remediation will not
exceed $400,000. The costs of this assessment and remediation will be paid
out of general and administrative expenses. Through September 30, 1999, we
have incurred expenses of approximately $300,000 in addressing the year 2000
problem. We expect to incur expenses of approximately $100,000 more for
remediation, testing and contingency planning.
Risks of Year 2000 Issues. In light of our assessment and remediation efforts
to date, and the planned upgrades, testing and contingency planning, we believe
that our Year 2000 risk is limited to non-critical business applications and
support hardware.* No assurance can be given, however, that: our systems will be
Year 2000 compliant; the manufacturers who supply semiconductors for us will be
Year 2000 compliant with their internal systems; or other major suppliers,
vendors, distributors and customers, upon whom our business is materially
dependant, will be Year 2000 compliant.
If our internal operations or those of our suppliers, vendors, distributors or
customers are adversely impacted because they are not Year 2000 compliant, our
business could be materially harmed.
Contingency Plans. In the event any Year 2000 issues relating to key suppliers,
vendors, distributors or customers are identified and not successfully resolved,
based on information available to us at present, we believe that the most likely
worst case scenario is a temporary disruption in infrastructure service,
particularly power and telecommunications, which could materially and adversely
impact supplier deliveries or customer shipments.* If severe disruptions occur
in these areas and are not corrected in a timely manner, a revenue or profit
shortfall may result in the Year 2000. We have developed contingency plans for
our operations to address the most reasonably likely worst case scenarios
regarding Year 2000 compliance. These plans include increasing our inventories
and using assembly and test facilities in different countries.
FACTORS AFFECTING FUTURE OPERATING RESULTS
- ---------------------------------------------
12
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.
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 September 30, 1999 was $59.4 million. 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 immaterial. If any of the following occur, our business will be
materially harmed:
13
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 the first
nine months of 1999, ESPs accounted for approximately 6% 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 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.
14
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
15
such an environment, we may be unable to have our products manufactured in a
timely manner or in quantities 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 our two foundry
manufacturers of semiconductors, Taiwan Semiconductor Manufacturing Company and
Cypress Semiconductor Corporation, to provide us with specified manufacturing
capacity. Our assembly and test work is done on a purchase order basis. If we
are unable to secure adequate manufacturing capacity from TSMC or 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 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
16
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, 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
17
such products in the future, the price for which we can sell such products
may decline, which would materially harm our business.
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 the nine months ended September 30, 1999,
approximately 81% of our sales were made through our distributors. We rely on
four principal distributors to market and sell a majority of our products,
particularly in North America. 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 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
18
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;
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
12 months, two 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.
19
As we seek to expand our operations, we may also significantly strain our
management and financial systems and other resources. We cannot be certain that
our systems, procedures, controls and existing space will be adequate to support
our operations.
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. It is too early for us to determine 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 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.
20
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 25%, 43%, 47%
and 50% of our total sales in 1996, 1997, 1998, and the nine months ended
September 30, 1999, 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;
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 United States dollars. As a result, any increase in the value of
the United States 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.
IF OUR OPERATIONS AND PRODUCTS DO NOT FUNCTION PROPERLY IN THE YEAR 2000, OUR
BUSINESS OPERATIONS COULD BE DISRUPTED
We are highly dependent on third party computer software programs and operating
systems used in our business. We also depend on proper functioning of computer
systems of third parties, such as suppliers, distributors and customers. Any
computer programs that have date-sensitive software may erroneously recognize a
date using "00" as the year 1900 instead of the year 2000. We have completed
audits of our internal systems, including our accounting, sales and technical
support automation system, and obtained assurances from our major suppliers,
distributors and customers that they have done the same. However, we do not have
the resources to verify these assurances. Thus, there is a risk that some of our
customers', distributors' and suppliers' systems will not function adequately.
If they do not, the result could be a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
21
We have developed two products, QuickWorks and QuickTools, which are design
software tools that support our FPGA and ESP devices. QuickWorks operates on
Microsoft Windows, while QuickTools runs on UNIX platforms. We have tested these
products and found them to be Year 2000 compliant. Our software products
integrate software tools that have been developed and are maintained by third
party vendors. We have contacted these vendors and have confirmed that such
software products are Year 2000 compliant. However, any failure of Windows, UNIX
or the integrated third party software tools due to Year 2000 problems, will
adversely impact the performance of our software design tools, and our business
could be materially harmed.
OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS
THAT MAY NOT BE IN THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS
Our officers, directors and principal stockholders together control
approximately 51% of our outstanding common stock. As a result, these
stockholders, if they act together, will be able to control 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 to 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
22
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.
10,975,570 shares outstanding before our initial public offering are subject
to lock-up agreements under which, many of our stockholders have agreed not
to sell or otherwise dispose of their shares of common stock. Most of these
shares will be available for sale after the 180th day after the date of our
public offering on October 15, 1999. In addition, we cannot assure you that
some or all of these lock-up restrictions will not be removed prior to 180
days after the offering without prior notice by the underwriters.
OUR COMMON STOCK HAS ONLY BEEN PUBLICLY TRADED FOR A SHORT TIME, AND WE
EXPECT THAT 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. An active public trading market may
not develop for our stock or, if developed, may not be sustained. 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1-Financial Data Schedule
(b) Reports on Form 8-K
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUICKLOGIC CORP.
- -----------------
Date November 12, 1999 /s/ Arthur O. Whipple
- -------------------------- -----------------
Arthur O. Whipple
Vice President of Finance and
Chief Financial Officer
(as principal accounting and financial
officer and on behalf of Registrant)
24