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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

or

COMMISSION FILE NUMBER 000-22671

QUICKLOGIC CORPORATION
(Exact name of registrant as specified in its charter)

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 ý    No o

        As of August 2, 2002, 23,461,484 shares of the Registrant's common stock were outstanding.

QUICKLOGIC CORPORATION
FORM 10-Q
JUNE 30, 2002

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Part I. Financial Information

Item 1. Financial Statements

QUICKLOGIC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)

See accompanying Notes to Condensed Unaudited Consolidated Financial Statements.

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QUICKLOGIC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

See accompanying Notes to Condensed Unaudited Consolidated Financial Statements.

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QUICKLOGIC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

See accompanying Notes to Condensed Unaudited Consolidated Financial Statements.

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QUICKLOGIC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

See accompanying Notes to Condensed Unaudited Consolidated Financial Statements.

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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and Basis of Presentation

        QuickLogic Corporation, 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 and hardware tools.

        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 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 Form 10-K for the year ended December 31, 2001. Operating results for the six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the full year.

        The Company primarily uses the U.S. dollar as its 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. The company does not use derivative financial instruments.

Principles of Consolidation

        The consolidated financial statements include the accounts of QuickLogic Corporation and its wholly-owned subsidiaries, QuickLogic International, Inc., QuickLogic Canada Company, QuickLogic Kabushiki Kaisha, QuickLogic (India) Private Limited, 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. 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

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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):

        For the six months ended June 30 2002, 3,793,157 shares with a weighted average exercise price of $10.24 were excluded because their effect would be anti-dilutive. For the six months ended June 30, 2001, 2,614,549 shares with a weighted average exercise price of $14.82 were excluded because their effect would be anti-dilutive.

Note 3. Investment in Tower Semiconductor, Ltd.

        On May 28, 2002, the Company entered into an Amendment (the "Amendment") to the original Share Purchase Agreement (the "Agreement") signed December 12, 2000, with Tower Semiconductor Ltd. ("Tower"). Under the Amendment, the Company agreed to make its third and fourth payments of $3.7 million each on May 31, 2002 and October 1, 2002. In exchange for these payments, Tower agreed to issue shares with a value equal to 60% of the amount of these payments, and wafer purchase credits equal to 40% of the payments. The wafer purchase credits issued under the Amendment can be applied immediately toward wafer purchases from Tower, up to 7.5% of the value of the purchases. After July 1, 2005, they can be applied at up to 15% of the value of the wafer purchases. In addition, Tower released the Company from its lockup on 700,000 of the previously purchased shares, allowing the Company to sell these shares on the open market. On June 30, 2002, the company recorded $119,000 in comprehensive income to account for the increase in value of the 700,000 shares of Tower that were available for sale as of that date.

        In fiscal 2001, the Company made payments of $14.0 million to purchase Tower shares and wafer credits under the Agreement. At December 31, 2001, the Company's balance sheet reflected 951,926 shares in Tower with a carrying value of $5.4 million, and $1.8 million in wafer credits. On May 31, 2002, the Company made an additional payment of $3.7 million to Tower, and in exchange, received an additional 357,166 shares and $1.5 million in wafer credits.

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Note 4. Balance Sheet Components

Note 5. Long-term Obligations

Notes Payable to Bank

        In June, 2002, QuickLogic signed a $12.0 million credit facility with Silicon Valley Bank. The facility includes an $8.0 million revolving line of credit and a $4.0 million equipment financing line. The revolving line bears interest at prime. The equipment line bears interest at prime plus 0.75%, and is secured by the specific equipment or software financed. Interest payments on the revolving line are due monthly. The equipment financing line must be paid in 36 equal installments from the date of each advance. Any advances for software purchases must be paid in 30 equal installments from the date of each advance. At the end of the quarter, the Company had drawn $1.8 million against the revolving line of credit.

Deferred Compensation Plan

        The Company maintains a non-qualified deferred compensation plan that covers executives and certain other key employees. This non-qualified plan is funded entirely by participants through voluntary deferrals of compensation. Income deferrals made by participants under this plan are deposited into a common trust account. 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. The related obligations are recorded as long-term obligations on the balance sheet. At June 30, 2002 and 2001, the liability accrued under the Company's Deferred Compensation Plan was $734,000 and $536,000.

Prepaid Royalty

        In October 2000, QuickLogic entered into a technology license agreement with Aeroflex UTMC. Under the terms of the technology agreement, the Company received $750,000 of prepaid royalty from Aeroflex UTMC which will be recognized as revenue when products with the licensed technology are

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sold by Aeroflex UTMC. Aeroflex UTMC had not made any royalty-bearing shipments through June 30, 2002, and accordingly, no royalty income has been recognized.

Note 6. Deferred Stock Compensation

        During the year ended December 31, 1999, the Company granted options to purchase 866,000 shares of common stock 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 $908,000, net of reversals associated with unvested shares of terminated employees. Such deferred stock compensation is being amortized ratably over the vesting period of the options. During the six months ended June 30, 2002 and 2001, deferred stock compensation amortization was $167,000 and $225,000, respectively.

Note 7. Other Comprehensive Income (Loss)

        Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income (loss) and it's components in financial statements. During the six month period ended June 30, 2002 the Company recorded comprehensive income in the amount of $119,000, which represents unrealized gain on shares of Tower Semiconductor Ltd.

Note 8. Income Taxes

        No provision for income taxes was recorded for the six month periods ended June 30, 2002 and 2001 because the Company incurred a loss in both periods.

        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.

Note 9. Information Concerning Business Segments and Major Customers

Information About Geographic Areas

        All of our sales originate in the United States and are denominated in U.S. dollars. 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 six months ended June 30, 2002 and 2001:

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Three customers, distributors of our products, accounted for approximately 17%, 12% and 8% of revenues in the six months ended June 30, 2002. Four customers, distributors of our products, accounted for approximately 16%, 8%, 8% and 8% of revenues in the six months ended June 30, 2001. Less than 10% of our long-lived assets, including property and equipment and other assets, were located outside the United States.

Note 10. Committments

        On December 12, 2000 QuickLogic entered into a Share Purchase Agreement (the "Agreement") with Tower Semiconductor Ltd. under which the Company will make a $25 million strategic investment in Tower as part of Tower's plan to build a new wafer fabrication facility. Under the terms of the Agreement, the Company's 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 the Company's proprietary ViaLink technology, and supply QuickLogic with a guaranteed portion of the new fabrication facility's available wafer capacity at competitive pricing, with first production expected in 2003. Per the terms of the Agreement, the Company paid Tower three payments totaling $14 million in 2001. On May 28, the Company signed an amendment to this Agreement, which did not change the number or amount of the payments the Company agreed to make. Per the terms of the amended Agreement, the Company made a payment of $3.7 million on May 31, 2002.

Note 11. Litigation

        On October 26, 2001, a putative securities class action was filed in the U.S. District Court for the Southern District of New York against some investment banks that underwrote the Company's initial public offerings, the Company, and some of the Company's officers and directors. This lawsuit is captioned Turoff v. QuickLogic et al., Case No. 01-CV-9503. Various plaintiffs have filed similar actions asserting virtually identical allegations against over 300 other public companies, their underwriters, and their officers and directors arising out of each company's public offering. The complaint in this case generally alleges that the underwriters obtained excessive and undisclosed commissions in connection with the allocation of shares of common stock in the Company's initial public offering and maintained artificially high prices through "tie-in" arrangements which required customers to buy shares in the aftermarket at pre-determined prices. The complaint alleges that the Company and its current officers and directors violated Sections of Securities Act of 1933, and the Securities Exchange Act of 1934 because the Company's registration statements did not disclose the purported misconduct of the underwriters. Plaintiffs seek an unspecified amount of damages on behalf of persons who purchased the Company's stock pursuant to the registration statements. The Company believes that the allegations against it are without merit and intends to defend the case vigorously.

        The semiconductor industry has experienced a substantial amount of litigation regarding patent and other intellectual property rights. From time to time, the Company has received and may receive in future, communications alleging that its products or processes may infringe on product or process technology rights held by others. The Company may in the future be involved in litigation with respect to alleged infringement by it of another party's patents.

        In the future, the Company may be involved with litigation to:

•

Enforce its patents or other intellectual property rights;



•

Protect its trade secrets and know-how;



•

Determine the validity or scope of the proprietary rights of others; and



•

Defend against claims of infringement or invalidity.

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        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 the Company's business, financial condition and results of operations.

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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, 2001, found in our Annual Report on Form 10-K filed March 14, 2002.

        Statements in this section, and elsewhere in this Annual Report on Form 10-Q, which express that QuickLogic "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. We currently have four FPGA product families: pASIC 1, introduced in 1991; pASIC 2, introduced in 1996; pASIC 3, introduced in 1997, and our Eclipse family of FPGAs which was introduced 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. During 2000, we introduced the QuickFC, QuickDSP, QuickSD and QuickMIPS families of ESPs. During 2001, we added the V3 products to our ESP offerings. We also license our QuickWorks and QuickTools design software and sell our programming hardware, which together have typically accounted for less than 2% of total revenue.

        In April 2001, we signed a definitive agreement with V3 Semiconductor, Inc. to acquire certain assets of V3 in a stock transaction. V3, based in Toronto, Ontario, manufactured application specific standard products, or ASSPs, that enhance high-speed data throughput within telecommunications and Internet infrastructure systems. The acquisition was designed to accelerate our ESP strategy by strengthening our ability to develop and market system-level products for the communications and networking markets. The acquisition was accounted for as a purchase. To facilitate the asset sale and the subsequent windup of V3 as a distinct entity, V3 filed for relief under Chapter 11 of the bankruptcy laws in May 2001. In August 2001, we completed the acquisition of certain assets of V3. On June 20, 2002, V3's plan of reorganization was approved by the bankrupcy court. During the quarter ended June 30, 2002, we filed a Registration Statement on Form S-3 to allow V3 to sell sufficient shares to satisfy its creditors in cash. Any remaining shares will be distributed to the stockholders of V3. On July 17, 2002, the SEC declared the S-3 effective.

        On December 12, 2000, we entered into a Share Purchase Agreement with Tower Semiconductor Ltd. Under the Agreement, we agreed to 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. In return for the investment, we will receive equity and committed production capacity in the advanced fabrication facility that Tower is building. In connection with the Agreement, we also entered into a foundry agreement under which we are entitled to a certain amount of wafer purchase credits.

        On May 28, 2002, the Company entered into an Amendment to the original Agreement. Under the Amendment, the Company agreed to make two payments of $3.7 million each on May 31, 2002 and October 1, 2002. In exchange for these payments, Tower agreed to issue shares with a value equal to

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60% of the amount of these payments, and wafer purchase credits equal to 40% of the payments. The wafer purchase credits issued under the Amendment can be applied immediately toward wafer purchases from Tower, up to 7.5% of the value of these purchases. After July 1, 2005, they can be applied at up to 15% of the value of the wafer purchases. In addition, Tower released the Company from its lockup on 700,000 of the previously purchased shares, allowing the Company to sell these shares on the open market.

        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. Approximately 68% of our products sold by point-of-sale distributors are programmed by us and are not returnable by these point-of-sale distributors. We recognize revenue on these programmed products at the time of shipment. 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 was 71% and 29%, respectively, for the six months ended June 30, 2002 and 77% and 23%, respectively, for the six months ended June 30, 2001.

        Three distributors accounted for 17%, 12% and 8% of sales, respectively, in six months ended June 30, 2002. Four distributors accounted for 16%, 8%, 8% and 8% of sales, respectively, in the six months ended June 30, 2001. We expect that a limited number of distributors will continue to account for a significant portion of our total sales. We believe the company's products are proprietary and sole source, and that the loss of a particular distributor would not result in a short term disruption in sales of our products, since our customers would either buy our products from another distributor or directly from us.

        Our international sales were 43% and 42% of our total sales for the six months ended June 30, 2002 and 2001. 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 margins and through manufacturing efficiencies and cost reductions. However, the markets in which we operate are highly competitive, and we may not 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 Taiwan Semiconductor Manufacturing Company and Cypress Semiconductor Corporation to manufacture our products, and we rely primarily upon Amkor Technology and ChipPAC, Inc. to assemble and test our products. Under our arrangements with Cypress, 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.

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        The following table sets forth the percentage of revenue for certain items in our statements of operations for the periods indicated: