<PAGE>
As filed with the Securities and Exchange Commission on October 10, 2000
Registration No. 333-42146
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
AMENDMENT NO. 3
to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
-------------------
SYNPLICITY, INC.
(Exact name of Registrant as specified in its charter)
-------------------
<TABLE>
<S> <C> <C>
California 7372 77-0368779
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
935 Stewart Drive
Sunnyvale, CA 94086
(408) 215-6000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-------------------
Douglas S. Miller
Vice President of Finance and Chief Financial Officer
935 Stewart Drive
Sunnyvale, CA 94086
(408) 215-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
Please send copies of all communications to:
<TABLE>
<S> <C>
Robert P. Latta, Esq. Peter T. Healy, Esq.
Julia Reigel, Esq. Steven L. Pickering, Esq.
Katherine Stephens, Esq. O'Melveny & Myers LLP
Jenny C. Yeh, Esq. Embarcadero Center West
Wilson Sonsini Goodrich & Rosati 275 Battery Street
Professional Corporation San Francisco, CA 94111-3305
650 Page Mill Road (415) 984-8700
Palo Alto, CA 94304
(650) 493-9300
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Title of Each Class of Securities to be Proposed Maximum Amount of Registration Fee
Registered Aggregate Offering Price (1) (2)
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<S> <C> <C>
Common stock, no par value..................... $59,340,000 $15,665.76
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</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2) Previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus front cover
page: (a) one to be used in connection with an offering in the United States
and Canada and (b) one to be used in connection with a concurrent offering
outside of the United States and Canada. The United States and Canadian
prospectus and the international prospectus are otherwise identical in all
respects. The international version of the front cover page is included
immediately before Part II of this registration statement.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer of sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 10, 2000.
[LOGO OF SYNPLICITY, INC. APPEARS HERE]
4,300,000 Shares
Common Stock
Synplicity, Inc. is offering 4,300,000 shares of its common stock. This is
our initial public offering and no public market currently exists for our
shares. Our shares have been approved for quotation on the Nasdaq National
Market under the symbol SYNP. We anticipate that the initial public offering
price will be between $10 and $12 per share.
---------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 8.
---------------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price.............................................. $ $
Underwriting Discounts and Commissions............................. $ $
Proceeds to Synplicity, Inc. ...................................... $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
We and our majority shareholders have granted the underwriters a 30 day
option to purchase up to an additional 645,000 shares of common stock to cover
over-allotments.
---------------
Robertson Stephens
Dain Rauscher Wessels
SG Cowen
The date of this Prospectus is , 2000
<PAGE>
[Description of Artwork]
First page: Text reads "Synplicity's synthesis and verification products
enable the design of internet infrastructure equipment." Pictures
of computer screens showing use of Synplify, Synplify Pro, HDL
Analyst, Amplify Physical Optimizer and Certify, a field
programmable gate array integrated circuit and the following
products: network switch, mobile phone, router and DSL access
multiplexor. Bottom of page shows Synplicity logo and "Simply
Better Results."
Second Page and Third page from top left in a counterclock-wise manner:
1. Picture of computer screen showing Synplify in use
Text reads: "Synplify and Synplify Pro.
. robust, comprehensive synthesis products
. developed for high density programmable gate arrays, or FPGAs, which
are semiconductors that are electrically configured to perform a user
specific function after manufacture
. easy to learn and use
. short run times
. feature high Quality of Results
Powerful synthesis Solutions for today's high density
FPGAs."
2. Diagram of semiconductor design flow with the caption "Synthesis
delivering high Quality of Results" and showing the design steps in which
Synplify, Synplify Pro and Amplify Physical Optimizer are used.
3. Picture of computer screen showing HDL Analyst in use. Text reads: "HDL
Analyst.
. intuitive interface enables rapid design optimization
. provides FPGA designers with high level graphical representations of
designs
. graphical representations automatically link directly back
to designer's textual description.
An easier and faster way to debug and optimize high density FPGA designs"
4. Photo showing computer screen with Certify in use. Text reads:
"Certify.
. prototyping and verification solution for application specific
integrated circuits, or ASICs, which are semicondutors that are
configured to perform a user specific function during manufacture
. rapidly partitions and synthesizes complex ASICs designs
. simultaneously synthesizes multiple FPGAs for prototypes early in the
design cycle
. improves prototype performance
. accelerates time to market
Rapid verification for large, complex ASICs
5. Text reades: "ASIC prototyping shortens time to market"
6. Diagram of ASIC design flow with Certify
7. Diagram of ASIC design flow without Certify
8. Photo showing computer screen with Amplify Physical Optimizer in use. Text
reads: "Amplify Physical Optimizer
. proprietary method for using and improving physical design information
during synthesis
. improves design productivity
. enhances performance of high capacity FPGAs
. eliminates weeks from production schedules
Enables designers to meet or exceed their performance goals"
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
Until , 2000, which is the 25th day after the final prospectus
related to this offering, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
Forward Looking Statements............................................... 20
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Consolidated Financial Data..................................... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 38
Management............................................................... 52
Related Party Transactions............................................... 62
Principal Shareholders................................................... 65
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 70
United States Tax Consequences to Non-U.S. Holders....................... 72
Underwriting............................................................. 75
Legal Matters............................................................ 79
Experts.................................................................. 79
Where You Can Find Additional Information................................ 79
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------------
Synplicity, the Synplicity "S" logo, Synplify, Simply Better Synthesis and
HDL Analyst are our registered trademarks. Behavior Extracting Synthesis
Technology, B.E.S.T., Embedded Synthesis, SCOPE, Synthesis Constraints
Optimization Environment, Partition-Driven Synthesis, DST, Simply Better
Results, Certify, Amplify and Physical Optimizer are our unregistered
trademarks and service marks. Other service marks, trademarks and trade names
referred to in this prospectus are the property of their respective owners.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary, together with the more detailed
information regarding our company, especially the "Risk Factors" section, and
our financial statements and notes to those statements appearing elsewhere in
this prospectus, before deciding to invest in shares of our common stock.
Our Business
We are a leading provider of software products that enable the rapid and
effective design and verification of semiconductors for internet
infrastructure, including next generation networking and communications
equipment, as well as various electronic devices. We benefit both from the
rapid growth of the internet, which creates strong demand for new networking
and communications equipment, and from continual innovation in these markets,
which produces ever shorter product life cycles and an expanded number of new
design starts.
Manufacturers of networking and communications equipment increasingly
respond to competitive pressures by using large, complex semiconductors such as
field programmable gate arrays, or FPGAs, to deliver new product features and
shorten the time between design and full production, known as time to market.
FPGAs are semiconductors that are electrically configured to perform user
specific functions after the component has been manufactured. Our software
products perform essential steps in the process of designing and verifying
complex semiconductors, including application specific integrated circuits,
known as ASICs, which are semiconductors that are configured during the
manufacturing process to perform a user specific function, system on a chip
ASICs that include microprocessors, known as SoCs, and, in particular, high-end
FPGAs. We employ proprietary logic synthesis and physical synthesis technology
to simplify, improve and accelerate the design and verification of these
complex semiconductors. Logic synthesis is a semiconductor design process in
which a textual description of a semiconductor's function is transformed into a
network of logic and memory elements. Physical synthesis is an alternative
semiconductor design process in which logic synthesis is performed while
simultaneously assigning logic and memory elements to specific locations in the
semiconductor. We have sold our software products to over 1,300 corporations,
governmental agencies and other organizations including leading internet
infrastructure and next generation networking customers, such as Alcatel
Business Systems, Ascend Communications Inc., Cisco Systems Inc., LM Ericsson,
Lucent Technologies Inc., Motorola Inc., Nortel Networks Corporation, Siemens
AG and Tellabs Inc.
The growth in internet traffic and increased demand for bandwidth have
resulted in the rapid deployment of high speed communications equipment, known
as next generation networking equipment. Intense competition and the constant
evolution of standards by which networking and communications equipment
manufactured by different vendors can communicate increase pressure on
equipment providers to design next generation products quickly. Their need for
improved performance and interoperability is accelerating the design cycle for
a variety of networking and communications equipment including fiber optic
backbone equipment, broadband access equipment, routers, switches, satellite
devices and wireless base stations.
Our software solutions enable customers to design and verify large,
complex, high performance semiconductors quickly and intuitively. Our Synplify
and Synplify Pro FPGA logic synthesis products use our proprietary Behavior
Extracting Synthesis Technology to quickly transform high-level semiconductor
design specifications into a format ready for implementation in a high
performance semiconductor. Our HDL Analyst product enables designers to
visualize and identify design bottlenecks and potential improvements using an
intuitive graphical interface. Our Amplify Physical Optimizer product uses and
improves physical implementation information for large, complex FPGAs to create
faster semiconductors in a shorter period of
4
<PAGE>
time. In addition, our Certify ASIC and SoC verification product facilitates
design verification at or near real-time speeds -- a distinct advantage when
designing semiconductors for data intensive applications such as data
networking or streaming media. We believe our software products, coupled with
our expert customer support, enable our customers to meet performance goals and
decrease the time to market of their products.
We intend to enhance and expand our semiconductor logic synthesis, physical
synthesis and verification product offerings by continuing to invest in
research, development and product innovation. Specifically, we intend to focus
our research and development efforts on our industry leading FPGA design
software as larger and more complex programmable semiconductors are
increasingly used in next generation networking and communications equipment.
In addition, we plan to continue expanding our strategic relationships with
leading manufacturers and suppliers of FPGAs to enhance the full value,
flexibility and depth of our product offerings. By doing so, we plan to
strengthen our position as a leading provider of software solutions for
manufacturers of internet infrastructure and next generation networking and
communications equipment.
Corporate Information
We incorporated in California on February 1, 1994 under the name Elemental
Logic, Inc. We changed our name to Synplicity, Inc. on February 22, 1994 to
represent the functionality of our products as simple to use synthesis
solutions. Our principal executive offices are located at 935 Stewart Drive,
Sunnyvale, California 94086. Our telephone number is (408) 215-6000. You can
access our web site at www.synplicity.com. Information contained on our web
site is not a part of this prospectus.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered............................... 4,300,000 shares
Common stock to be outstanding after the offering.. 23,494,582 shares
Use of proceeds.................................... General corporate
purposes, including
funding our operations,
working capital, repayment
of a term loan, capital
expenditures and potential
acquisitions of
complementary businesses,
products and technologies.
Proposed Nasdaq National Market symbol............. SYNP
</TABLE>
The above information is based on 19,194,582 shares outstanding as of June
30, 2000 and excludes 4,129,412 shares issuable upon exercise of options and
warrants outstanding as of June 30, 2000 and 4,475,433 shares available for
future issuance under our various stock plans. See "Capitalization" and
"Management--Incentive Plans" for further information about these options,
warrants and stock plans.
Subsequent to June 30, 2000, we have granted additional options to purchase
shares of our common stock and have issued new shares pursuant to the exercise
of options.
Other Information
Unless otherwise noted, this prospectus assumes:
. the completion of our two-for-three reverse stock split in July 2000;
. the automatic conversion of our outstanding preferred stock into
4,304,083 shares of common stock upon the closing of this offering;
. the filing of our amended and restated articles of incorporation
authorizing a class of 10,000,000 shares of undesignated preferred
stock upon the closing of this offering; and
. no exercise by the underwriters of their option to purchase 645,000
additional shares of our common stock in this offering, of which we are
selling 445,000 shares and our majority shareholders, Kenneth S.
McElvain and Alisa Yaffa, are selling an aggregate of 200,000 shares.
6
<PAGE>
Summary Consolidated Financial Information
(in thousands, except per share data)
The following table sets forth a summary of our consolidated statement of
operations data for the periods presented. We incurred $175,000 of expense
related to amortization of stock compensation in 1999, $4,000 in the six months
ended June 30, 1999 and $386,000 in the six months ended June 30, 2000. The pro
forma basic and diluted net loss per share for the year ended December 31, 1999
and the six months ended June 30, 2000 gives effect to the conversion of our
convertible preferred stock, using the if-converted method, from the original
date of issuance.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
----------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Total revenue........... $ 365 $1,798 $ 5,454 $11,028 $18,175 $ 8,082 $13,860
Gross profit............ 347 1,755 5,293 10,349 16,749 7,438 13,087
Loss from operations.... (17) (22) (519) (3,619) (6,933) (3,501) (2,904)
Net loss................ (16) (13) (472) (3,638) (6,940) (3,548) (2,827)
Basic and diluted net
loss per common share.. $(0.01) $ -- $ (0.04) $ (0.29) $ (0.52) $ (0.27) $ (0.20)
====== ====== ======= ======= ======= ======= =======
Shares used in per share
calculation............ 2,171 6,667 11,954 12,451 13,227 13,054 13,820
====== ====== ======= ======= ======= ======= =======
Pro forma basic and
diluted net loss per
common share
(unaudited)............ $ (0.42) $ (0.16)
======= =======
Shares used in pro forma
per share calculation
(unaudited)............ 16,432 17,742
======= =======
</TABLE>
The following table sets forth a summary of our consolidated balance sheet
data as of June 30, 2000:
. on an actual basis; and
. on a pro forma basis to reflect the automatic conversion of our
outstanding preferred stock upon the closing of this offering and our
receipt of the estimated net proceeds from the sale of 4,300,000 shares
of common stock by us in this offering at an assumed initial public
offering price of $11.00 per share, after deducting the estimated
underwriting commissions and discounts and estimated offering expenses.
<TABLE>
<CAPTION>
As of June 30, 2000
---------------------
Pro Forma
Actual As Adjusted
-------- -----------
(unaudited)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................. $ 8,248 $50,637
Working capital........................................... 1,496 43,885
Total assets.............................................. 14,011 56,400
Total current liabilities................................. 10,082 10,082
Long-term obligations, less current portion............... 584 584
Accumulated deficit....................................... (13,990) (13,990)
Total shareholders' equity................................ 3,345 45,734
</TABLE>
7
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider the risks described below carefully and all of the information
contained in this prospectus before deciding whether to purchase our common
stock. If any of the following risks actually occur, our business, financial
condition and results of operations would suffer. In such case, the trading
price of our common stock could decline, and you may lose all or part of your
investment in our common stock. References to "partners," "channel partners" or
"corporate partners" do not necessarily imply the existence of a legal
partnership or that the party or parties have any equity investment in our
company.
Risks Related to our Operations
We have a history of losses and may experience losses in the future, which
could result in the market price of our common stock declining
Since our inception, we have incurred significant net losses, including net
losses of $3.6 million in 1998, $6.9 million in 1999 and $2.8 million in the
six months ended June 30, 2000. In addition, we had an accumulated deficit of
$14.0 million as of June 30, 2000. We expect to continue to incur significant
research and development, sales and marketing and general and administrative
expenses. As a result, we will need to generate significant revenue to achieve
profitability. We do not expect to show an operating profit in 2000 or the
first half of 2001. We may not achieve profitability thereafter or, if we
achieve profitability, sustain it. If we do not achieve and maintain
profitability, the market price of our common stock may decline, perhaps
substantially.
We anticipate that our expenses will increase substantially in the next 12
months as we:
. continue to invest in research and development to enhance our existing
products and technologies;
. develop additional logic synthesis, physical synthesis and
verification products;
. increase our sales and marketing activities, particularly by expanding
our direct sales force outside North America;
. continue to increase the size and number of locations of our customer
support organization and begin to provide consulting services; and
. implement additional internal systems, develop additional
infrastructure and hire additional management to keep pace with our
growth.
Any failure to significantly increase our revenue as we implement our
product and distribution strategies would also harm our ability to achieve and
maintain profitability and could negatively impact the market price of our
common stock.
We may not be able to increase our revenue at rates that meet the expectations
of investment analysts and others, which could cause our stock price to decline
Our annual rate of revenue growth declined from 102% in 1998 to 65% in
1999. We may not be able to exceed or maintain our historical rates of revenue
growth in 2000 or in the future. As our revenue base grows larger, it will be
difficult to maintain high percentage increases over time. If we fail to
introduce new products or enhanced versions of existing products when expected,
the rate of our revenue growth could decline. In addition, growing competition
and our inexperience in selling our products to customers that use ASICs and
SoCs could also adversely affect our revenue growth. Our revenue could decline
as a result of technological changes that negatively affect the demand for
FPGAs, ASICs and SOCs. Any significant decrease in our rate of revenue growth
after this offering would likely result in a decrease in our stock price,
because our revenue may fail to meet the expectations of investment analysts
and others.
8
<PAGE>
Our quarterly operating results and stock price may fluctuate, because our
ability to accurately forecast our quarterly sales is limited, our costs are
relatively fixed in the short term and we expect our business to be affected by
seasonality
Because of the rapidly evolving market for FPGAs, ASICs and SoCs, our
ability to accurately forecast our quarterly sales is limited, which makes it
difficult to predict the quarterly revenue that we will recognize. In addition,
the time to initiate and complete a sale for our products is relatively short,
and our ability to foresee and react to changes in customer demand for our
products may be limited and, therefore, be inaccurate. Most of our costs are
for personnel and facilities, which are relatively fixed in the short term. If
we have a shortfall in revenue in relation to our expectations, we may be
unable to reduce our expenses quickly to avoid lower quarterly operating
results. We also do not know whether our business will grow rapidly enough to
absorb the costs of our personnel and facilities. As a result, our quarterly
operating results could fluctuate, and the fluctuations could adversely affect
the market price of our common stock.
In addition, we expect to experience fluctuations in the sale of licenses
for our products due to seasonality. For example, we expect that sales may
decline during the summer months, particularly in European markets. We have
experienced and anticipate we will continue to experience relatively lower
sales in our first fiscal quarter due to patterns in the capital budgeting and
purchasing cycles of our current and prospective customers and the economic
incentives for our sales force. These factors may lead to fluctuations in our
quarterly operating results. It is difficult for us to evaluate the degree to
which these capital budgeting and customer purchasing cycle variations and
sales incentives may reduce our sales because our recent revenue growth may
have largely overshadowed these factors in recent periods.
We have relied and expect to continue to rely on sales of our Synplify,
Synplify Pro and HDL Analyst products for a substantial majority of our license
revenue, and a decline in sales of these products could cause our license
revenue to decline
Historically, we have derived substantially all of our revenue from sales
of our Synplify, Synplify Pro and HDL Analyst products. License revenue for our
Synplify, Synplify Pro and HDL Analyst products accounted for 100% of our
license revenue in 1998, approximately 93% of our license revenue in 1999 and
approximately 86% of our license revenue in the six months ended June 30, 2000.
We expect that the revenue from these products will continue to account for a
majority of our license revenue for at least the next two fiscal years. Any
factors adversely affecting the pricing of our licenses or demand for our
Synplify, Synplify Pro and HDL Analyst products, including competition or
technological change, could cause our license revenue to decline and our
business to suffer. Factors that may affect sales of our Synplify, Synplify Pro
and HDL Analyst products, some of which are beyond our control, include the
following:
. the growth and changing requirements of the programmable semiconductor
market, particularly with respect to FPGAs;
. the performance, quality, price and total cost of ownership of our
software products relative to other logic synthesis products for
FPGAs; and
. maintaining and enhancing our existing relationships with leading
manufacturers of FPGAs, which may provide us advance information or
detailed data about those vendors' FPGAs and software.
We may not succeed in developing and marketing new logic synthesis, physical
synthesis and verification products, and our operating results may decline as a
result
We intend to develop additional logic synthesis, physical synthesis and
verification products. Developing new products that meet the needs of
electronic product designers requires significant investments in research and
development. If we fail to successfully develop and market new products, our
operating results will decline.
9
<PAGE>
We introduced our Certify product in 1999, our Amplify Physical Optimizer
product in March 2000 and our Synplify Pro product in May 2000. To date, these
products have accounted for only a limited portion of our revenue. However, our
future growth and profitability will depend on our ability to increase sales of
these verification, physical and logic synthesis products. If customers do not
accept and widely adopt these products our operating results will decline.
We intend to develop a new logic synthesis product for ASIC design and
intend to develop other products that leverage our core capabilities.
Developing these products and other required features for the release of new
products will require significant investments in research and development. We
cannot be certain that our entry into the ASIC logic synthesis product market
or other new markets will be successful or that our customers will accept and
widely adopt these products.
Our revenue could decline substantially if our existing customers do not
continue to purchase additional licenses or maintenance from us
We rely on sales of additional licenses to our existing customers, as well
as annual maintenance renewals for our products. Additional license sales to
our existing customers represented approximately 45% of our license revenue in
1999 and approximately 61% in the six months ended June 30, 2000. If we fail to
sell additional licenses for our products to our existing customers or if they
fail to renew their annual maintenance, we would experience a material decline
in revenue. Even if we are successful in selling our products to new customers,
the rate of growth of our revenue could be harmed if our existing customers do
not continue to purchase a substantial number of additional licenses from us or
fail to renew their maintenance.
If we experience any increase in the length of our sales cycle, our quarterly
operating results could become more unpredictable and our stock price may
decline as a result
We experience sales cycles, the time between an initial customer contact
and completing a sale, generally ranging from two weeks to four months,
depending on the product. If we experience any increase in the length of our
sales cycle, our quarterly operating results could suffer and our stock price
could decline as a result. In addition, for all of our products, a typical
customer may purchase a small number of licenses and then incrementally
increase the number of licenses over time. If customers were to implement
enterprise-wide evaluation programs or purchase products for the entire
organization at once, our sales cycle could lengthen and our revenue could be
more unpredictable from quarter to quarter. We do not have enough historical
experience selling our Amplify Physical Optimizer product to determine how the
sales cycle for this product will affect our revenue; however, the sales cycle
could be longer and could result in unpredictability in our revenue from
quarter to quarter.
Risks Related to Market Growth
Our business depends on continued demand for next generation networking
equipment and other complex electronic equipment that incorporate FPGAs, ASICs
or SoCs, and our revenue may suffer if demand for FPGAs, ASICs and SoCs does
not continue
Demand for next generation networking equipment may decrease if internet
use declines, the build-out of internet infrastructure or communications
networks slows or surplus capacity in existing communications and internet
infrastructure develops. Potential consumers of next generation networking
equipment, such as communications companies, may use or modify existing types
of equipment and never adopt next generation networking equipment. If the
business of next generation networking equipment manufacturers does not
continue at its current level of growth, our revenue and business will suffer,
because our products are used to design the FPGAs, ASICs and SoCs that are an
integral part of next generation networking equipment.
10
<PAGE>
The markets for FPGAs, ASICs and SoCs are evolving rapidly and if these markets
do not develop and expand as we anticipate, our revenue may not grow, because
our products may not be needed
We expect that substantially all of our revenue will continue to come from
sales of our logic synthesis, physical synthesis and verification products. We
depend on the growing use of logic synthesis products to design FPGAs for use
in next generation networking equipment and other applications. If the role of
FPGAs in communications infrastructure equipment and computer networking
equipment does not increase as we anticipate, or decreases, our revenue would
decline. The FPGA market may not grow if customers choose to use other
semiconductors that might be more affordable or available with shorter time to
market schedules. This could cause electronic equipment manufacturers to limit
the number of new FPGAs they design and would reduce their need for our
products. We also depend on the continued adoption of ASICs and SoCs in order
for our revenue to increase. If demand for our software products were to
decline, we may choose to lower the prices of our products or we may sell fewer
licenses and have lower maintenance renewal rates. In addition, if equipment
manufacturers do not widely adopt the use of FPGAs, or if there is a wide
acceptance of alternative semiconductors that provide enhanced capabilities,
the market price of our stock could decline due to our lower operating results
or investors' assessment that the growth potential for sales of our licenses is
limited.
The markets for FPGAs, ASICs and SoCs are evolving rapidly and we cannot
predict their potential sizes or future growth rates. Our success in generating
revenue in these evolving markets will depend on, among other things, our
ability to:
. educate potential designers, next generation networking equipment and
other electronics companies about the benefits of FPGAs, ASICs and
SoCs and the use of logic synthesis, physical synthesis and
verification products to design them;
. establish and maintain relationships with leading FPGA manufacturers,
electronic equipment designers and next generation networking
equipment and other electronics companies and maintain and enhance our
relationships with our other customers; and
. predict and base our products on technology that ultimately becomes
industry standard.
We depend on our marketing, product development and sales relationships with
leading FPGA manufacturers, and if these relationships suffer, we may have
difficulty introducing and selling our products and our revenue would decline
We believe that our success in penetrating our target markets depends in
part on our ability to maintain or further develop our strategic marketing,
product development and sales relationships with leading FPGA manufacturers,
including Altera Corporation and Xilinx, Inc. We believe our relationships with
leading FPGA manufacturers are important in order to validate our technology,
facilitate broad market acceptance of our products and enhance our sales,
marketing and distribution capabilities. For example, we attempt to coordinate
our product offerings with the future releases of Altera's and Xilinx's FPGA
components and software. If we are unable to maintain and enhance our existing
relationships with Altera and Xilinx and develop a similar relationship with
other major FPGA vendors, we may have difficulty selling our products or we may
not be able to introduce products on a timely basis that capitalize on new FPGA
component characteristics or software feature enhancements. These manufacturers
may also compete in the FPGA product market by developing their own synthesis
products. For example, Xilinx has recently begun selling a synthesis product
that could be competitive with our Synplify product. These manufacturers may
adversely impact the price of our products through the expansion of their
distribution of our competitors' products. Either of these developments could
harm our business and financial prospects.
Sales of FPGA components may be harmed due to natural disasters or political
unrest and as a result, sales of our products may decline, if events occur that
limit the ability of FPGA manufacturers to manufacture and ship their products
We believe that a majority of all FPGA components is produced in Taiwan by
foundry partners of leading FPGA manufacturers. These foundry and manufacturing
activities are located in areas that have been seismically active, as
demonstrated by the earthquakes that occurred in Taiwan during the fall of
1999. If a
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major earthquake affecting key FPGA manufacturing locations occurs in the
future, leading FPGA manufacturers' operations may be disrupted. In addition,
tensions between the governments of Taiwan and the People's Republic of China
could disrupt operations of FPGA manufacturers' foundry partners if military
conflict were to occur between the People's Republic of China and Taiwan, a
state of emergency were declared in Taiwan or civil unrest were to erupt in
Taiwan. These types of disruptions could result in FPGA manufacturers'
inability to ship products in a timely manner, and, as a result, demand for our
products may be reduced and our business would suffer.
Our success depends on the continued growth of the internet, which could be
impeded by, among other things, declining use or increased government
regulation
Our success depends on the internet infrastructure semiconductor industry,
which in turn depends on increased use of the internet for e-commerce and other
commercial and personal activities. Consumers and businesses may choose not to
use the internet for a number of reasons, including: internet access costs;
inconsistent service quality; unavailability of cost-effective, high-speed
service; perceived security risks, such as a lack of confidence in encryption
technology; and privacy concerns. In addition, governmental agencies and
legislators may respond to these concerns or others about the internet with
laws and regulations covering issues such as user privacy or security,
obscenity, freedom of expression, pricing, content and quality of products and
services, copyright and other intellectual property issues and taxation. Such
legislation or rule making could dampen the growth in internet use generally
and decrease the acceptance of the internet as a commercial medium. If use of
the internet decreases, some of our customers may experience slower or negative
growth in demand for their products, which could impact their purchases of our
software products and reduce our operating results.
Risks Related to our Marketing and Sales Efforts
If we do not continue to expand our sales force substantially to increase sales
of our products, our revenue may not grow
Our products require a sophisticated sales effort that depends on
experienced and knowledgeable sales personnel. Competition for these
individuals is intense due to the limited number of people available with the
necessary sales experience and technical understanding of our products. If we
are unable to continue to identify, hire, train and retain these individuals,
our revenue may not grow.
Because we rely on channel partners to sell a portion of our products, our
revenue could decline if our existing channel partners do not continue to
purchase products from us
We rely on semiconductor distributors Insight Electronics LLC and Wyle
Electronics to refer customers to us, which result in a portion of our license
sales in North America. A majority of our sales outside North America are
conducted through our channel partners, and we rely on Pacific Design Inc., one
of our distributors, to sell our products in Japan. We have opened a direct
sales office in Japan and have notified our Japanese distributor of our intent
to terminate their services as our local distributor as of December 31, 2000.
Sales to our channel partners accounted for approximately 28% of our total
revenue in 1999 and approximately 23% of our total revenue in the six months
ended June 30, 2000. If we fail to sell our products through our existing
channel partners or directly, we would experience a material decline in
revenue. We cannot be certain that we will be able to attract channel partners
that market our products effectively or provide timely and cost-effective
customer support and service. Even if we are successful in selling our products
through new channel partners, the rate of growth of our total revenue could be
harmed if our existing channel partners do not continue to sell our products.
In the past, we have terminated our relationships with certain channel partners
for poor performance. None of our existing channel partners is obligated to
continue selling our products. We face the risk that one or more of our channel
partners will not continue to represent our products or that our channel
partners will not devote a sufficient amount of effort and resources to selling
our products in their territories.
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Our expansion to international markets will result in higher personnel costs
and could reduce our operating margins due to the higher costs of international
sales
In order to significantly penetrate international markets, we plan to
increase our direct international sales presence. We may also expand the number
of channel partners who sell our products. To date, we have relied primarily on
international channel partners and have only recently begun to significantly
employ direct sales personnel outside of the United States. As we increase our
direct international sales presence, we will incur higher personnel costs that
may not result in additional revenue. If we rely on channel partners, our
exposure to the risks described above may increase. If we expand our direct and
indirect international selling efforts successfully, our efforts may not create
or increase international market demand for our products. Even if we increase
our international sales, we may not realize corresponding growth in operating
margins, due to the higher costs of these sales. Our revenue outside North
America represented approximately 20% of our total revenue in 1999 and
approximately 20% of our total revenue in the six months ended June 30, 2000.
If we are unable to continue to expand our customer service and support
organization, we may not be able to retain our existing customers or attract
new customers, and our revenues could decline as a result
We will need to continue to increase our customer service and support staff
to support new customers and the expanding needs of our existing customers.
Hiring customer service and support personnel is very competitive in our
industry due to the limited number of people available with the necessary
technical skills and understanding of the design of FPGAs, ASICs and SoCs and,
accordingly, we may not succeed in doing so. If we are unable to expand our
customer service and support organization, we may not be able to retain our
existing customers, customers may not renew their maintenance or we may not be
able to attract new customers.
Risks Related to Competition within our Industry
We may not be able to effectively compete against other providers of products
that design FPGAs, ASICs and SoCs, as a result of their greater financial
resources and distribution channels, which could cause our sales to decline
We face significant competition from larger companies that market suites of
semiconductor design software products that address all or almost all steps of
semiconductor design or that incorporate intellectual property components for
semiconductors. These competitors have greater financial resources and name
recognition than we do. We believe that Mentor Graphics Corporation and
Synopsys, Inc., each of which is also currently competing with us by marketing
logic synthesis or verification products, could also introduce new suites of
products or individual products that include the functionality that we
currently provide in our products and at lower prices or they may otherwise
have more favorable relationships with customers. If these or other vendors
provide lower cost logic synthesis, physical synthesis or verification products
that outperform our products in addition to having broader applications of
their existing product lines, our products could become unsaleable. Even if our
competitors' standard products offer functionality equivalent to ours, we face
a substantial risk that a significant number of customers would elect to pay a
premium for similar functionality rather than purchase products from a less
well-known vendor.
We may face competition in the future from established FPGA manufacturers
that compete in the design software market, such as Altera or Xilinx, or from
emerging software companies. Increased competition may negatively affect our
business and future operating results by leading to price reductions, higher
selling expenses or a reduction in our market share.
Our products are subject to rapid technological change and could be rendered
obsolete and unsaleable
The semiconductor design software market is characterized by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changes in customer demands and
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<PAGE>
evolving industry standards. Our products could be rendered obsolete if design
products based on new technologies are introduced or new industry standards
emerge. For example, if customers widely adopt new engineering languages to
describe their semiconductor designs and our products fail to support those
languages adequately, our business will suffer.
We may not be able to compete effectively if our products are delayed or do not
incorporate new specifications, and if we cannot compete effectively, our
business could be damaged
Our future success depends on our ability to enhance existing products,
develop and introduce new products, satisfy customer requirements, meet
industry standards and achieve market acceptance. We may not successfully
identify new product opportunities or develop and bring new products to market
in a timely and cost-effective manner. Significant delays in new product
releases or significant problems or delays in enhancing existing products or
implementing new products to keep pace with new FPGA specifications could
seriously damage our business. We have, from time to time, experienced delays
in the scheduled introduction of new and enhanced products and we may
experience similar delays in the future.
We may sell fewer products and our revenue may decline if other vendors'
products are no longer compatible with ours or other vendors bundle their
products with those of our competitors and sell them at lower prices
Our ability to sell our products depends in part on the compatibility of
our products with other vendors' semiconductor design software and verification
hardware products. These vendors may change their products so that they will no
longer be compatible with our products. Some vendors already bundle their
products with other logic synthesis, physical synthesis or verification
products and sell the bundle at lower prices, and more vendors may do so in the
future. As a result, this may negatively affect our ability to offer
commercially viable or competitive products.
Our revenue could be reduced if large semiconductor design software companies
make acquisitions in order to join their extensive distribution capabilities
with our competitors' products
Large semiconductor design software vendors, such as Cadence Design
Systems, Inc., Mentor Graphics or Synopsys, may also acquire or establish
cooperative relationships with our other current competitors, including private
companies. Because large semiconductor design software vendors have significant
financial and organizational resources available, they may be able to further
penetrate the logic synthesis, physical synthesis or verification markets by
leveraging the technology and expertise of smaller companies and utilizing
their own extensive distribution channels. We expect that the semiconductor
design software product industry will continue to consolidate. For example,
Cadence acquired Ambit Design Systems, Inc., an ASIC logic synthesis company,
in 1998. It is possible that new competitors or alliances among competitors may
emerge and rapidly acquire significant market share, which would harm our
business and financial prospects.
Risks Related to our Products' Dependence on Intellectual Property Rights
We may not be able to preserve the value of our products' intellectual property
rights because we do not have any patents and other vendors could challenge our
intellectual property rights
Our products are differentiated from those of our competitors by our
internally developed technology that is incorporated into our products. If we
fail to protect our intellectual property rights, other vendors could sell
logic synthesis, physical synthesis or verification products with features
similar to ours, and this could reduce demand for our products. We protect our
intellectual property rights through a combination of copyright, trade secret
and trademark laws. We have only recently commenced a patent program and to
date have filed only six patent applications, none of which has been issued as
of this date. We generally enter into confidentiality or license agreements
with our employees, consultants and corporate partners, and generally seek to
control access to our intellectual property rights and the distribution of our
logic synthesis, physical synthesis and verification products,
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<PAGE>
documentation and other proprietary information. However, we believe that these
measures afford only limited protection. Others may develop technologies that
are similar or superior to our technology or design around the copyrights and
trade secrets we own. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise improperly obtain and use
our products or technology. Policing unauthorized use of our products is
difficult and expensive, and we cannot be certain that the steps we have taken
will prevent misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as
those in the United States. For example, with respect to our sales and support
operations in India, the laws in India do not protect proprietary rights to the
same extent as the United States, and Indian statutory law does not protect
service marks. Our means of protecting our proprietary rights may be
inadequate.
Our operating results would suffer if we were subject to a protracted
infringement claim or a significant damage award
Substantial litigation and threats of litigation regarding intellectual
property rights exist in our industry. We expect that logic synthesis, physical
synthesis and verification products may be increasingly subject to third-party
infringement claims as the number of competitors in our industry segment grows
and the functionality of products in different industry segments overlaps. We
are not aware that our products employ technology that infringes any valid
proprietary rights of third parties. However, third parties may claim that we
infringe their intellectual property rights. Any claims, with or without merit,
could:
. be time consuming to defend;
. result in costly litigation and/or damage awards;
. divert our management's attention and resources;
. cause product shipment delays; or
. require us to seek to enter into royalty or licensing agreements.
These royalty or licensing agreements may not be available on terms
acceptable to us, if at all. A successful claim of product infringement against
us or our failure or inability to license the infringed or similar technology
could adversely affect our business because we would not be able to sell the
impacted product without exposing ourselves to litigation risk and damages.
Furthermore, redevelopment of the product so as to avoid infringement would
cause us to incur significant additional expense. Although we maintain business
insurance, it would not cover an infringement claim, and we would be required
to pay any damages and legal expenses from a successful claim ourselves.
Other Risks Related to our Business
Our recent growth has placed a significant strain on our management systems and
resources, and we may be unable to effectively control our costs and implement
our business strategies as a result
As we continue to increase the scope of our operations, our headcount has
grown substantially. Our total number of employees increased from 101 as of
December 31, 1998 to 156 as of June 30, 2000. Our productivity and the quality
of our products may be adversely affected if we do not integrate, train and
motivate our new employees quickly and effectively. We also cannot be sure that
our revenue will continue to grow at a sufficient rate to absorb the costs
associated with a larger overall headcount, as well as training and recruiting
expenses.
We may be unable to attract, assimilate or retain highly qualified software
engineers and other research and development employees. There is a severe
shortage of qualified personnel in the San Francisco Bay area where our
headquarters are located. The scarcity of these persons in the current market
may cause us to incur higher salary costs, require us to provide larger stock
option grants or require us to establish additional costly
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<PAGE>
development locations outside the San Francisco Bay area. If we fail to
attract, motivate and retain these engineers, we may be unable to complete
development of our products or meet the demands of our customers in a timely
manner and our business would suffer.
We expect that any future growth we experience will continue to place a
significant strain on our management, systems and resources. To manage the
anticipated growth of our operations, we may be required to:
. hire, train, manage and retain additional qualified personnel,
especially software engineers;
. improve existing and implement new operational, financial and
management information controls, reporting systems and procedures; and
. establish relationships with additional suppliers and corporate
partners and maintain our existing relationships.
We rely on the services of our founders and other key personnel, and those
persons' knowledge of our business and technical expertise would be difficult
to replace
Our products and technologies are complex and we depend substantially on
the continued service of Bernard Aronson, our President and Chief Executive
Officer, and our existing engineering personnel, especially Kenneth S.
McElvain, our Chief Technology Officer and Vice President and a founder, and
Robert Erickson, our Vice President of Engineering. The loss of any of our key
employees could adversely affect our business and slow our product development
process. Although we maintain key person life insurance on Mr. McElvain, we do
not maintain key person life insurance on any of our other employees and the
amount of the policy on Mr. McElvain may be inadequate to compensate us for his
loss.
Because our strategy to expand our international operations is subject to
uncertainties, we may not be able to enter new international markets or
generate a significant level of revenue from those foreign markets
Customers outside North America accounted for $3.6 million of our total
revenue in 1999 and $2.7 million of our total revenue in the six months ended
June 30, 2000. Although international sales represented 20% of our total
revenue in the six months ended June 30, 2000, the absolute dollar amount of
our international sales was relatively small and must grow substantially in
order for us to achieve and maintain profitability. We plan to increase our
international sales activities, but we have limited experience marketing and
directly selling our products internationally.
We have sales offices in France, Germany, India, Israel, Japan and the
United Kingdom. We also rely on indirect sales in Asia, Europe and elsewhere.
Although our sales contracts provide for payment for our products in United
States dollars, our expenses incurred in foreign locations are generally
denominated in the respective local currency. To date we have not undertaken
any foreign currency hedging transactions, and as a result, our future expense
levels from international operations may be unpredictable due to exchange rate
fluctuations. Our international operations are subject to other risks,
including:
. the impact of economic conditions, such as interest rate increases or
inflation, which may lead to higher cost of capital and slower demand
for capital equipment used to build next generation networks;
. greater difficulty in accounts receivable collection and longer
collection periods;
. unexpected changes in regulatory requirements, including government
ownership of communications systems, laws relating to use of and sales
over the internet or tariffs;
. difficulties and costs of staffing and managing foreign operations;
. reduced protection for intellectual property rights in some countries;
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<PAGE>
. potentially adverse tax consequences, including the impact of expiry
of tax holidays;
. foreign currency fluctuations; and
. political instability, which may limit production of FPGAs in Asia or
reduce government or private sector spending on next generation
networking equipment.
Significant errors in our products or the failure of our products to conform to
specifications could result in our customers demanding refunds from us or
asserting claims for damages against us
Because our logic synthesis, physical synthesis and verification products
are complex, our products could fail to perform as anticipated or produce
semiconductors that contain errors that are undetected at any point in the
customers' design cycle. While we continually test our products for errors and
work with users through our customer support service organization to identify
and correct errors in our software and other product problems, errors in our
products may be found in the future. Although a number of these errors may
prove to be immaterial, many of these errors could be significant. The
detection of any significant errors may result in:
. the loss of or delay in market acceptance and sales of our products;
. delays in shipping dates for our products;
. diversion of development resources from new products to fix errors in
existing products;
. injury to our reputation;
. costs of corrective actions or returns of defective products;
. reduction in maintenance renewal rates; or
. product liability claims or damage awards.
Occasionally, we have warranted that our products will operate in
accordance with specified customer requirements. If our products fail to
conform to these specifications, customers could demand a refund for the
purchase price or assert and collect on claims for damages. Although we
maintain general business insurance, our coverage does not extend to product
liability claims, and we cannot assure you that our resources would be
sufficient to pay a damages award, if one were to arise.
Moreover, because our products are used in connection with other vendors'
products that are used to design complex FPGAs, ASICs and SoCs, significant
liability claims may be asserted against us if our products do not work
properly, individually or with other vendors' products for which we also do not
maintain insurance. Our agreements with customers typically contain provisions
intended to limit our exposure to liability claims. However, these limitations
may not preclude all potential claims and we do not insure against such
liabilities. Regardless of their merit, liability claims could require us to
spend significant time and money in litigation and divert management's
attention from other business pursuits. If successful, a product liability
claim could require us to pay significant damages. Any claims, whether or not
successful, could seriously damage our reputation and our business.
Risks Related to this Offering
Our common stock will likely be subject to substantial price and volume
fluctuations due to a number of factors, many of which will be beyond our
control, which may prevent our shareholders from reselling our common stock at
a profit
The securities markets have experienced significant price and volume
fluctuations in the past and the market prices of the securities of technology
companies have been especially volatile. The initial public offering price of
our common stock will be determined through our negotiations with the
underwriters. This market volatility, as well as general economic, market or
political conditions, could reduce the market price of
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<PAGE>
our common stock in spite of our operating performance. In addition, our
operating results could be below the expectations of investment analysts and
investors, and in response the market price of our common stock could decrease
significantly. Investors may be unable to resell their shares of our common
stock at or above the offering price. In the past, companies that have
experienced volatility in the market price of their stock have been the object
of securities class action litigation. If we were the object of securities
class action litigation, it could result in substantial costs, liabilities and
a diversion of management's attention and resources.
We have broad discretion in how we use the net proceeds of this offering, and
we may not use these proceeds effectively
Our management could spend most of the net proceeds from this offering in
ways which our shareholders may not desire or that do not yield a favorable
return. You will not have the opportunity, as part of your investment in our
common stock, to assess whether the net proceeds of this offering will be used
appropriately. As of the date of this prospectus, we plan to use the net
proceeds from this offering primarily for working capital, repayment of a bank
line of credit and general corporate purposes. We may also use the net proceeds
in future strategic acquisitions, but we do not have any acquisitions planned.
Until we need to use the net proceeds of this offering, we plan to invest the
net proceeds in investment grade, interest-bearing corporate and government
securities, but these investments may not produce income or may lose value.
Our officers and persons affiliated with our directors hold a substantial
portion of our stock and could reject mergers or other business combinations
that a shareholder may believe are desirable
Our directors, officers and individuals or entities affiliated with our
directors will beneficially own approximately 65.3% of our outstanding common
stock as a group immediately after this offering closes. Acting together, these
shareholders would be able to significantly influence all matters that our
shareholders vote upon, including the election of directors or the rejection of
a merger or other business combination that other shareholders may believe is
desirable.
The provisions of our charter documents may inhibit potential acquisition bids
that a shareholder may believe are desirable, and the market price of our
common stock may be lower as a result
Upon the closing of this offering, our board of directors will have the
authority to issue up to 10,000,000 shares of preferred stock. Our board of
directors can fix the price, rights, preferences, privileges and restrictions
of the preferred stock without any further vote or action by our shareholders.
The issuance of shares of preferred stock may delay or prevent a change in
control transaction. As a result, the market price of our common stock and the
voting and other rights of our shareholders may be adversely affected. The
issuance of preferred stock may result in the loss of voting control to other
shareholders. We have no current plans to issue any shares of preferred stock.
This provision could discourage potential acquisition proposals and could
delay or prevent a change in control transaction. It could also have the effect
of discouraging others from making tender offers for our common stock. As a
result, these provisions may prevent the market price of our common stock from
increasing substantially in response to actual or rumored takeover attempts.
This provision may also prevent changes in our management.
Investors who purchase shares in this offering will incur immediate dilution
and may experience further dilution in the future
If you purchase shares in this offering, you will experience immediate and
substantial dilution of $9.05 in pro forma net tangible book value per share
based on our book value as of June 30, 2000. Pro forma net tangible book value
per share represents the amount of our total assets less our total liabilities,
divided by the number of shares of our common stock that will be outstanding
immediately after this offering. Our existing
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shareholders paid an average price per share of $0.90 as of June 30, 2000 and
will have an average unrealized gain of $10.10 per share based on the assumed
initial public offering price of $11.00. We also have outstanding a large
number of stock options with exercise prices significantly below the assumed
initial public offering price. To the extent these options are exercised,
investors who purchase shares in this offering will experience further
dilution. We intend to continue to grant stock options to our employees as part
of our general compensation practices, and the exercise prices of those
options, generally the fair market value on the date of grant, may be lower
than the assumed initial public offering price and result in further dilution.
A large number of shares, 19,194,582, or 81.7% of our total outstanding common
stock may be sold into the market in the near future, which could cause the
market price of our common stock to drop significantly
Our current shareholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock could cause our stock price to
fall. In addition, the sale of these shares could impair our ability to raise
capital through the sale of additional stock.
Immediately after the closing of this offering, we will have outstanding
23,494,582 shares of common stock. This includes 4,300,000 shares that we are
selling in this offering, which may be resold immediately in the public market.
The remaining 18,994,582 shares will become eligible for resale in the public
market as shown in the table below.
<TABLE>
<CAPTION>
Number of Shares/Percent Date of Availability for Resale
Outstanding Immediately After This Offering into Public Market
------------------------------------------- -------------------------------
<C> <S>
18,544,576/78.9% The date that is 180 days after
the date of the final prospectus
due to agreements these
shareholders have with Synplicity
and the underwriters. However,
Robertson Stephens, Inc. can waive
this restriction and allow these
shareholders to sell their shares
at any time. Of these shares,
15,052,978 shares will be subject
to sales volume limitations under
the federal securities laws.
450,006/1.9% At various times thereafter upon
the expiration of applicable
holding periods and lapse of
certain rights of repurchase.
</TABLE>
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FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance
and involve known and unknown risks, uncertainties and other factors that may
cause our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the forward-
looking statements. These risks and other factors include those listed under
"Risk Factors" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this prospectus to conform our prior
statements to actual results, as a result of new information or otherwise.
We have obtained the market data and forecasts that we use in this
prospectus, including estimates of the size and growth rates of the market for
telecommunications equipment and the demand for semiconductor components for
internet-specific applications, from independent industry sources. We have not
independently verified their data.
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USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of common
stock that we are selling in this offering will be approximately $42.4 million
or $46.9 million if the underwriters exercise their over-allotment option in
full, based on an estimated initial public offering price of $11.00 per share
and after deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by us. We will not receive any of the $2.0
million of net proceeds of the 200,000 shares that will be sold by our majority
shareholders, Kenneth S. McElvain and Alisa Yaffa, if the underwriters exercise
their over-allotment option in full.
The principal purposes of this offering are to:
. fund our operations;
. increase our working capital;
. repay a term loan of approximately $817,000;
. fund our capital expenditures; and
. fund any potential acquisitions of complementary products,
technologies or businesses.
The amounts and timing of our actual expenditures for working capital
purposes will vary significantly depending on a number of factors, including
future revenue growth, if any, the amount of cash we generate from operations
and competitive and technological developments. As a result, we will retain
broad discretion in the allocation of the net proceeds from this offering. In
addition, we may use a portion of the net proceeds for further development of
our product lines and for acquisitions of or investments in products,
technologies and businesses. However, we currently have no present plans,
commitments or agreements with respect to any acquisitions or investments. We
have not yet determined the manner in which we will allocate the net proceeds
with any certainty. Pending these uses, we intend to invest the net proceeds in
interest-bearing, investment-grade corporate and government securities.
DIVIDEND POLICY
Since August, 1996 when we converted our company from an "S" corporation to
a "C" corporation for tax purposes, we have not declared or paid any dividends
on our capital stock. We currently expect to retain any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends. In addition, our bank line of credit generally prohibits us
from paying cash dividends.
21
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000. Our
capitalization is presented:
. on an actual basis;
. on a pro forma basis to give effect to the automatic conversion of all
outstanding shares of our preferred stock into shares of common stock
upon the closing of this offering; and
. on a pro forma as adjusted basis to reflect the automatic conversion
of our preferred stock upon the closing of this offering and our
receipt of the estimated net proceeds from the sale of 4,300,000
shares of common stock in this offering at an assumed initial public
offering price of $11.00 per share, after deducting the estimated
underwriting discounts and commissions and offering expenses payable
by us.
<TABLE>
<CAPTION>
As of June 30, 2000
--------------------------------
Pro Forma
Actual Pro Forma as Adjusted
-------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Long-term obligations, less current
portion................................. $ 584 $ 584 $ 584
-------- -------- --------
Shareholders' equity:
Convertible preferred stock, no par
value, 5,222,806 shares authorized;
3,415,198 shares issued and
outstanding, actual; 10,000,000
shares authorized, no shares issued
or outstanding pro forma and
pro forma as adjusted................. 14,858 -- --
Common stock, no par value, 110,000,000
shares authorized; 14,890,499 shares
issued and outstanding, actual;
19,194,582 shares issued and
outstanding, pro forma; 23,494,582
shares issued and outstanding,
pro forma as adjusted................. 2,330 17,188 59,577
Additional paid-in capital.............. 3,485 3,485 3,485
Notes receivable from shareholders...... (468) (468) (468)
Deferred stock-based compensation....... (2,870) (2,870) (2,870)
Accumulated deficit..................... (13,990) (13,990) (13,990)
-------- -------- --------
Total shareholders' equity........... 3,345 3,345 45,734
-------- -------- --------
Total capitalization............... $ 3,929 $ 3,929 $ 46,318
======== ======== ========
</TABLE>
In addition to the shares of common stock to be outstanding immediately
after the closing of this offering, we may issue additional shares of common
stock under the following plans and arrangements, which are excluded from the
table above:
. 4,115,377 shares of our common stock issuable upon exercise of options
outstanding at a weighted average exercise price of $2.87 per share as
of June 30, 2000;
. 14,035 shares of our common stock issuable upon exercise of warrants
outstanding at a weighted average exercise price of $4.28 per share as
of June 30, 2000; and
. a total of 4,475,433 shares of our common stock available for future
grant under our 2000 and 1995 stock option plans, 2000 employee stock
purchase plan and 2000 director option plan as of June 30, 2000,
excluding the annual increases in the number of shares authorized
under each of those plans beginning January 1, 2001. See "Management--
Incentive Plans" for a description of how these annual increases are
determined.
22
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was $3.3 million
or $0.17 per share. Pro forma net tangible book value per share represents the
amount of our total tangible assets reduced by the amount of our total
liabilities and divided by the total number of shares of our common stock
outstanding after giving effect to the automatic conversion of all of our
series A, series B and series C preferred stock. Dilution in pro forma net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of our common stock in this offering and the
pro forma net tangible book value per share of our common stock immediately
after the closing of this offering. After giving effect to the sale of the
4,300,000 shares of our common stock offered by us at an assumed initial public
offering price of $11.00 per share, and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma net tangible book value as of June 30, 2000 would have
been approximately $45.7 million or $1.95 per share of common stock. This
represents an immediate increase in pro forma net tangible book value of $1.78
per share to existing shareholders and an immediate dilution of $9.05 per share
to new investors in our common stock. The following table illustrates this
dilution on a per share basis:
<TABLE>
<S> <C> <C>
Estimated initial public offering price per share............ $11.00
Pro forma net tangible book value per share as of June 30,
2000..................................................... $0.17
Increase in net tangible book value per share attributable
to new investors......................................... 1.78
-----
Pro forma net tangible book value per share after this
offering................................................... 1.95
------
Pro forma dilution per share to new investors................ $ 9.05
======
</TABLE>
The following table summarizes on a pro forma basis after giving effect to
this offering, based on an assumed initial public offering price of $11.00 per
share, as of June 30, 2000, the differences between the existing shareholders
and new investors with respect to the number of shares of our common stock
purchased from us, the total consideration paid by the existing shareholders
and new investors and the average price paid per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders...... 19,194,582 81.7% $17,330,000 26.8% $ 0.90
New investors.............. 4,300,000 18.3 47,300,000 73.2 11.00
---------- ----- ----------- -----
Total.................... 23,494,582 100.0% $64,630,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing discussion and tables are based upon the number of shares of
our common stock issued and outstanding on June 30, 2000. If the underwriters
exercise their over-allotment option in full, our majority shareholders will
sell 200,000 of shares they own to new investors. As a result, existing
shareholders would hold 18,994,582 shares and new investors would hold
4,945,000 shares of our common stock. The table above excludes shares of our
common stock issuable upon exercise of options or warrants outstanding as of
June 30, 2000. As of that date, there were:
. 4,115,377 shares of our common stock issuable upon exercise of options
outstanding at a weighted average exercise price of $2.87 per share;
and
. 14,035 shares of common stock issuable upon exercise of warrants
outstanding at a weighted average exercise price of $4.28 per share.
Assuming the exercise in full of all of the outstanding options and
warrants, our pro forma as adjusted net tangible book value as of June 30, 2000
would be $2.09 per share, representing an immediate increase in net tangible
book value of $1.92 per share to our existing shareholders and an immediate
decrease in the net tangible book value of $8.91 to new investors.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes. The selected consolidated statement of operations data for the
years ended December 31, 1997, 1998 and 1999 and the selected consolidated
balance sheet data as of December 31, 1998 and 1999, are derived from, and are
qualified by reference to, the audited consolidated financial statements
included elsewhere in this prospectus. The selected consolidated balance sheet
data as of December 31, 1995, 1996 and 1997 and the selected consolidated
statement of operations data for the years ended December 31, 1995 and 1996 are
derived from our audited consolidated financial statements that are not
included in this prospectus. The selected consolidated statement of operations
data for the six months ended June 30, 1999 and 2000 and the selected
consolidated balance sheet data as of June 30, 2000 are derived from unaudited
consolidated financial statements included elsewhere in this prospectus. We
prepared the unaudited selected consolidated financial statements on
substantially the same basis as the audited consolidated financial statements
and, in our opinion, they include all adjustments, consisting only of normal
recurring adjustments, we consider necessary for a fair presentation of our
financial position and results of operations for these periods. The historical
results presented below are not necessarily indicative of future results.
The outstanding shares of our convertible series A preferred stock will
convert into shares of our common stock on a one for two basis and our series B
preferred stock and series C preferred stock will each convert into shares of
our common stock on a one for one basis in connection with the closing of this
offering. We will not pay any dividends or convert dividends into common stock
when our preferred stock is converted upon the closing of this offering. The
pro forma basic and diluted net loss per share for the year ended December 31,
1999 and the six months ended June 30, 2000 reflect the conversion of our
preferred stock (using the if-converted method from the original date of
issue).
24
<PAGE>
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
---------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------- ------- ------- -------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue:
License................ $ 272 $1,594 $4,679 $ 8,373 $13,019 $ 5,898 $ 9,754
Maintenance............ 93 204 775 2,655 5,156 2,184 4,106
------ ------ ------ ------- ------- ------- -------
Total revenue......... 365 1,798 5,454 11,028 18,175 8,082 13,860
Cost of revenue:
Cost of license........ 18 43 97 148 239 126 82
Cost of maintenance.... -- -- 64 531 1,187 518 691
------ ------ ------ ------- ------- ------- -------
Total cost of
revenue............. 18 43 161 679 1,426 644 773
------ ------ ------ ------- ------- ------- -------
Gross profit............ 347 1,755 5,293 10,349 16,749 7,438 13,087
Operating expenses:
Research and
development.......... 202 323 1,054 4,031 8,018 3,459 5,724
Sales and marketing.... 116 1,167 3,970 8,317 12,903 6,259 8,340
General and
administrative....... 46 287 788 1,620 2,586 1,217 1,541
Stock-based
compensation......... -- -- -- -- 175 4 386
------ ------ ------ ------- ------- ------- -------
Total operating
expenses............ 364 1,777 5,812 13,968 23,682 10,939 15,991
------ ------ ------ ------- ------- ------- -------
Loss from operations.... (17) (22) (519) (3,619) (6,933) (3,501) (2,904)
Other income (expense),
net................... 1 9 47 (19) (7) (47) 77
------ ------ ------ ------- ------- ------- -------
Net loss................ $ (16) $ (13) $ (472) $(3,638) $(6,940) $(3,548) $(2,827)
====== ====== ====== ======= ======= ======= =======
Basic and diluted net
loss per common
share................. $(0.01) $ -- $(0.04) $ (0.29) $ (0.52) $ (0.27) $ (0.20)
====== ====== ====== ======= ======= ======= =======
Basic and diluted
weighted average
shares used in per
share calculation..... 2,171 6,667 11,954 12,451 13,227 13,054 13,820
====== ====== ====== ======= ======= ======= =======
Pro forma basic and
diluted net loss per
common share
(unaudited)........... $ (0.42) $ (0.16)
======= =======
Shares used in pro forma
per share calculation
(unaudited)........... 16,432 17,742
======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------- June 30,
1995 1996 1997 1998 1999 2000
---- ------ ------ ------- ------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents.... $276 $2,093 $2,314 $ 1,193 $ 2,633 $ 8,248
Working capital (deficit).... 179 2,042 1,619 (1,273) (2,363) 1,496
Total assets................. 365 2,570 4,434 6,509 9,119 14,011
Long term obligations, less
current portion............ 125 125 403 2,343 720 584
Total shareholders' equity
(deficit).................. 114 2,065 1,939 (1,660) (734) 3,345
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our financial statements and the related notes included
elsewhere in this prospectus. In addition to historical information, the
discussion in this prospectus contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated by these forward-looking statements due to factors including, but
not limited to, those factors set forth under "Risk Factors" and elsewhere in
this prospectus.
Overview
We were founded in February 1994, and we released our first product,
Synplify, our FPGA logic synthesis software solution in 1995. Prior to the
release of Synplify, our activities primarily consisted of product development.
In the second quarter of 1997, we launched HDL Analyst, a complementary product
to Synplify that provides graphical representation and design analysis. In the
first quarter of 1999, we released Certify, our ASIC and SoC verification
product. We released Amplify Physical Optimizer, which we believe is the only
physical synthesis product for FPGAs, in March 2000 and Synplify Pro, an
advanced FPGA logic synthesis product, in May 2000. We began recognizing
revenue from Amplify Physical Optimizer and Synplify Pro in the second quarter
of 2000.
Our revenue, which consists of license and maintenance revenue, was $11.0
million in 1998, $18.2 million in 1999 and $13.9 million in the six months
ended June 30, 2000. Historically, we have generated the majority of our total
revenue from licenses. However, as a result of our growing installed customer
base maintenance revenue has increased as a percent of total revenue. We
currently derive substantially all of our total revenue from sales of a small
number of products. Sales of our Synplify, Synplify Pro and HDL Analyst
products were 100% of our license revenue in 1998, approximately 93% of our
license revenue in 1999 and approximately 86% of our license revenue in the six
months ended June 30, 2000. We expect that a substantial majority of our total
revenue in 2000 will continue to be generated from sales of our Synplify,
Synplify Pro and HDL Analyst products.
We sell our products directly through our sales force and indirectly
through channel partners that include international distributors, resellers and
FPGA manufacturers. Direct sales provide a majority of our total sales and
account for substantially all of our sales in North America. Direct sales were
approximately 60% of our total revenue in 1998, approximately 72% of our total
revenue in 1999 and approximately 77% of our total revenue in the six months
ended June 30, 2000. We have recently invested in expanding our direct sales
force in international locations. Revenue attributable to sales outside North
America accounted for approximately 19% of our total revenue in 1998, 20% of
our total revenue in 1999 and 20% of our total revenue in the six months ended
June 30, 2000. Pacific Design, our Japanese distributor, accounted for
approximately 9% of total revenue in 1999 and 6% of total revenue in the six
months ended June 30, 2000. No end customer accounted for over 10% of our total
revenue in 1999 or in the six months ended June 30, 2000. While we continue to
seek to diversify our customer base and expand the portion of our total revenue
which is derived from direct sales, we anticipate that our operating results
will continue to depend to a lesser extent on a relatively high volume of sales
to a relatively small number of international distributors and other channel
partners. In addition, we plan to continue to expand our international
operations significantly, since we believe international markets represent a
significant growth opportunity. We anticipate that international revenue will
increase as a percent of total revenue in the future.
We sell perpetual licenses to use our software products and also sell
related maintenance services. For each sale, we defer the recognition of
revenue until a purchase order is received from the customer, delivery of the
product and license key has occurred, the fee is fixed or determinable,
collection of the fee is probable based on completed credit review procedures
and there are no remaining obligations by us. Once all of the
26
<PAGE>
above conditions have been met, we recognize license revenue based upon the
residual method after all elements other than maintenance have been delivered
as prescribed by Statement of Position 98-9 Modification of SOP No. 97-2 with
Respect to Certain Transactions. Sales to international distributors are
recognized by us when the international distributor has resold the product to
an end user.
Our products are generally priced based on a perpetual fee per license
basis. Our per license list prices generally range from $9,000 to $115,000,
depending on the product. Our products do not require customization,
modification or on-site implementation services for our customers to install
and use them.
A substantial majority of customers that license our products also purchase
maintenance annually, which we price at 20% of the list price of the license.
Customers purchasing maintenance receive unspecified product updates and
electronic, internet-based technical support and telephone support. We
recognize revenue from maintenance ratably over the maintenance period, which
is typically one year. In general, customers on maintenance receive product
updates that support new FPGA devices when we make these updates available for
the licensed product. We believe these product updates are the primary reason a
majority of our customers renew maintenance. We have also provided a feature
limited version of one of our products to certain FPGA manufacturers for
distribution to their customers. As these arrangements do not provide for a
renewal fee for the licensed software or maintenance services, we have
concluded that we do not have vendor specific objective evidence of fair value
of the licensed software or maintenance on these type of arrangements as they
are not priced or offered separately. As a result, license and maintenance
revenue is recognized ratably over the period of each arrangement.
Maintenance revenue comprised 24% of our total revenue in 1998, 28% of our
total revenue in 1999 and 30% of our total revenue in the six months ended June
30, 2000. We expect maintenance revenue to continue to represent a significant
percent of total revenue and to vary as a percent of total revenue based on the
growth rate of license revenue and the number of customers renewing annual
maintenance. If maintenance revenue increases as a percent of total revenue,
our gross margin as a percent of total revenue may decrease due to lower
margins on maintenance revenue resulting from incremental maintenance support
costs. However, over the next 12 months, we do not expect maintenance revenue
as a percent of total revenue to vary significantly.
Our channel partners include distributors, resellers and FPGA vendors.
Although we enter into general sales contracts with our distributors, resellers
and FPGA vendors, none of our channel partners are generally obligated to
purchase any amount of our products pursuant to these contracts. We rely on our
channel partners to submit purchase orders for specific quantities of our
products. We do not consider backlog to be a meaningful measure of future
revenue because our customers can generally cancel orders without penalty.
Since our inception in 1994, we have incurred substantial costs to develop
our technology and products, to recruit and train personnel for our
engineering, sales and marketing and customer support departments and to
establish an administrative organization. As a result, we had an accumulated
deficit of $14.0 million as of June 30, 2000. We anticipate that our operating
expenses will increase substantially in the future as we fund additional
research and development projects, increase our sales and marketing operations
both domestically and internationally, develop new sales channels, increase our
customer support capabilities and improve our operational and financial
systems. Accordingly, we will need to generate higher revenue in the future to
achieve and maintain profitability.
We apply Statement of Financial Accounting Standards No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, or
SFAS 86, to software technologies we develop internally. We include internal
development costs in research and development, and we expense those costs as
they are incurred. SFAS 86 requires the capitalization of certain internal
development costs once technological feasibility is established, which, based
upon our development process, generally occurs upon the completion of a working
model. As the time period between the completion of a working model and the
general availability of our products has not been significant, we have not
capitalized any software development costs to date.
27
<PAGE>
We recorded unearned stock based compensation on our balance sheet of $3.8
million in connection with stock option grants to our employees that were
granted between June 1, 1999 and September 15, 2000. We will amortize this
stock-based compensation over the vesting period of the related options, which
is generally four years. During 1999 and the six months ended June 30, 2000, we
amortized $175,000 and $386,000 of stock compensation, respectively. We expect
the remaining deferred stock-based compensation at September 15, 2000 will be
amortized as follows: $566,000 for the six months ending December 31, 2000,
$1.0 million for the year ending December 31, 2001, $753,000 for year ending
December 31, 2002, $541,000 for the year ending December 31, 2003 and the
balance thereafter. The amount of stock-based compensation expense to be
recorded in future periods could decrease if options for which accrued but
unvested compensation has been recorded are forfeited.
As of June 30, 2000, we had approximately $9.3 million of federal and
$400,000 of state net operating loss carryforwards for tax reporting purposes
available to offset future taxable income. These net operating loss
carryforwards expire beginning in 2018 and 2002, respectively. We have not
recognized any benefit from the future use of loss carryforwards for these
periods or for any other period since inception because of uncertainty
surrounding their realization. The amount of net operating losses that we can
utilize may be limited under tax regulations in circumstances including a
cumulative stock ownership change of more than 50% over a three year period.
In order to increase market share in international locations and better
serve our global customers, we plan to further expand our international
operations. We expect that this expansion will require a substantial investment
in personnel, facilities and operations, which tend to be more costly than
similar investments in domestic operations. As a result of these investments in
our international operations, we may experience an increase in cost of sales
and other operating expenses disproportionate to revenue from those operations.
Our sales are generally denominated in United States dollars; however, a
portion of our operating expenses in international locations is denominated in
local currencies. Historically, our exposure to foreign exchange fluctuations
has been minimal. As our international sales and operations expand, we
anticipate that our exposure to foreign currency fluctuations will increase.
We had 156 employees as of June 30, 2000, which represents a substantial
increase from 101 employees as of December 31, 1998. This rapid growth has
placed significant demands on our management and operational resources. In
order to manage our growth effectively, we must implement and improve our
operational systems, procedures and controls on a timely basis.
28
<PAGE>
Results of Operations
The following table sets forth the results of our operations expressed as a
percent of total revenue. Our historical operating results are not necessarily
indicative of the results for any future period.
<TABLE>
<CAPTION>
Six Months
Years Ended Ended
December 31, June 30,
--------------------- -------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
License............................... 85.8 % 75.9 % 71.6 % 73.0 % 70.4 %
Maintenance........................... 14.2 24.1 28.4 27.0 29.6
----- ----- ----- ----- -----
Total revenue........................ 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of license....................... 1.8 1.4 1.3 1.6 0.6
Cost of maintenance................... 1.2 4.8 6.5 6.4 5.0
----- ----- ----- ----- -----
Total cost of revenue................ 3.0 6.2 7.8 8.0 5.6
Gross margin........................... 97.0 93.8 92.2 92.0 94.4
Operating expenses:
Research and development.............. 19.3 36.5 44.1 42.8 41.3
Sales and marketing................... 72.8 75.4 71.0 77.4 60.2
General and administrative............ 14.4 14.7 14.3 15.1 11.1
Stock-based compensation.............. -- -- 1.0 -- 2.8
----- ----- ----- ----- -----
Total operating expenses............. 106.5 126.6 130.4 135.3 115.4
Loss from operations................... (9.5) (32.8) (38.2) (43.3) (21.0)
Other income (expense), net............ 0.9 (0.2) -- (0.6) 0.6
----- ----- ----- ----- -----
Net loss............................... (8.6)% (33.0)% (38.2)% (43.9)% (20.4)%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 30, 1999 and 2000
Total revenue
Our total revenue consists of license revenue and maintenance revenue. Our
total revenue increased by 71.5% from $8.1 million for the six months ended
June 30, 1999 to $13.9 million for the six months ended June 30, 2000. These
increases were attributable to an increase in our customer base resulting in
substantial growth in license and maintenance revenue, as well as additional
sales to our existing customers.
License revenue. License revenue increased by 65.4% from $5.9 million for
the six months ended June 30, 1999 to $9.8 million for the six months ended
June 30, 2000. These increases were primarily attributable to an increase in
our customer base resulting in substantial growth in license revenue, as well
as additional sales to our existing customers. The increase also resulted from
a larger and more productive sales force and the introduction of our new
Certify, Amplify and Synplify Pro products.
Maintenance revenue. Our maintenance revenue increased by 88.0% from $2.2
million for the six months ended June 30, 1999 to $4.1 million for the six
months ended June 30, 2000. The increase in maintenance revenue was
attributable to both the increase in license sales to new and existing
customers, in connection with which we generally sell one year of maintenance
support services, as well as an increase in revenue from customers renewing
maintenance support services.
Cost of revenue
Cost of license revenue. Cost of license revenue includes product
packaging, software documentation and other costs associated with shipping, as
well as royalties due from us to third parties. Our cost of license
29
<PAGE>
revenue decreased 34.9% from $126,000 for the six months ended June 30, 1999 to
$82,000 for the six months ended June 30, 2000. As a percent of license
revenue, the cost of license revenue decreased from 2.1% for the six months
ended June 30, 1999 to 0.8% for the six months ended June 30, 2000. The
decrease in the cost of license revenue was primarily due to the shipment of a
product update to our customer base in the six months ended June 30, 1999. We
expect that the absolute dollar amount of the cost of license revenue will
continue to increase over the next 12 months and that the cost of license
revenue as a percent of license revenue will vary based on the timing of update
releases.
Cost of maintenance revenue. Cost of maintenance revenue consists primarily
of personnel and other expenses related to providing maintenance support to our
customers. Our cost of maintenance revenue increased 33.4% from $518,000 for
the six months ended June 30, 1999 to $691,000 for the six months ended June
30, 2000. The increase in cost of maintenance revenue in absolute dollars was
primarily attributable to increased hiring of customer support personnel to
provide improved levels of support to a growing installed customer base. As a
percent of maintenance revenue, the cost of maintenance revenue decreased from
23.7% for the six months ended June 30, 1999 to 16.8% for the six months ended
June 30, 2000. The decrease in the cost of maintenance revenue as a percent of
maintenance revenue was primarily due to the increased volume of maintenance
renewals in the latter period. We expect that the absolute level of cost of
maintenance revenue will grow in the next 12 months to support our growing base
of domestic and international customers.
Operating expenses
Research and development. Research and development expenses consist of
engineering costs to develop new products, enhance existing products and
perform quality assurance activities. Our research and development expenses
increased 65.5% from $3.5 million for the six months ended June 30, 1999 to
$5.7 million for the six months ended June 30, 2000. The increase in research
and development expenses in absolute dollars was primarily attributable to the
hiring of additional software engineers who are focused on both enhancing the
features and performance of existing products as well as developing new
products. As a percent of total revenue, research and development expenses
decreased from 42.8% for the six months ended June 30, 1999 to 41.3% for the
six months ended June 30, 2000. The decrease in research and development
expenses as a percent of total revenue was primarily related to the increase in
total revenue in the six months ended June 30, 2000. We believe that
significant investment in research and development has been and will continue
to be required to develop new products and enhance existing products to allow
us to further penetrate our target markets. We anticipate that research and
development expenses will increase in absolute dollars in the future.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions, travel and promotional and advertising costs. Our sales
and marketing expenses increased 33.2% from $6.3 million for the six months
ended June 30, 1999 to $8.3 million for the six months ended June 30, 2000. The
absolute dollar increase in sales and marketing expenses was primarily
attributable to the hiring of additional sales and marketing personnel,
increases in commissions due to increased sales and the expansion of our sales
offices, particularly in Europe. As a percent of total revenue, sales and
marketing expenses decreased from 77.4% for the six months ended June 30, 1999
to 60.2% for the six months ended June 30, 2000. The decrease in sales and
marketing expenses as a percent of revenue was primarily attributable to the
increase in total revenue for the six months ended June 30, 2000. We expect
that the absolute dollar level of sales and marketing expenses will continue to
increase in future periods.
General and administrative. General and administrative expenses represent
corporate, finance, human resource, administrative and legal expenses. Our
general and administrative expenses increased 26.6% from $1.2 million for the
six months ended June 30, 1999 to $1.5 million for the six months ended June
30, 2000. The absolute dollar level increase in general and administrative
expenses was primarily attributable to the hiring of additional finance and
operations personnel, as well as increased legal, accounting and other
consulting fees. As a percent of total revenue, general and administrative
expenses decreased from 15.1% for
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<PAGE>
the six months ended June 30, 1999 to 11.1% for the six months ended June 30,
2000. The decrease in general and administrative expenses as a percent of
revenue was primarily attributable to the increase in total revenue for the six
months ended June 30, 2000. We expect that the absolute dollar level of general
and administrative expenses will continue to increase to support our future
operations.
Stock-based compensation. Stock-based compensation was $4,000 for the six
months ended June 30, 1999, and $386,000 for the six months ended June 30,
2000. Of these amounts, employee stock compensation related to the following:
research and development expenses of $3,000 for the six months ended June 30,
1999, and $201,000 for the six months ended June 30, 2000; and selling, general
and administrative expenses of $1,000 for the six months ended June 30, 1999
and $185,000 for the six months ended June 30, 2000.
Other income (expense), net
Other income (expense), net consists of interest income, interest expense
and other miscellaneous expenses. Our other income (expense), net increased
from other expense of $47,000 for the six months ended June 30, 1999 to other
income of $77,000 for the six months ended June 30, 2000. As a percent of total
revenue, other expense increased from 0.6% for the six months ended June 30,
1999 to other income of 0.6% for the six months ended June 30, 2000. The
increase was primarily due to higher interest income on increased cash levels
in the six months ended June 30, 2000.
Years Ended December 31, 1998 and 1999
Total revenue
Our total revenue increased by 64.8% from $11.0 million for 1998 to $18.2
million for 1999. These increases were primarily attributable to an increase in
our customer base resulting in substantial growth in license and maintenance
revenue, as well as additional sales to our existing customers. In 1998, one
distributor accounted for approximately 11% of our total revenue and one end
customer accounted for approximately 12% of our total revenue. In 1999, no
distributor or end customer accounted for over 10% of our total revenue.
License revenue. License revenue increased by 55.5% from $8.4 million for
1998 to $13.0 million for 1999. The increase in revenue was primarily
attributable to increased market acceptance of our Synplify and HDL Analyst
products, and to a lesser degree, the introduction of our Certify product in
1999. The increase also reflects the results from a larger and more productive
sales force.
Maintenance revenue. Our maintenance revenue increased by 94.2% from $2.7
million for 1998 to $5.2 million for 1999. The increase in maintenance revenue
was primarily attributable to the increase in license sales to new and existing
customers, in connection with which we generally sell one year of maintenance
support services, as well as an increase in revenue from customers renewing
maintenance support services.
Cost of revenue
Cost of license revenue. Our cost of license revenue increased 61.5% from
$148,000 for 1998 to $239,000 for 1999. The increase in the cost of license
revenue in absolute dollars was due primarily to the increased volume of unit
shipments during the year. As a percent of license revenue, the cost of license
revenue remained unchanged at 1.8% for 1998 and 1999.
Cost of maintenance revenue. Our cost of maintenance revenue increased
123.5% from $531,000 for 1998 to $1.2 million for 1999. As a percent of
maintenance revenue, the cost of maintenance revenue increased from 20.0% for
1998 to 23.0% for 1999. The increase in cost of maintenance revenue was
primarily attributable to increased hiring of customer support personnel to
provide improved levels of service to our growing customer base.
31
<PAGE>
Operating expenses
Research and development. Our research and development expenses increased
99.0% from $4.0 million for 1998 to $8.0 million for 1999. As a percent of
total revenue, research and development expenses increased from 36.6% for 1998
to 44.1% for 1999. This increase in research and development expenses was
primarily attributable to an increase in the number of software engineers we
employed for the enhancement of existing products and the development of new
products, including Amplify Physical Optimizer.
Sales and marketing. Our sales and marketing expenses increased 55.1% from
$8.3 million for 1998 to $12.9 million for 1999. The absolute dollar increase
in sales and marketing expenses was primarily attributable to the hiring of
additional sales and marketing personnel, increases in commissions due to
increased sales and the expansion of our sales offices, particularly in Europe.
As a percent of total revenue, sales and marketing expenses decreased from
75.4% for 1998 to 71.0% for 1999. The decrease in sales and marketing expenses
as a percent of total revenue was primarily attributable to the increase in
total revenue for 1999.
General and administrative. Our general and administrative expenses
increased 59.6% from $1.6 million for 1998 to $2.6 million for 1999. The
absolute dollar level increase in general and administrative expenses was
primarily attributable to the hiring of additional finance and operations
personnel, as well as increased legal, accounting and other consulting fees. As
a percent of total revenue, general and administrative expenses decreased from
14.7% for 1998 to 14.2% for 1999. The decrease in general and administrative
expenses as a percent of total revenue was primarily attributable to the
increase in total revenue for 1999.
Stock-based compensation. We did not incur any stock-based compensation
expense for the year ended December 31, 1998. Stock-based compensation expense
was $175,000 for the year ending December 31, 1999. This compensation related
to the following: research and development expenses of $118,000, sales and
marketing and general and administrative expenses of $57,000.
Other income (expense), net
Our other expense, net decreased from $19,000 for 1998 to $7,000 for 1999,
as a result of increased interest income on a higher level of cash balances
offset by higher interest expense from a higher level of borrowing.
Years Ended December 31, 1997 and 1998
Total revenue
Our total revenue increased by 102.2% from $5.5 million for 1997 to $11.0
million for 1998. This increase was primarily attributable to an increase in
our customer base resulting in substantial growth in license and maintenance
revenue, as well as additional sales to our existing customers. Two
distributors and one end customer accounted for approximately 29% of our total
revenue in the aggregate in 1997 and 30% in 1998.
License revenue. Our license revenue increased by 78.9% from $4.7 million
for 1997 to $8.4 million for 1998. The increase in license revenue was
primarily attributable to the sale of an increased number of licenses for our
Synplify and HDL Analyst products.
Maintenance revenue. Our maintenance revenue increased by 242.6% from
$775,000 for 1997 to $2.7 million for 1998. The increase in maintenance revenue
was primarily attributable to the increase in license sales, with which we
generally sell one year of maintenance support services, as well as an increase
in the revenue from customers renewing maintenance support services.
Cost of revenue
Cost of license revenue. Our cost of license revenue increased 52.6% from
$97,000 for 1997 to $148,000 for 1998. The absolute dollar increase in the cost
of license revenue was due primarily to the
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<PAGE>
increased volume of unit shipments during the year. As a percent of license
revenue, the cost of license revenue decreased from 2.1% for 1997 to 1.8% for
1998. The decrease in cost of license revenue as a percent of license revenue
was primarily due to efficiencies achieved on the greater volume of product
shipments.
Cost of maintenance revenue. Our cost of maintenance revenue increased
729.7% from $64,000 for 1997 to $531,000 for 1998. As a percent of maintenance
revenue, the cost of maintenance revenue increased from 8.3% for 1997 to 20.0%
for 1998. The increase in both absolute dollars and as a percent of maintenance
revenue was primarily attributable to increased hiring of customer support
personnel to provide improved levels of support to a growing customer base.
Operating expenses
Research and development. Research and development expenses increased
282.4% from $1.1 million for 1997 to $4.0 million for 1998. As a percent of
total revenue, research and development expenses increased from 19.3% for 1997
to 36.6% for 1998. The increase in research and development expenses was
primarily attributable to an increase in the number of software engineers we
employed for the enhancement of existing products and the development of new
products, including Certify.
Sales and marketing. Sales and marketing expenses increased 109.5% from
$4.0 million for 1997 to $8.3 million for 1998. As a percent of total revenue,
sales and marketing expenses increased from 72.8% for 1997 to 75.4% for 1998.
This increase in both absolute dollars and as a percent of total revenue was
primarily attributable to increased hiring in both the marketing and sales
departments, increased trade show and travel costs, and to a lesser extent, the
expansion of our sales and marketing activities in Europe.
General and administrative. Our general and administrative expenses
increased 105.6% from $788,000 for 1997 to $1.6 million for 1998. As a percent
of total revenue, general and administrative expenses increased from 14.4% for
1997 to 14.7% for 1998. The absolute dollar level increase of general and
administrative expenses was primarily attributable to hiring of additional
finance and operations personnel, as well as other related costs.
Other income (expense), net
Our other income (expense), net decreased from other income of $47,000 for
1997 to other expense of $19,000 for 1998. The decrease in other income
(expense), net was primarily due to increased interest expense in 1998 as a
result of borrowings under our credit facilities and lower interest earnings on
available cash balances.
33
<PAGE>
Quarterly Results of Operations
The following table presents our consolidated operating results for each of
the six quarters in the period from January 1, 1999 through June 30, 2000. The
information for each of these quarters is unaudited and has been prepared on
the same basis as our audited consolidated financial statements appearing
elsewhere in this prospectus. In the opinion of our management, all necessary
adjustments, consisting only of normal recurring adjustments, have been
included to present fairly the unaudited quarterly results when read in
conjunction with our audited consolidated financial statements and the related
notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1999 1999 1999 1999 2000 2000
-------- -------- --------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue:
License................ $ 2,842 $ 3,056 $ 3,351 $ 3,770 $ 3,947 $5,807
Maintenance............ 1,008 1,176 1,396 1,576 1,875 2,231
------- ------- ------- ------- ------- ------
Total revenue......... 3,850 4,232 4,747 5,346 5,822 8,038
Cost of revenue:
Cost of license........ 33 93 35 78 48 34
Cost of maintenance.... 220 298 320 349 367 324
------- ------- ------- ------- ------- ------
Total cost of
revenue.............. 253 391 355 427 415 358
------- ------- ------- ------- ------- ------
Gross profit............ 3,597 3,841 4,392 4,919 5,407 7,680
Operating expenses:
Research and
development........... 1,648 1,811 2,082 2,477 2,687 3,037
Sales and marketing.... 2,866 3,393 3,131 3,513 3,603 4,737
General and
administrative........ 622 595 691 678 766 775
Stock-based
compensation.......... -- 4 41 130 189 197
------- ------- ------- ------- ------- ------
Total operating
expenses............. 5,136 5,803 5,945 6,798 7,245 8,746
------- ------- ------- ------- ------- ------
Loss from operations.... (1,539) (1,962) (1,553) (1,879) (1,838) (1,066)
Other income (expense),
net.................... (52) 5 34 6 (9) 86
------- ------- ------- ------- ------- ------
Net loss................ $(1,591) $(1,957) $(1,519) $(1,873) $(1,847) $ (980)
======= ======= ======= ======= ======= ======
As a Percent of Total
Revenue:
Revenue:
License................ 73.8 % 72.2 % 70.6 % 70.5 % 67.8 % 72.2 %
Maintenance............ 26.2 27.8 29.4 29.5 32.2 27.8
------- ------- ------- ------- ------- ------
Total revenue......... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of license........ 0.9 2.2 0.7 1.5 0.8 0.5
Cost of maintenance.... 5.7 7.0 6.8 6.5 6.3 4.0
------- ------- ------- ------- ------- ------
Total cost of
revenue.............. 6.6 9.2 7.5 8.0 7.1 4.5
------- ------- ------- ------- ------- ------
Gross profit............ 93.4 90.8 92.5 92.0 92.9 95.5
Operating expenses:
Research and
development........... 42.8 42.8 43.9 46.3 46.2 37.8
Sales and marketing.... 74.4 80.2 65.9 65.7 61.9 58.9
General and
administrative........ 16.2 14.0 14.5 12.7 13.1 9.6
Stock-based
compensation.......... -- 0.1 0.9 2.4 3.2 2.5
------- ------- ------- ------- ------- ------
Total operating
expenses............. 133.4 137.1 125.2 127.1 124.4 108.8
------- ------- ------- ------- ------- ------
Loss from operations.... (40.0) (46.3) (32.7) (35.1) (31.5) (13.3)
Other income (expense),
net.................... (1.3) 0.1 0.7 0.1 (0.2) 1.1
------- ------- ------- ------- ------- ------
Net loss................ (41.3)% (46.2)% (32.0)% (35.0)% (31.7)% (12.2)%
======= ======= ======= ======= ======= ======
</TABLE>
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<PAGE>
License revenue has increased each quarter due to a larger number of
product licenses sold to our customers reflecting increased market acceptance
of our products, as well as from increases in the size and productivity of our
sales force. Maintenance revenue has increased each quarter due to increases in
license sales to new and existing customers in connection with which we
generally sell one year of maintenance support, as well as from an increase in
revenue from customers renewing maintenance. While we have increased revenue
from both licenses and maintenance in each of our recent quarters, we believe
seasonal factors in our business may cause revenue in the quarter ended March
31 to decrease from the revenue of the immediately preceding quarter. These
seasonal factors include patterns in the capital budgeting and purchasing
cycles of our current and prospective customers and the economic incentives to
our sales force that generally occur in the last quarter of the calendar year.
Our operating results have varied significantly from quarter to quarter in
the past and may continue to fluctuate in the future. The quarterly
fluctuations are caused by a number of factors, including demand for our
products and services, size and timing of specific sales, level of product and
price competition, timing and market acceptance of new product introductions
and product enhancements by us and our competitors, the length of our sales
cycle, personnel changes, budgeting cycles of our customers, the impact of our
revenue recognition policies, changes in technology and changes caused by the
rapidly evolving market for FPGAs, ASICs and SoCs. Many of these factors are
beyond our control. Therefore, we believe that results of operations for
interim periods should not be relied upon as any indication of the results to
be expected or achieved in any future period.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of preferred stock including:
<TABLE>
<CAPTION>
Per Share Aggregate
Series Date Price Proceeds
------ ---- --------- ----------
<S> <C> <C> <C>
Series A preferred......................... October 1996 $2.25 $1,999,998
Series B preferred......................... March 1999 4.28 7,500,000
Series C preferred......................... March 2000 7.13 5,500,001
</TABLE>
We have also financed our operations through the sale of common stock,
equipment financing and cash generated from product sales. As of June 30, 2000,
we had cash and cash equivalents of $8.2 million, an accumulated deficit of
$14.0 million and working capital of $1.5 million.
Net cash used in operating activities was $1.9 million for the year ended
December 31, 1998 and $3.4 million for the year ended December 31, 1999. Net
cash used in operating activities was $294,000 for the six months ended June
30, 2000. Cash used in operating activities for each period resulted primarily
from net losses in those periods, and to a lesser extent, increases in accounts
receivable. These uses of cash were partially offset by increases in accrued
liabilities and deferred revenue.
Net cash used in investing activities was $1.5 million for the year ended
December 31, 1998 and $1.3 million for the year ended December 31, 1999. Net
cash used in investing activities was $542,000 for the six months ended June
30, 2000. Net cash used was primarily for purchases of new computers, equipment
and furniture as we expanded operations. We expect to use approximately $2.0
million of cash to purchase property and equipment over the next 12 months.
Net cash provided by financing activities was $2.3 million for the year
ended December 31, 1998 and $6.1 million for the year ended December 31, 1999.
Net cash provided by financing activities was $6.5 million for the six months
ended June 30, 2000. For 1998, net cash provided by financing activities was
primarily due to equipment loans and borrowings under a bank line of credit.
For 1999, net cash provided by financing activities was primarily due to the
sale of $7.4 million of series B preferred stock in March 1999. For the
six months ended June 30, 2000, net cash provided by financing activities was
primarily due to the sale of $5.5 million of series C preferred stock and the
proceeds from the exercise of employee stock options.
35
<PAGE>
We also have a $3.0 million line of credit with Silicon Valley Bank. The
line of credit expires in September 2000 and has an interest rate of prime plus
0.25%. Advances under the line of credit are limited to a specified percent of
eligible accounts receivable as defined in the line of credit agreement. As of
June 30, 2000, we had no borrowings outstanding under this line of credit and
had available borrowings under the line of approximately $1.9 million. We are
subject to financial ratio and other covenants in connection with this line of
credit and were in compliance with the covenants as of June 30, 2000. As of
June 30, 2000, we had $981,000 in fixed term obligations of which we intend to
repay approximately $817,000 from the proceeds of this offering. In addition,
as of June 30, 2000, we had approximately $900,000 available under an equipment
lease line with Comdisco, Inc., on which availability expires on December 31,
2000.
Our future liquidity and capital requirements will depend on numerous
factors, including:
. the amount and timing of license revenue;
. the extent to which our existing and new products gain market
acceptance;
. the extent to which customers continue to renew annual maintenance;
. the cost and timing of expansion of product development efforts and
the success of these development efforts;
. the cost and timing of expansion of sales and marketing activities;
and
. available borrowings under line of credit arrangements.
We believe that the net proceeds from this offering, together with our
current cash and investment balances and any cash generated from operations and
from current credit facilities, will be sufficient to meet our operating and
capital requirements for at least the next 12 months. However, it is possible
that we may require additional financing within this period. We have no current
plans, and we are not currently negotiating, to obtain additional financing
following the closing of this offering. We intend to continue to invest heavily
in the development of new products and enhancements to our existing products.
The factors described above will affect our future capital requirements and the
adequacy of our available funds. In addition, even if we raise sufficient funds
to meet our anticipated cash needs during the next 12 months, we may need to
raise additional funds beyond this time. We may be required to raise those
funds through public or private financings, strategic relationships or other
arrangements. We cannot assure you that such funding, if needed, will be
available on terms attractive to us, or at all. Furthermore, any additional
equity financing may be dilutive to shareholders, and debt financing, if
available, may involve restrictive covenants. If we fail to raise capital when
needed, our failure could have a negative impact on our ability to pursue our
business strategy and achieve and maintain profitability.
Qualitative and Quantitative Disclosures About Market Risk
We develop products in the United States and sell those products primarily
in North America, Europe and Japan. Our revenue for sales outside North America
was approximately 20% of our total revenue in 1999 and in the six months ended
June 30, 2000. As a result, our financial results could be affected by factors
such as changes in foreign currency exchange rates or weak economic conditions
in foreign markets. As all of our sales are currently made in U.S. dollars, a
strengthening of the U.S. dollar could make our products less competitive in
foreign markets. Our sales are generally denominated in U.S. dollars. Our
expenses incurred in foreign locations are generally denominated in the
respective local currency and translated to United States dollars using the
average exchange rate during the period. Balance sheet accounts are translated
using the current exchange rate in effect at the balance sheet date. The
effects of translation are included in the results of operations and to date
have not been material. Historically, our exposure to foreign exchange
fluctuations has been minimal; however, as our international sales and
operations expand, we anticipate that our exposure to foreign currency
fluctuations will increase. We have not undertaken any hedging actions to
reduce our exposure to changes in foreign currency exchange rates.
36
<PAGE>
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we
have concluded that we do not have material market risk exposure.
Our investment policy requires us to invest funds in excess of current
operating requirements in:
. obligations of the U.S. government and its agencies;
. investment grade state and local government obligations;
. securities of U.S. corporations rated A1 or P1 by Standard & Poors' or
the Moody's equivalents; and/or
. money market funds, deposits or notes issued or guaranteed by U.S. and
non-U.S. commercial banks meeting certain credit rating and net worth
requirements with maturities of less than two years.
As of June 30, 2000, our cash and cash equivalents consisted primarily of
demand deposits and money market funds held by large institutions in the U.S.
Recent Accounting Pronouncements
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin 101, Revenue Recognition, or SAB 101, which
outlines the basic criteria that must be met to recognize revenue and provides
guidance for presentation of revenue and for disclosure related to revenue
recognition policies in financial statements filed with the Securities and
Exchange Commission. We are required to adopt this pronouncement for our
company beginning in the fourth quarter of 2000. We believe that our adoption
of SAB 101 will not have a material impact on our financial position or results
of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, or SFAS 133. SFAS 133 establishes methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. We will be subject to SFAS 133
commencing in 2001. We have not yet determined what the impact of SFAS 133 will
be on our financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25, or FIN 44. FIN 44 clarifies the definition of an employee for
purposes of applying APB 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or award and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occur after either December 15, 1998 or January
12, 2000. To the extent that FIN 44 covers events occurring during the period
after December 15, 1998 or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying FIN 44 are recognized on a prospective
basis from July 1, 2000. We are currently evaluating the impact FIN 44 will
have on our financial position and results of operations.
37
<PAGE>
BUSINESS
Overview
We are a leading provider of software products that enable the rapid and
effective design and verification of large, complex semiconductors used in
internet infrastructure hardware, including next generation networking and
communications equipment, as well as various electronic devices. Our synthesis
software performs essential steps in the process of designing FPGAs, ASICs and
SoCs. We employ proprietary logic synthesis and physical synthesis technology
to simplify, improve and accelerate the design and verification of large
complex semiconductors, in particular, high-end FPGAs. We believe our software
products, coupled with our expert customer support, enable our customers to
meet performance goals and decrease the time to market of their products.
Industry Background
Internet infrastructure, next generation networking and communications
equipment
The internet continues to expand rapidly as a global medium for
communications, entertainment and commerce, redefining the way many businesses
and consumers interact and exchange information. The growth in internet use has
led to increased demand for high speed wireline and wireless networks, known as
next generation networks. Communications carriers, cable operators, internet
service providers, corporations and other entities are deploying next
generation networking equipment, which facilitates the transmission of growing
volumes of network traffic. This equipment includes fiber optic backbone
equipment, broadband access equipment, routers, switches, satellite devices,
base station equipment for wireless data and other infrastructure equipment. In
its publication "U.S. Industry and Trade Outlook 2000," the United States
Department of Commerce estimates that the projected worldwide market size for
telecommunications equipment in 2001 will be over $400 billion.
Intense competition and rapid technological advances have increased the
pressure on next generation networking equipment manufacturers to design and
produce equipment with higher performance, greater reliability and more
sophisticated features. Equipment providers must meet a challenging set of
requirements to be successful. Shorter product life cycles and competitive
markets require vendors to reduce the period from design to sale, known as time
to market. Networking and communications markets are complex and rapidly
changing. The constant evolution of standards by which networking equipment
manufactured by different vendors can communicate also increases pressure on
next generation networking equipment providers when designing new products.
In response to these competitive dynamics on the internet infrastructure
and next generation networks, networking equipment vendors are demanding
enhanced functionality from the semiconductors used in their products. inSearch
Research, a market research firm, projects that the value of semiconductors in
selected communications-related applications will grow at a compound annual
growth rate of 26% from 1998 to 2003 and that spending for semiconductor
components of communications-related applications will reach $70.6 billion per
annum by 2003.
Use of FPGAs, ASICs and SoCs for internet infrastructure, next generation
networking and communications equipment
Manufacturers of next generation networking equipment employ a wide variety
of advanced semiconductors, including application specific integrated circuits,
known as ASICs, system on a chip ASICs that also include a microprocessor,
known as SoCs, and increasingly, programmable semiconductors. Unlike standard,
off the shelf semiconductors, ASICs, SoCs and programmable semiconductors, such
as field programmable gate arrays, called FPGAs, are tailored to perform
specific functions defined by electronic product designers. ASICs and SoCs are
semiconductors that are customized prior to manufacture to perform a specific
function, whereas FPGAs are customized, or programmed, after the semiconductors
are manufactured. ASICs, SoCs and FPGAs are used to implement proprietary
intellectual property and to provide the equipment manufacturer's products with
enhanced performance, flexibility and differentiation from those of
competitors.
38
<PAGE>
ASICs and SoCs can achieve higher performance, lower power consumption and
lower unit cost when produced in volume than FPGAs. However, ASICs and SoCs
have longer development cycles as well as lengthy and expensive custom
fabrication processes prior to shipment to the equipment manufacturer. FPGAs
provide next generation networking equipment manufacturers with the ability to
create and modify semiconductor designs quickly and easily and make changes
even after the product is used by the customer. This ease of creation and
modification helps electronics manufacturers meet time to market requirements
by shortening development times. In this respect, FPGAs provide equipment
manufacturers with the ability to get to market quickly and the flexibility to
update their products to address rapidly changing industry and interoperability
standards. To take advantage of their relative strengths, several vendors have
announced plans to create semiconductors that combine an ASIC with a FPGA on a
single chip.
We believe that the expanded capacity and performance of ASICs and SoCs and
the relative ease of use and design flexibility of FPGAs will continue to fuel
growth in the use of these semiconductors in next generation networking
equipment. The capacity of FPGAs, ASICs and SoCs has increased in accordance
with Moore's law, which predicts that the functional capacity of semiconductors
will double approximately every 18 months. The advanced manufacturing processes
that facilitate these capacity increases also improve performance and further
expand the breadth of applications for which the semiconductors can be used.
According to the Semiconductor Industry Association's June 2000 estimates, the
total market size for ASICs is forecasted to grow from $9.8 billion in 1999 to
$22.6 billion in 2003, while the market for FPGAs and other programmable
semiconductors is estimated to grow from $2.9 billion in 1999 to $9.7 billion
in 2003. This represents a compound growth rate of 23% for ASICs and 35% for
FPGAs.
Challenges of designing FPGAs, ASICs and SoCs for internet infrastructure,
next generation networking and communications equipment
While higher capacity, more complex FPGAs, ASICs and SoCs are used in the
design of next generation networking equipment, they often require significant
resources to design and test their functionality. Large semiconductor designs
require more time to develop and test, which may limit the network equipment
manufacturer's ability to get to market quickly. While state of the art
semiconductors are designed to achieve high performance standards, reaching
these performance goals can require time consuming design processes. Electronic
product designers seek design solutions that increase productivity, are easy to
learn and use and result in high performance designs. To achieve these
objectives, electronic product designers, including equipment manufacturers
using FPGAs, ASICs and SoCs, have recognized the advantages of software
solutions, which can address critical needs.
To date, these software solutions have focused on several functions
including:
. Logic synthesis. Logic synthesis software compiles a high level
textual description of the desired function of a semiconductor into an
optimized network of elements, each of which is known as a logic or
memory element. Because the logic and memory elements must interact
and exhibit high performance, logic synthesis is critical to reduce
the number of required components and improve the frequency at which
the semiconductor can be operated.
. Physical synthesis. Physical synthesis software combines the function
of logic synthesis software with some of the functions of placement
and routing software. Placement and routing software processes the
optimized description of the semiconductor created by logic synthesis
to place the logic and memory elements in locations on the
semiconductor and to assign routes for wires between those placed
elements. The goal is to keep wires short in order to maximize
performance. Because a physical synthesis system controls the
locations of elements, it can more easily identify performance
limitations and fix them with a combination of placement changes and
logic synthesis optimizations.
. Verification. Verification software uses the information about the
functions of the semiconductor to test whether it will perform as
intended. For example, with ASICs, the designer must verify whether
the semiconductor will perform as intended and whether the proposed
design works with
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other components of the resulting product, such as software or a
communication module. Mistakes not identified prior to chip
manufacture are costly and require weeks or months for correction. We
believe that the nonrecurring cost for processing of a typical 0.18
micron ASIC is $500,000.
A number of software companies have attempted to provide products that
address these semiconductor design challenges, but we believe these products
fail to meet fully the needs of next generation networking equipment and other
high performance electronics manufacturers. Products in these categories have
exhibited a variety of shortcomings in addressing FPGA, ASIC and SoC design
requirements. They have proven to be too narrow in scope, limited in terms of
functionality by not being able to process a variety of FPGA components or
large designs, difficult and costly to use or some combination of the above.
Many existing logic synthesis software products do not meet users' needs,
because they:
. fail to achieve the user's performance and capacity requirements or to
do so within the allotted design time;
. were originally intended for ASICs and have been adapted for FPGAs,
and, as a result, they cannot exploit fully the features of a
particular FPGA;
. have lengthy processing times that either impair the electronic
product designers' ability to meet short time to market requirements
or limit the analysis of alternative designs such that performance
goals may suffer due to these constraints;
. require a lengthy training period before a designer can use them
productively, and therefore, equipment manufacturers must allocate a
substantial portion of their design budgets to training for skills
which are not otherwise valuable to their businesses;
. fail to incorporate features that support collaborative design of
complex, large FPGAs, which results in designers being unable to
exploit the benefits of those FPGAs; or
. need responsive and skilled after purchase user support, without which
a design may fall behind schedule or be rejected due to the risk that
the semiconductor will not function as required.
Many existing ASIC and SoC verification software products do not meet the
users' needs, because they:
. suffer from weaknesses, such as the inability to test large designs at
once due to size and operating speed limitations, that may lead
equipment manufacturers to avoid large and complex semiconductor
designs due to the risk that the finished product will not meet
functional or performance specifications; or
. require lengthy processing times that impair rapid time to market and
do not permit comprehensive software verification prior to the
availability of the ASIC, either of which increases the likelihood
that the ASIC will have to be redesigned before it can be produced in
volume.
Many existing ASIC and SoC emulation and prototyping products used for
verification do not meet users' needs because they:
. operate at reduced speeds necessitating the development of complex
connections to other system components;
. require a lengthy training period before a designer can use them
productively because the designer must have a detailed and extensive
understanding of the underlying equipment, which is irrelevant to the
specific design being tested, in order to configure the verification
equipment for a specific design;
. do not result in prototypes that could be duplicated and distributed
to geographically dispersed design team members, who are each focusing
on different aspects of the end product;
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. require substantial responsive and skilled after purchase user
support, without which a design may fall behind schedule or be
rejected due to the risk that the semiconductor will not function as
required; or
. prevent timely design completion due to lack of available upgrades and
maintenance releases.
Equipment manufacturers and electronic product designers increasingly seek
semiconductor design solutions that provide rapid productivity and highly
optimized results. High productivity and highly optimized results enable the
electronic product designer to exploit fully the capacity of the semiconductor.
They also seek vendors that provide responsive customer support that will not
stall the design process. These semiconductor design products should not
require next generation networking and other equipment manufacturers to train
their electronic product designers to be qualified as experienced semiconductor
device designers as well, unless those skills are otherwise useful to the
equipment manufacturer. A verification product should enable the designer to
test the semiconductor under realistic conditions by prototyping the entire
design at once and enabling the prototype to run at the actual speed required
for the finished semiconductor.
Our Solution
We are a leading provider of software products that enable the rapid and
effective design and verification of FPGAs, ASICs and SoCs for use in next
generation networking equipment. Our software solutions are also applied in the
design of other communications systems, computers, industrial and medical
electronics, as well as consumer products and military and aerospace systems.
Our software solutions improve performance and shorten development times for
complex FPGAs, ASICs and SoCs by simplifying, improving and automating key
logic synthesis, physical synthesis and verification functions. Our products
combine a number of sophisticated mathematical algorithms, electrical
engineering techniques and advanced software operations.
A key feature of our products is their ability to generate and display
concurrently three views of a semiconductor design--the textual design
description, a highly abstract graphical representation of the design
description and an optimized, detailed diagram showing the various elements of
the semiconductor design. As the designer changes the textual description, the
changes are automatically reflected in the other two views. These alternate
representations aid the designer to manipulate and optimize the design and
diagnose problems. Our software products also provide the following features
and benefits to our customers and their electronic product designers:
Design goal achievement. Our products enable designers to design products
quickly and intuitively that meet or exceed their semiconductor performance and
capacity utilization goals. Efficient and cost-effective manufacturing of a
semiconductor depends on full utilization of the semiconductor's capacity.
Users specify design constraints through our graphical user interface and then
use our products to automatically process the design to achieve function,
performance and capacity goals. The complex optimization operations that our
products perform employ the most advanced features of the target semiconductor
and result in a highly optimized design that improves performance of the
electronic equipment. As a result, our solutions may also enable designers to
use less costly semiconductors to achieve the same performance goals, thus
reducing costs.
Accelerated time to market. Electronic product designers require time
efficient solutions. Our products optimize small designs in seconds and large
designs in hours or even minutes, significantly faster than alternative
software. Reduced run time significantly shortens time to market because logic
synthesis, physical synthesis and verification are typically performed
repeatedly during the design process. In addition, our products allow designers
to select an optimal design from various design possibilities in the same
amount of time that alternative software would require to evaluate a single
solution.
Ease of use. Our products are designed to be easy to install, learn and
use. The user enters only easily acquired and understood information that is
specific to the design. Our products employ complex algorithms, but their
sophistication makes the designers' work simpler. Both experienced and novice
users value our products because they provide highly optimized designs that
require a minimum level of effort as compared
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with conventional approaches. We believe our solutions' ease of use and
graphical representations make them accessible to a larger group of designers
without sacrificing quality of results or achievement of design goals.
Capacity for complex designs. We believe our products provide significant
advantages for designing FPGAs, ASICs and SoCs that contain large numbers of
transistors. Our products can implement designs for the largest available FPGAs
by incorporating algorithms that increase run time linearly with design size,
as opposed to nonlinearly with alternative software products. Synplify Pro, one
of our new products, enhances electronic product designer productivity, as well
as the performance for complex designs. Amplify Physical Optimizer, one of our
new products, is intended specifically for large FPGA designs and incorporates
specialized features for optimizing these designs that can improve performance
up to 35% for large FPGAs. Certify, our ASIC and SoC verification product,
includes features that enable the designer to validate large designs using high
speed prototypes. Without these prototypes, ASIC and SoC designers may elect
not to undertake a large design because it cannot be adequately tested.
Comprehensive customer support. Because of the complex nature of our
customers' design activities, support services are an integral part of our
solution. We emphasize rapid resolution of customer questions by staffing our
customer support operation with knowledgeable engineers. These engineers, who
have substantial design experience with the entire design flow, answer incoming
support requests from our customers. We have provided our customer service
organization with sufficient resources so that our staff can address our goal
of responding to customer problems within 24 hours. We also make available
through our web site information regarding support solutions, problem
submission and problem status.
Our Strategy
Our objective is to extend our position as a leading software provider of
logic synthesis, physical synthesis and verification products for FPGAs, ASICs
and SoCs for use by next generation networking equipment manufacturers. To
achieve these goals we intend to:
Continue to invest in research, development and product innovation. We
intend to continue to introduce new products addressing different design tasks
in the general areas of logic synthesis, physical synthesis and verification
while continuing to improve our existing products. We expect to accomplish this
through substantial research and development investments while using our core
technology platform to drive development. We intend to continue to improve our
core optimization algorithms that underlie all of our products and to provide
timely support for new FPGA products as they are introduced. We intend to
extend our physical synthesis product line to include greater integration with
our ASIC verification product line and with design software from FPGA
semiconductor vendors and will enhance our ASIC verification product line with
more automation, features, options and third party software integration. We
also intend to produce ASIC products including an ASIC synthesis product
targeted at existing Synplify customers, a large percentage of whom also design
ASICs.
Focus on FPGAs and next generation networking and communications
equipment. We believe that expanding functional capacity, increased performance
expectations and time to market pressures are accelerating demand for FPGAs.
These increasingly sophisticated FPGAs will require innovative design software
to cope with more complex designs. We also believe that the FPGAs will increase
in importance and breadth for use in next generation networking and
communications equipment due to improvements in FPGA performance and time to
market pressures. We intend to maintain a strong focus on the next generation
networking and communications uses for FPGAs and to provide products that
facilitate the rapid design of high quality semiconductors. We have assembled
what we believe to be the largest engineering team focused on FPGA synthesis
products, and we intend to continue to expand this team to increase our focus
and extend our leadership in this area.
Leverage and expand strategic relationships. We have developed marketing
and engineering relationships with Altera, Lucent Technologies Inc. and Xilinx,
three leading manufacturers of FPGAs. In addition, we have original equipment
manufacturer agreements with Actel Corporation, Lattice Semiconductor
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Corporation and QuickLogic Corporation, which also manufacture and supply
FPGAs. We have developed an extensive relationship with Cadence that includes
reciprocal original equipment manufacturing arrangements and joint marketing
and sales efforts. We intend to continue and to expand our strategic
relationships to enhance the full value, flexibility and depth of our product
offerings.
Continue to emphasize customer success. We believe that the further growth
and quality of our customer support organization will continue to facilitate
our customers' success and build brand loyalty. Our skilled user support
organization contributed to the high renewal rate of our maintenance services
in 1999 and the six months ended June 30, 2000. We believe the strength of our
support services and ease of use of our products will continue to generate a
high percentage of maintenance revenue from renewals. We intend to establish
support centers outside North America that will be staffed by similarly
qualified individuals who will provide services to our customers in those
areas. As we acquire more customers and they purchase annual maintenance
services from us, we intend to continue to recruit persons with substantial
engineering experience so as to increase the size of our user support
organization. We believe the quality and experience of our user support staff
will continue to strengthen our competitive advantage. We intend to continue to
encourage prospective customers to evaluate and compare our customer support.
Increase sales to existing customer base. An increasing portion of our
revenue comes from the sale of additional licenses to our current customers for
our existing and newly developed products. We intend to continue to target our
customers producing next generation networking equipment, which are a majority
and growing portion of our customer base. In addition, we will continue to
market our products to our other existing customers, which produce many types
of electronic equipment including other communications systems, as well as
computers, medical and industrial electronics, consumer and military and
aerospace applications. Because of our large user base and the diverse nature
of their businesses, we believe that selling new products to our current
customers represents a significant opportunity for our company.
Expand global distribution channels. Presently, we sell our products
domestically through our direct, outside sales force and our telesales
organization. In order to further expand domestic sales coverage, we also have
sales and marketing relationships with semiconductor distributors Insight and
Wyle. We believe that markets outside North America offer a significant growth
opportunity for us as equipment designers in those markets more widely adopt
design techniques for semiconductors that include logic synthesis, physical
synthesis and verification software products. We also intend to strengthen our
direct sales presence and engage distributors in key international markets to
maximize sales coverage and user support.
Products and Customer Support
We develop and market software products for the rapid and effective design
and verification of FPGAs, ASICs and SoCs. Our products facilitate the creation
of high performance designs and enable the fast time to market required by our
customers in the next generation networking and communications equipment
market. Our logic synthesis, physical synthesis and verification products
enable electronic product designers to reduce overall design time. We have
developed and will continue to improve our comprehensive support organization
and expect to provide an increasing level of support to our customers.
Synplify and Synplify Pro
In 1995, we introduced our first product, Synplify, a logic synthesis
product which enables customers to implement their designs in FPGAs quickly and
easily. In May 2000, we launched Synplify Pro, an advanced FPGA logic synthesis
product incorporating improved productivity features and offering enhanced
results. To perform logic synthesis, Synplify and Synplify Pro employ
proprietary optimization algorithms, which we call Behavior Extracting
Synthesis Technology. Synplify and Synplify Pro take advantage of any
specialized features provided by the FPGA manufacturers that improve
performance for a particular design. Logic synthesis software products
transform a high level design specification into a format comprised of logic
elements and wires interconnecting those elements that is ready for
implementation in a semiconductor. Logic synthesis is a primary determinant of
FPGA, ASIC or SoC design performance. As a result, logic synthesis has
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a significant impact on the overall performance of the electronic system in
which the FPGA, ASIC or SoC resides. We believe that Synplify and Synplify Pro
have the industry's highest performance results on the basis of speed and
capacity utilization of the resulting FPGA. In addition, Synplify Pro
automatically identifies and restructures certain types of control circuits to
achieve better performance.
Because logic synthesis is performed multiple times during the design
process, the less time synthesis requires, the more quickly the engineer can
complete the design process. We believe that Synplify and Synplify Pro have the
industry's fastest synthesis run times. We employ algorithms that scale
linearly in run time with the size of the design. Small designs can be
synthesized in seconds and designs for the newest, largest FPGAs can be
synthesized in hours or even minutes. Synplify and Synplify Pro require only
the input of readily available design data. This information is entered via a
simple to use graphical user interface, which allows designers to specify all
design constraints in a single location quickly and intuitively. We believe
that our experienced customers embraced Synplify because it does not sacrifice
performance in order to achieve ease of use and short design times.
HDL Analyst
In 1997, we introduced HDL Analyst, a software product that is available as
an option to Synplify and is incorporated into most of our other products. A
key feature of HDL Analyst is its ability to generate and display concurrently
three views of a semiconductor design--the textual design description, a highly
abstract graphical representation of the design description and an optimized,
detailed diagram showing the various elements of the semiconductor design. As
the designer changes the textual description, the changes are automatically
reflected in the other two views. HDL Analyst enables designers to quickly
identify performance bottlenecks and identify other opportunities for
improvement.
Certify
In 1999, we introduced Certify, a software product for verification of
ASICs and SoCs using prototypes consisting of multiple FPGAs. Certify enables
design teams to create hardware prototypes early in the design process so that
design changes are easier and less costly. It is also important for verifying
that the final system will work as specified, will work with system level
software and will meet customer requirements. Customers who use Certify to
define their prototypes can begin system integration, software verification,
chip verification and system verification earlier than other approaches to
functional verification. Certify processes multimillion gate designs in a
single pass without the complex scripts commonly required by ASIC or SoC
synthesis products.
Certify is the first commercially available verification product
incorporating synthesis and that enables the user to create prototypes directly
from the user's textual design specification. We believe Certify is easier to
use than alternative solutions. Being able to operate the prototype at or near
the speed of the final product is very important for ASIC and SoC verification,
particularly for next generation networking and multimedia applications. Other
available approaches, such as logic simulation software, emulation systems or
reconfigurable prototyping systems, cannot run at a sufficient performance
level for many applications, such as mobile telephony, optical switching or
streaming video in real time. Certify enables designers to create prototypes
that operate at or near the speed of the final product and at substantially
higher frequencies than other available approaches by using our proprietary
embedded synthesis technology that optimizes the final prototype performance.
Certify achieves high performance for a multi-FPGA semiconductor prototype by
optimizing all FPGAs in the prototype simultaneously.
Amplify Physical Optimizer
In March 2000, we introduced Amplify Physical Optimizer, a software product
specifically created for designing large, complex FPGAs. The key innovation and
differentiating feature of Amplify Physical Optimizer is the method by which it
uses and improves physical implementation information provided by the designer
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during the synthesis process to produce a faster semiconductor. We believe that
Amplify Physical Optimizer is the industry's first commercially available
physical synthesis product for FPGA design. The user provides this physical
implementation information through a graphical interface, and Amplify Physical
Optimizer utilizes this information to improve the design performance up to
35%.
We believe Amplify Physical Optimizer improves time to market. Without
physical optimizations, users must undertake numerous time consuming iterations
of design, constraint and software option changes in hopes of creating a design
that has the desired performance and functionality. Our goal is to enable
designers to use Amplify Physical Optimizer to achieve successful design
specification in much less time.
FPGA components are sold in performance grades. An FPGA offering marginally
higher performance may cost substantially more than the next lower grade.
Amplify Physical Optimizer assists designers to use less expensive components
to meet the same design requirements.
As design sizes increase, there is a trend toward design of FPGAs by groups
in which portions of the design are allocated to individual members. When the
design is assembled, a performance bottleneck may result if the independently
designed portions of the semiconductor do not operate smoothly together.
Amplify Physical Optimizer has features that assist a group of designers to
collaborate on a single, large FPGA design. We believe these features result in
collaborative designs that achieve higher performance than would otherwise be
possible.
Customer support
Our products are designed to be employed quickly and effectively by our
customers and to minimize the level of support from us for the designer to be
productive. Our customers use our products along with design software from
semiconductor manufacturers and from other third party design software
developers. The overall semiconductor design process is complex, and our
customers may seek assistance with various aspects of the semiconductor design
process from us. We believe that a high level of customer service and support
of their activities is critical to the success of our business. We have
developed and expect to continue to improve our comprehensive service and
support organization to manage customer accounts. We provide support for our
products and services primarily from our Sunnyvale, California and Bangalore,
India locations. We plan to expand existing and establish additional service
and support sites outside of the United States to support customers in those
markets.
We provide technical support to our customers through maintenance and
support services. The first year of maintenance and support is generally sold
when the customer purchases a product license. Thereafter, customers may
annually elect to renew maintenance. In 1999, a substantial majority of our
customers that were receiving maintenance elected to renew their maintenance
with us. We price our maintenance service on a per license basis of 20% of the
list license fee. Maintenance service provides us with a valuable, ongoing
revenue stream.
We believe that customers will continue to renew maintenance because the
rate of innovation in the FPGA industry is high, and equipment manufacturers
expect us to support the latest components as soon as they are available.
Customers paying maintenance receive software updates for new FPGA components
when we make these updates available. In the past, we have issued at least two
new updates to our products per year. These frequent releases typically include
support for new components and enable our customers to optimize their designs
or create prototypes using those components. We work closely with leading FPGA
manufacturers to incorporate support for new components as quickly as possible.
Our service and support organization assists customers with product
installation and configuration. However, our service and support organization
devotes a majority of its efforts to assisting customers to resolve complicated
design and software questions that arise from the customers' complex design
tasks. We generally respond to customer support requests within 24 hours.
Effective execution of these tasks requires highly skilled engineers familiar
with our customers' design tasks as well as familiarity with third party
products that may be used by the customer in conjunction with our products. Our
support staff consists of engineers who have an average of eight years of
experience. We generally provide our support via electronic mail, our web site,
facsimile and telephone.
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Customers
Our software solutions enable the rapid development and effective design of
FPGAs, ASICs and SoCs for use in next generation networking and other
electronic equipment. We have sold our products to over 1,300 corporations,
governmental agencies and other organizations worldwide. The following tables
list our top 100 customers based on the dollar value of product orders in the
18 months ended June 30, 2000. These customers accounted for approximately 54%
of the dollar value of our product orders other than maintenance renewals over
that period:
Next Generation Networking and Communications Segments
<TABLE>
<CAPTION>
Broadband Internet Backbone Enterprise Networks
--------- ----------------- -------------------
<S> <C> <C>
Alcatel Business Systems Amber Networks, Inc. Astral Point Communications, Inc.
Cadant Cable Data Network
Solutions Ascend Communications, Inc. Cabletron Systems, Inc.
Caspian Networks, Inc. Cisco Systems, Inc. CoSine Communications, Inc.
Catena Networks, Inc. CopperCom, Inc. Crescent Networks, Inc.
Centerpoint Broadband
Technologies, Inc. Corning, Inc. Heidelberg Digital LLC
CIENA Corporation Foundry Networks, Inc. Mayan Networks Corp.
Digital Lightwave, Inc. Lucent Technologies Inc. Netcom Systems, Inc.
Efficient Networks, Inc. Luminous Networks, Inc. Nortel Networks Corporation
Exabyte Corporation Nokia Corp. Siemens AG
Excess Bandwidth Corporation Pirus Networks Sycamore Networks, Inc.
General Instrument Inc. PMC-Sierra, Inc.
Jasmine Networks Silicon Access Networks, Inc. Other Communications
--------------------
Ocular Networks, Inc. Texas Instruments, Inc. Conextant Systems, Inc.
Quantum Bridge
Communications, Inc. Vivace Networks, Inc. Italtel
Redback Networks, Inc. Yoda Networks, Inc. Scientific-Atlanta, Inc.
Tellabs, Inc. Sunrise Telecom, Inc.
Terayon Corporation Wireless Tenor Networks
--------
Turin Networks, Inc. AT&T Wireless Services, Inc. ViaSat, Inc.
LM Ericsson Vitesse Semiconductor Corp.
Motorola, Inc. Wavetek Wandell Gottermann
Tachyon, Inc.
Other Segments
<CAPTION>
Aerospace & Military Computer Consumer
-------------------- -------- --------
<S> <C> <C>
The Boeing Company Calimetrics, Inc. Agilent Technologies
Chrysalis-ITS Incorporated Compaq Computer Corporation Matsushita Electric
Computer Sciences Corporation ConnectCom Solutions, Inc. Industrial Co. Ltd.
Department of Defense Credence Systems Corporation Samsung Electronics Co., Ltd.
EMS Technologies Canada, Ltd. Etec Systems, Inc. Sony Corporation
Honeywell Inc. Fujitsu Microelectronics, Inc. Xerox Corporation
Lockheed Martin Hewlett-Packard Company
National Aeronautics and Interface Corporation Medical & Industrial
--------------------
Space Administration International Business Machines Lockheed Martin Advanced
Northrop Grumman Corporation Corporation Technology Laboratories
Raytheon Company Intel Corporation Teradyne, Inc.
Rockwell Collins, Inc. KLA-Tencor Corporation
TRW Systems & Information LG Information & Other
-----
Technology Group Communications, Ltd. Cadence Design Systems, Inc.
Xetron Corporation Micron Technology, Inc. Hitachi Micro Systems, Inc.
Mitsubishi Corporation iCompression, Inc.
NEC Corporation LTX Corporation
Philips Semiconductor STMicroelectronics N.V.
SAN Valley Systems, Inc.
Tektronix, Inc.
Toshiba America, Inc.
Unisys Corporation
</TABLE>
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Our customers often buy licenses for a single location, department or
division, and then, based upon the initial success of the products, later
expand their use of our products into other parts of their organizations. We
believe we can sell our existing products more extensively within our existing
customer sites and sell them new products as we expand our product line. We
will continue to pursue enterprise wide sales as appropriate. In 1997, Pacific
Design, Inc., our Japanese distributor, represented 15% of our revenue, and
Insight, a FPGA distributor, represented 10% of our revenue. In 1998, Pacific
Design represented 11% of our revenue, and Nortel Networks Corporation
represented 12% of our revenue. In 1999 and the six months ended June 30, 2000,
no single end customer comprised more than 10% of our revenue.
Marketing and Sales
Marketing
We focus our marketing efforts to create awareness for our products and
generate leads for our sales organization. Our strategy is to distinguish our
products by their high level of design performance, ease of use and time to
market advantages. We employ a wide variety of communication channels to inform
customers and potential customers about our products. These channels include
our web site, print and web advertising, public relations, web based seminars,
live seminars, trade shows and electronic mail notification to customers about
new product releases.
Direct sales
We employ a multi-channel approach to sell our products. We license our
software products primarily through our direct sales organization, as well as
distributors, resellers and other strategic partners. Our direct sales efforts
target customers who design semiconductors for next generation networking
equipment.
As of June 30, 2000, our direct sales staff consisted of 46 employees based
in 13 sales offices. Direct sales accounted for approximately 72% of total
revenue in 1999 and 77% of total revenue in the six months ended June 30, 2000.
Our sales teams generally include a sales manager, applications engineer and
telesales representative for each territory. A majority of our direct sales
contacts obtain an evaluation trial of our product from our web site. A
telesales representative prequalifies the potential customer. Our sales
managers target middle management during the sales cycle, while our application
engineer focuses on the end user to demonstrate that our products address the
customer's specific needs. The direct sales team also relies heavily on
distribution and strategic partners for demand creation and leads. Our typical
sales cycle varies by product from two weeks to several months.
We have domestic direct sales offices in or near Sunnyvale, California; San
Diego, California; Newport Beach, California; Chicago, Illinois; Andover,
Massachusetts; Durham, North Carolina; and Austin, Texas. We also have
international direct sales offices in Bracknell, England; Paris, France;
Munich, Germany; Bangalore, India; Netanya, Israel; and Tokyo, Japan.
Indirect sales
In addition to our direct sales strategy, we have established indirect
sales channels through distributors and other resellers. Our relationships with
distributors play a critical role in extending our reach to more customers.
Distribution is key in either assisting our direct sales staff or by being our
sole sales and support representatives in territories that include portions of
Europe and Asia. Revenue from distribution was approximately 20% of total
revenue in 1999 and 14% of total revenue in the six months ended June 30, 2000.
Outside North America, we have historically relied heavily on our indirect
sales channel. We have established a network of resellers and distributors in
Europe and Asia. Our international distributors and other resellers typically
perform marketing, sales and technical support functions in their country or
region. Each one may distribute directly to the customer, via other resellers
or through a mixture of both channels. We actively train our international
distributors in both product and sales methods.
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Strategic Relationships
Our strategic partners include FPGA manufacturers, FPGA distributors and
semiconductor design software companies, which provide information that assists
us with the successful development and distribution of our software solutions.
FPGA manufacturers. Our FPGA manufacturer partners work closely with us
before each product release to ensure that our products perform optimally with
their FPGAs. We rely on these FPGA manufacturers to provide us advance
information and answer detailed questions about their FPGA components and
software. Our FPGA partners currently include Actel, Altera, Atmel Corp.,
Cypress Semiconductor Corp., Lattice, Lucent, QuickLogic and Xilinx. Actel,
Lattice and QuickLogic also resell a limited feature version of Synplify. These
reselling relationships provide a strong endorsement of our products, expand
our sales channels and serve to introduce our products to a large number of
potential customers. These FPGA manufacturers generated approximately 5% of our
total revenue in 1999 and 6% of our total revenue in the six months ended June
30, 2000.
FPGA distributors. Insight and Wyle refer customers to us and we conduct
joint marketing activities with them. These distributors are of high strategic
value to us because they also distribute the most widely used FPGAs from Xilinx
and Altera, respectively.
Semiconductor design software companies. We work with semiconductor design
software company partners to integrate our complementary products with theirs
to create a more complete, easier to use set of design solutions for the
benefit of our mutual customers. Our semiconductor design software company
partners include those whose products perform functions such as design entry,
simulation, analysis, hardware prototyping and simulation acceleration
hardware. We have three agreements with Cadence, under which Cadence resells
our Synplify, HDL Analyst and Certify products in combination with some of its
products. We resell versions of Cadence's Affirma simulators bundled with our
products. We also have reselling agreements in place with Aldec Corp. and
TransLogic Corp. under which we resell their simulation and design entry
products, respectively.
Technology and Research and Development
Technology
Our products are used to design FPGAs, ASICs and SoCs, and we believe our
products are easier to use and produce superior results more rapidly than
alternative solutions. In addition, our core technology platform enables us to
produce innovative products quickly. These product and development
characteristics are made possible by our proprietary technology. Selected
features of our technology include:
Behavior Extracting Synthesis Technology. Our products are designed with
our proprietary technology to recognize and locate common circuit building
blocks within designs and maintain high level representations of these blocks
throughout the synthesis process. Other synthesis products use circuit
representations that maintain detailed level representations of the design, but
lose important information. By maintaining behavioral information that
describes a semiconductor's function throughout synthesis, we believe our
synthesis products make better overall optimizations, which result in better
circuit performance.
Physical synthesis innovations. Achieving superior performance in large
FPGAs requires solving specialized problems not encountered in smaller FPGAs.
We have invented and submitted applications for patents related to algorithms
that solve many of these problems. These algorithms involve combining synthesis
with processes that are normally applied later in the semiconductor design
process. This combination is termed physical synthesis, and we believe that we
are the first to offer products based on this technology to FPGA designers.
Fast, memory efficient algorithms. Long run times are a commonly
encountered barrier to processing large designs. Because synthesis is performed
repeatedly during the design process, fast run times are an important time to
market determinant. All of the algorithms employed in our products were
carefully selected and implemented for fast run times and efficient memory
utilization. These algorithms' run times increase linearly as design size
increases, as opposed to nonlinearly with other software products.
48
<PAGE>
Embedded electrical engineering knowledge. Synthesis and optimization of
complex circuits is accomplished through a large collection of algorithms and
heuristics. For any given circuit, the application of these algorithms requires
many decisions including, for example, which algorithms to use and in what
order to apply them. Implementing a synthesis product is considerably easier if
the user is required to make these types of decisions. However, this places the
burden of understanding the effects of synthesis algorithms on the user and
results in a difficult to use product. Instead, we build products with a level
of automation for making these decisions by embedding a high degree of
electrical engineering knowledge in the products so that optimization decisions
are performed automatically.
Research and development
We believe that strong product development capabilities are essential to
our strategy of enhancing our core technology, developing additional
applications and increasing the competitiveness of our product offerings. We
have invested significant time and resources in creating a structured process
for undertaking all product development projects. This process involves key
functional groups within our company and is designed to provide a framework for
defining and addressing the steps required to bring product concepts and
development projects to market successfully. Our product development strategy
emphasizes rapid innovation and product releases.
We have actively recruited key computer engineers and software developers
with expertise and degrees in computer science, electrical engineering and
other engineering disciplines. As of June 30, 2000, we had 80 employees engaged
in research and development activities and related customer support services.
Our research and development expenses were $4.0 million in 1998, $8.0 million
in 1999 and $5.7 million in the six months ended June 30, 2000.
Intellectual Property
Our software products rely on our internally developed intellectual
property and other proprietary rights. We rely primarily on a combination of
patent, copyright, trademark and trade secret laws, confidentiality procedures
and contractual provisions to protect our intellectual property and other
proprietary rights. However, we believe that these measures afford only limited
protection. We have six patent applications pending before the United States
Patent and Trademark Office, none of which has been granted to date. We license
our software products primarily under shrink wrap licenses that are included as
part of the product packaging. Shrink wrap licenses are not negotiated with or
signed by individual customers, and purport to take effect upon the opening of
the product package or use of the software license key. The legal
enforceability of shrink wrap licenses is uncertain in many jurisdictions. We
also generally enter into confidentiality agreements with our employees and
technical consultants. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or obtain and
use information that we regard as proprietary. Policing unauthorized use of our
products is difficult and we are unable to determine the extent to which piracy
of our software products exists. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the
United States.
We are not aware that our products employ technologies that infringe any
valid proprietary rights of third parties. We expect that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows and the functionality of
products in different industry segments overlaps. From time to time third
parties have claimed that our products violate their proprietary rights but
none of these claims has resulted in litigation or material expense. Any
infringement claims, with or without merit, could:
. be time consuming to defend;
. result in costly litigation or damage awards;
. divert management's attention and resources;
. cause product shipment delays; or
. require us to enter into royalty or licensing agreements.
These royalty or licensing agreements may not be available on terms
acceptable to us, if at all.
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<PAGE>
Government Regulation
Our success depends on the internet infrastructure equipment industry,
which in turn depends on increased use of the internet for e-commerce and other
commercial and personal activities. Laws and regulations have been proposed in
the United States and Europe to address privacy and security concerns related
to the collection and transmission of information over the internet. In the
United States, the Federal Trade Commission, or FTC, is considering regulations
that may require companies to:
. give adequate notice to consumers regarding information collection and
disclosure practices;
. provide consumers with the ability to have personal, identifying
information deleted from a company's database;
. clearly identify affiliations or a lack thereof with third parties
which may collect information or sponsor activities on a company's
website; and
. obtain express parental consent prior to collecting and using personal
identifying information obtained from children under 13 years of age.
Under the proposed FTC regulations, businesses that violate the regulations
could face monetary fines. At the international level, the European Union, or
EU, has adopted a directive that imposes restrictions on the collection and use
of personal data from individuals in EU member countries. This EU directive
could affect internet businesses elsewhere that have users in one or more EU
member countries.
The proposed FTC regulations, if adopted, or the EU directive, as adopted,
could adversely affect the ability of internet businesses to collect
demographic and personal information from users, which could have an adverse
effect on the ability of internet businesses to target product offering and
attract advertisers. Any of these developments could harm the results of
operation and financial condition of internet businesses and impair the growth
of the internet.
In addition to government regulations related to internet privacy concerns,
it is possible that any number of additional laws and regulations may be
adopted with respect to the internet covering issues such as obscenity, freedom
of expression, pricing, content and quality of products and services, copyright
and other intellectual property issues and taxation. As an example, a number of
proposals have been made at the federal and local level and by various foreign
governments to impose taxes on the sale of goods and services and other
internet activities. Recently, the U.S. Internet Tax Information Act was
enacted, which places a three-year moratorium on new state and local taxes on
internet commerce. However, the moratorium does not prevent the U.S. federal
government or foreign governments from adopting laws that impose taxes on
internet commerce. The passage of new laws or changes to existing laws intended
to address use of the internet could create uncertainty in the marketplace,
increase the cost of doing business on the internet, increase legal liabilities
from doing business on the internet or in some other manner have a negative
impact on internet commerce and substantially impair its growth. Since our
customers supply the semiconductor equipment to build and operate internet
networks, if use of the internet decreases, our customers may see a decreased
demand for their products. In that event, our customers may purchase fewer
licenses for our products, which would cause our license and maintenance
revenue to fall.
Competition
We compete in markets that are intensely competitive and rapidly evolving.
We face competition primarily from semiconductor design software companies that
provide software suites to perform a variety of design functions for all types
of semiconductors. We have experienced and expect to continue to experience
increased competition from current and potential competitors, many of which
have significantly greater financial, technical, marketing and other resources.
Companies offering competitive products vary in scope and breadth. Our
competitors include:
. providers of single solution products for logic synthesis, simulation
and graphic design entry, such as Mentor Graphics, through its
Exemplar Logic division;
50
<PAGE>
. programmable semiconductor manufacturers, such as Altera, Cypress,
Lattice and Xilinx;
. providers of general purpose synthesis and compiler software such as
Cadence, Mentor Graphics and Synopsys;
. providers of software design suites that include synthesis products
such as Innoveda, Inc. and Protel International Ltd.; and
. providers of verification software and hardware products such as Aptix
Corp., Cadence, IKOS Systems, Inc., Mentor Graphics and Synopsys.
While all of these companies compete with us, some also market or sell our
products.
We believe the principal factors that will draw end customers to a
semiconductor design software product, including logic synthesis, physical
synthesis and verification products, include:
. high performance and quality;
. short run time;
. ease of use;
. depth and breadth of product features;
. high quality customer support;
. frequency of product updates;
. conformance to industry standards; and
. price.
We believe that we compete favorably on these factors. However, we expect
competition in the semiconductor design software market for FPGAs, ASICs and
SoCs to increase significantly as new companies enter the market and current
competitors expand their product lines and services. Many of these potential
competitors are likely to enjoy substantial competitive advantages, including
greater resources that can be devoted to the development, promotion and sale of
their products. In addition, these potential competitors may have more
established sales channels, greater software development experience and/or
greater name recognition.
Employees
As of June 30, 2000, we had 156 full time employees, of whom 80 were
engaged in research and development and related customer support services, 46
in sales, 10 in marketing and 20 in finance, administration and operations.
None of our employees is represented by a labor union. We have not experienced
any work stoppages and consider our relations with our employees to be good.
Facilities
Our principal offices are located in a leased 34,200 square foot facility
in Sunnyvale, California and house substantially all of our research and
development and related customer support services employees, as well as all
marketing, administration and finance employees. Our lease for the Sunnyvale
facility expires in September 2002. In addition, we lease a 3,900 square foot
development and support center in Bangalore, India, a 3,000 square foot sales
office in Andover, Massachusetts, a 3,000 square foot facility in Tokyo, Japan
and a 1,300 square foot sales office in Austin, Texas. We also maintain leased
sales offices, each of 1,000 square feet or less, in or near Newport Beach and
San Diego, California; Austin, Texas; Chicago, Illinois; Durham, North
Carolina; Redmond, Washington; Bracknell, United Kingdom; Dornach, Germany;
Paris, France; and Netanya, Israel. Other than our Andover, Massachusetts and
Austin, Texas sales offices, none of the leases for our sales offices is more
than 12 months in duration. We expect that our current leased facilities will
be sufficient for our needs over the next 12 months.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
Our officers and directors, their ages as of June 30, 2000 and positions
are as follows:
<TABLE>
<CAPTION>
Name Age Position
---------------------------------------- --- ----------------------------------------
<C> <C> <S>
Bernard Aronson......................... 69 Chief Executive Officer, President and
Director
Kenneth S. McElvain..................... 40 Chief Technology Officer, Vice President
and Director
Alisa Yaffa............................. 36 Chairman of the Board of Directors, Vice
President of Intellectual Property and
Secretary
Douglas S. Miller....................... 42 Vice President of Finance and Chief
Financial Officer
Robert J. Erickson...................... 46 Vice President of Engineering
Andrew Haines........................... 50 Vice President of Marketing
Gary Meyers............................. 35 Vice President of Worldwide Sales
Prabhu Goel(/1/,/2/).................... 51 Director
Kevin G. Hall(/1/,/2/).................. 41 Director
</TABLE>
--------
(/1/)Member of the Audit Committee
(/2/)Member of the Compensation Committee
Bernard Aronson has served as our Chief Executive Officer, President and a
Director since July 1997. From February to July, 1997, Mr. Aronson served as
senior vice president and co-general manager of the EPIC Technology Group at
Synopsys, a semiconductor design software company. From July 1991 to February
1997, Mr. Aronson served as president of EPIC Design Technology, Inc., a
semiconductor design software company, and also served as a director of EPIC
from March 1992 to February 1997, until its merger with Synopsys. From March
1990 to August 1991, Mr. Aronson served as executive vice president of Zoran
Corporation, a semiconductor company. From 1987 to January 1990, he served as
president of ICI Array Technology, Inc., a contract assembly company. From 1976
to 1987, Mr. Aronson served as president of Pico Design, Inc., a semiconductor
chip design company that he founded and which became a wholly owned subsidiary
of Motorola in 1979. Mr. Aronson holds a Bachelor of Science degree in
Electrical Engineering from the City University of New York.
Kenneth S. McElvain, one of our co-founders, has served as our Chief
Technology Officer, Vice President and Director since inception. Mr. McElvain
also served as our President from our inception to January 1996, and our Chief
Executive Officer from January 1996 to July 1997. From March 1990 to January
1994, Mr. McElvain was a manager of the logic and timing optimization group and
chief architect of the AutoLogic logic synthesis product at Mentor Graphics.
From April 1984 to March 1990, Mr. McElvain was a senior member of technical
staff and the originator of the AutoLogic logic synthesis product at Silicon
Compilers, Inc., an intellectual property and semiconductor design software
company. From July 1980 to April 1984, Mr. McElvain served as a mainframe
designer at Hewlett Packard Company. Mr. McElvain holds a Bachelor of Arts
degree in Mathematics and a Bachelor of Science degree in Computer Science from
Washington State University.
Alisa Yaffa, one of our co-founders, has served as our Chairman of the
Board of Directors, Vice President of Intellectual Property and Secretary since
March 1997, October 1998 and our inception, respectively. Ms. Yaffa also served
as our Chief Executive Officer from our inception to January 1996 and our
President from January 1996 to July 1997. From inception to October 1998, Ms.
Yaffa served as Chief Financial Officer of our company. Prior to joining our
company, Ms. Yaffa served in various technical and marketing roles at Cadence
Design Systems, Inc., a semiconductor design company, Mentor Graphics, EDA
Systems, Inc., a design framework software company, and VLSI Technology, Inc.,
a semiconductor manufacturer that has subsequently been acquired by Philips
Semiconductor. Ms. Yaffa holds a Bachelor of Arts degree in Applied Mathematics
and Computer Science from University of California at Berkeley.
52
<PAGE>
Douglas S. Miller has served as our Vice President of Finance and Chief
Financial Officer since October 1998. From June 1998 to September 1998, Mr.
Miller was a self-employed financial consultant. From April 1997 to May 1998,
Mr. Miller served as Vice President and Chief Financial Officer of 3Dlabs,
Inc., a graphics semiconductor company. From October 1991 to April 1997, Mr.
Miller served as a partner at Ernst & Young LLP, and from July 1985 to
September 1991, Mr. Miller served as a manager at Ernst & Young LLP, a
professional services organization. Mr. Miller is a certified public
accountant. He holds a Bachelor of Science degree in Accounting from Santa
Clara University.
Robert J. Erickson, has served as our Vice President of Engineering since
April 1998. From June 1997 to April 1998, Mr. Erickson was a principal of
Vermilion DA, a semiconductor design software consulting firm. From May 1984 to
June 1997, Mr. Erickson served in various positions including a director of
engineering at Mentor Graphics. Mr. Erickson holds Bachelor of Arts degrees in
Physics and Electrical Engineering from Rice University and a Master of Science
degree in Electrical Engineering from Stanford University.
Andrew Haines has served as our Vice President of Marketing since November
1996. Prior to joining our company, Mr. Haines was active as president and
founder of Page Mill Marketing, Inc., a marketing consulting company from
February 1995 to November 1996. Previously, Mr. Haines acted as director of
marketing for Actel, an FPGA company from 1987 to 1993. Mr. Haines also held a
variety of marketing positions at VLSI Technology, Inc. and Intel Corporation.
Mr. Haines holds a Bachelor of Science degree in Physics from the University of
Wisconsin, Madison.
Gary Meyers has served as our Vice President of Worldwide Sales since
November 1999 and was Vice President of North American Sales from January 1999
to November 1999. Mr. Meyers joined Synplicity in January 1998 where he served
as Western Area Sales Manager until January 1999. From 1988 through 1997, Mr.
Meyers served in various senior sales and marketing roles at LSI Logic, a
semiconductor company, including from 1996 to 1997 as Director of Marketing of
the Communications Products Division, and from 1994 to 1996, as Major Account
Sales Manager. Mr. Meyers holds a Bachelor of Science degree in Electrical
Engineering from the University of Maryland and a Masters of Business
Administration degree from the University of California at Los Angeles.
Prabhu Goel has served as a director of our company since October 1996.
Since July 1992, Dr. Goel has served as Chairman of iPolicy Networks, Inc.,
formerly known as Duet Technologies, Inc., a networking company, and has served
as its Chief Executive Officer since October 1998. From July 1993 to June 1996,
Dr. Goel served as founder and chairman of Frontline Design Automation, a
semiconductor design software company, which merged with Avant! in 1996. From
January 1990 to June 1992, Dr. Goel served as a director of a business unit of
Cadence and from January 1990 to December 1991, Dr. Goel also served as the
President of the Advanced CAE Division of Cadence Design Systems. From July
1982 to December 1989, Dr. Goel served as founder and chief executive officer
of Gateway Design Automation, a semiconductor design software company. From
1973 to 1982, Dr. Goel was a member of the research and development team at
Wang Laboratories and IBM. Dr. Goel holds Masters of Science and Doctorate
degrees in Electrical Engineering from Carnegie Mellon University.
Kevin G. Hall has served as a director of our company since April 1999. Mr.
Hall has served as a general partner of Norwest Venture Partners since August
1993. Prior to that time, he served as a principal at Brentwood Associates,
another venture capital firm. Mr. Hall also sits on the board of directors of
Continuus Software Corporation, an electronic asset management software
company. Mr. Hall holds a Bachelor of Science degree and a Masters of Science
degree in Electrical Engineering from Purdue University and a Masters of
Business Administration degree from Stanford University.
Our board of directors currently consists of five members, each of whom is
subject to election at our annual meeting of shareholders. Our board of
directors can change the number of our directors from four to seven without the
approval of our shareholders.
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<PAGE>
Executive officers are elected by the board of directors on an annual basis
and serve until their successors have been duly elected and qualified. There
are no family relationships among any of our directors, officers or key
employees except that Mr. McElvain and Ms. Yaffa are married.
Board Committees
We have established an audit committee and a compensation committee.
Messrs. Goel and Hall are members of both the audit and the compensation
committees. The audit committee reviews our internal accounting procedures and
consults with and reviews the services provided by our independent accountants.
The compensation committee reviews and recommends to the board of directors the
compensation and benefits of all of our officers and establishes and reviews
general policies relating to compensation and benefits of our other employees.
Compensation Committee Interlocks and Insider Participation
Our board of directors established its compensation committee in April
2000. Prior to establishing the compensation committee, our board of directors
as a whole performed the functions delegated to the compensation committee. No
interlocking relationship exists between any member of our compensation
committee and any member of any other company's board of directors or
compensation committee.
Director Compensation
Directors do not currently receive any cash compensation from us for their
service as members of our board of directors, except for reimbursement for
reasonable travel expenses in connection with attendance at board and committee
meetings. Under our 1995 stock option plan and our 2000 stock option plan,
nonemployee directors are eligible to receive stock option grants at the
discretion of the board of directors, and, after this offering is completed,
nonemployee directors, who are not greater than 10% shareholders or who do not
represent greater than 10% shareholders, will receive stock options pursuant to
the automatic option grant program in effect under the 2000 director option
plan. See "--Incentive Stock Plans" for more about the automatic grant program.
54
<PAGE>
Executive Compensation
Summary compensation information
The following table sets forth the compensation earned for services
rendered to us in all capacities by our Chief Executive Officer and our four
most highly compensated executive officers whose total cash compensation
exceeded $100,000--collectively, the "Named Executive Officers"--for the year
ended December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-term
Compensation Compensation
---------------- ------------
Securities
Underlying All Other
Name and Principal Position Salary Bonus Options Compensation
--------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Bernard Aronson .................... $207,494 $50,000 266,666 $262
Chief Executive Officer, President
and Director
Robert J. Erickson ................. 190,398 -- 83,333 262
Vice President of Engineering
Kenneth S. McElvain................. 178,429 -- -- 262
Chief Technology Officer, Vice
President and Director
Gary Meyers......................... 121,365 99,087 166,665 262
Vice President of Worldwide Sales
Douglas S. Miller .................. 153,240 39,862 83,333 262
Vice President of Finance and Chief
Financial Officer
</TABLE>
The amounts in the column titled "Bonus" for Mr. Meyers represents sales
commissions.
The amounts in the column titled "All Other Compensation" represent
premiums for life insurance paid by us for Messrs. Aronson, Erickson, McElvain,
Meyers and Miller.
Option grants in last fiscal year
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers during the year ended
December 31, 1999. For grants in 2000 to the Named Executive Officers, see
"Related Party Transactions--Option Grants to our Directors and Executive
Officers." These options were granted under our 1995 stock option plan and as
individual grants not subject to the 1995 stock option plan. Options under the
1995 stock option plan generally vest over four years with 25% of the shares
subject to the option vesting on the first anniversary of the grant date, and
the remaining option shares vesting ratably monthly thereafter. The vesting
schedule on the grants not subject to the 1995 stock option plan are described
below.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------
Potential Realizable Value
at Assumed Annual Rates
Number of Percent of of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term
Options Employees Price per Expiration ---------------------------
Name Granted During Period Share Date 5% 10%
---- ---------- ------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bernard Aronson......... 266,666 13.23 $3.75 12/31/09 $ 3,778,082 $ 6,608,293
Robert J. Erickson...... 83,333 4.13 3.75 12/31/09 1,180,649 2,065,089
Kenneth S. McElvain..... -- -- -- -- -- --
Gary Meyers............. 40,000 1.98 1.88 01/29/09 566,714 991,246
43,333 2.15 2.93 11/30/09 613,935 1,073,842
83,332 4.13 3.75 12/31/09 1,180,635 2,065,064
Douglas S. Miller....... 83,333 4.13 3.75 12/31/09 1,180,649 2,065,089
</TABLE>
55
<PAGE>
The exercise price per share of each option was equal to the fair market
value of the common stock as determined by the board of directors on the date
of grant. To determine fair market value, our board of directors considered a
number of factors. The potential realizable values assume that the initial
public offering price of $11.00 per share was the fair market value of the
common stock on the date of grant and that the price of the applicable stock
increases from the date of grant until the end of the ten-year option term of
the annual rates specified. There is no assurance provided to any holder of our
securities that the actual stock price appreciation over the ten-year option
term will be at the assumed 5% and 10% levels or at any other defined level.
The percents of total options granted to employees during the period above
are based on an aggregate of 2,016,041 shares subject to options we granted to
employees and consultants in the year ended December 31, 1999.
With respect to the options set forth above, the 40,000 and 43,333 share
grants to Mr. Meyers were made pursuant to the 1995 stock option plan described
below and vest as of one-fourth of the shares on the first anniversary of the
date of grant and 1/48th of the shares per month thereafter. The remaining
grants set forth in the table above for Messrs. Aronson, Erickson, Meyers and
Miller are not subject to the terms of the 1995 stock option plan or the 2000
stock option plan described below. The nonplan options are exercisable as to
1/48th of the shares granted each month, and the nonplan options begin to vest
on July 22, 2001 for Mr. Aronson, April 28, 2002 for Mr. Erickson, January 30,
2003 for Mr. Meyers and October 14, 2002 for Mr. Miller.
Aggregate Option Exercises in 1999 and Values at December 31, 1999
The following table sets forth information with respect to the Named
Executive Officers concerning option exercises for the year ended December 31,
1999 and exercisable and unexercisable options held as of December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
Shares December 31, 1999 at December 31, 1999
Acquired on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bernard Aronson......... -- $ -- -- 266,666 $-- $ --
Robert J. Erickson...... -- -- -- 83,333 -- --
Kenneth S. McElvain..... -- -- -- -- -- --
Gary Meyers............. 62,500 178,125 -- 187,498 -- 1,529,068
Douglas S. Miller....... 83,332 155,831 -- 166,667 -- 1,364,170
</TABLE>
The value of in-the-money options represents the positive spread between
the exercise price of the stock options and the assumed initial public offering
price of $11.00 per share.
Incentive Plans
1995 Stock Option Plan
Our 1995 stock option plan was adopted by our board of directors and
approved by our shareholders in September 1995. The 1995 stock option plan was
amended most recently in December 1999. A total of 7,400,000 shares of common
stock have been reserved for issuance under our 1995 stock option plan and we
do not intend to grant any additional options from the 1995 plan after the
effectiveness of the registration statement of which this prospectus forms a
part. In April 2000, our board of directors approved the termination of the
1995 stock option plan as to future grants, effective upon the closing of this
offering. However, options outstanding under the 1995 stock option plan will
continue and will be governed by the terms of the 1995 stock option plan.
56
<PAGE>
The 1995 stock option plan provided for grants of incentive stock options
to our employees, including officers and employee directors, and nonstatutory
stock options to our consultants including nonemployee directors. The purposes
of our 1995 stock option plan were to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to our employees and consultants to our company and to promote the
success of our business. At the request of the board of directors, the
compensation committee administers our 1995 stock option plan and determines
the optionees and the terms of options granted, including the exercise price,
number of shares subject to the option and the exercisability thereof.
The term of the options granted under the 1995 stock option plan is set
forth in the option agreement. However, the term of an incentive stock option
may not exceed ten years and, in the case of an option granted to an optionee
who owns more than 10% of our outstanding stock at the time of grant, the term
of an option may not exceed five years. Options granted under the 1995 stock
option plan vest and become exercisable as set forth in each option agreement.
With respect to any optionee who owns more than 10% of our outstanding
stock, the exercise price of any stock option granted must be at least 110% of
the fair market value on the grant date.
No incentive stock options may be granted to an optionee, which, when
combined with all other incentive stock options becoming exercisable in any
calendar year that are held by that person, would have an aggregate fair market
value in excess of $100,000.
As of June 30, 2000, we had issued 2,890,518 shares of common stock upon
the exercise of options granted under our 1995 stock option plan, we had
outstanding options to purchase 3,467,381 shares of common stock at a weighted
average exercise price of $2.70 per share and 1,042,101 shares remain available
for future option grants under our 1995 stock option plan until the closing of
this offering.
2000 Stock Option Plan
Our 2000 stock option plan was adopted by our board of directors and
approved by our shareholders in April 2000. A total of 2,666,666 shares of
common stock have been reserved for issuance under our 2000 stock option plan,
together with an annual increase in the number of shares of common stock
reserved thereunder beginning on the first day of our fiscal year, commencing
January 1, 2001, in an amount equal to the lowest of:
. 2,333,333 shares of common stock;
. 5% of our outstanding shares of common stock on the last day of the
prior fiscal year; or
. an amount determined by our board of directors.
As a result of these annual increases, a maximum of 23,666,663 additional
shares of common stock could be issued over the ten year life of the 2000 stock
option plan.
The 2000 stock option plan provides for grants of incentive stock options
to our employees including officers and employee directors and nonstatutory
stock options to our consultants including nonemployee directors. The purposes
of our 2000 stock option plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to our employees and consultants to our company and to promote the
success of our business. At the request of the board of directors, the
compensation committee administers our 2000 stock option plan and determines
the optionees and the terms of options granted, including the exercise price,
number of shares subject to the option and the exercisability thereof.
The term of the options granted under the 2000 stock option plan is set
forth in the option agreement. However, the term of an incentive stock option
may not exceed ten years and, in the case of an option granted to an optionee
who owns more than 10% of our outstanding stock at the time of grant, the term
of an option may not exceed five years. Options granted under the 2000 stock
option plan vest and become exercisable as set forth in each option agreement.
57
<PAGE>
With respect to any optionee who owns more than 10% of our outstanding
stock, the exercise price of any stock option granted must be at least 110% of
the fair market value on the grant date.
No incentive stock options may be granted to an optionee, which, when
combined with all other incentive stock options becoming exercisable in any
calendar year that are held by that person, would have an aggregate fair market
value in excess of $100,000. In any fiscal year, we may not grant any employee
options to purchase more than 1,000,000 shares or 666,666 shares in the case of
an employee's initial employment.
The 2000 stock option plan will terminate in April 2010, unless our board
of directors terminates it sooner.
As of June 30, 2000, we had granted no options or issued any shares of
common stock upon the exercise of options granted under our 2000 stock option
plan, and 2,666,666 shares remain available for future option grants under our
2000 stock option plan.
2000 Employee Stock Purchase Plan
Our 2000 employee stock purchase plan was adopted by our board of directors
and our shareholders in April 2000 and will become effective upon the closing
of this offering. We have reserved a total of 666,666 shares of common stock
for issuance under the 2000 employee stock purchase plan, together with an
annual increase in the number of shares of common stock reserved thereunder
beginning on the first day of our fiscal year commencing January 1, 2001 in an
amount equal to the lowest of:
. 666,666 shares of common stock;
. 2% of our outstanding common stock on the last day of the prior fiscal
year; or
. an amount determined by our board of directors.
As a result of these annual increases, a maximum of 6,666,660 additional
shares of common stock could be sold over the remaining ten year life of the
employee stock purchase plan.
Our employee stock purchase plan is administered by the board of directors
and is intended to qualify under Section 423 of the Internal Revenue Code. Our
employees, including our officers and employee directors but excluding our 5%
or greater shareholders, are eligible to participate if they are customarily
employed for at least 30 hours per week and for more than five months in any
calendar year. Our 2000 employee stock purchase plan permits eligible employees
to purchase common stock through payroll deductions, which may not exceed the
lesser of 12% of an employee's cash compensation, defined as Form W-2
compensation plus contributions to our 401(k) plan, $18,000 per annum or 1,000
shares per purchase period.
Our 2000 employee stock purchase plan will be implemented in a series of
overlapping 24 month offering periods, and each offering period consists of
four six month purchase periods. The initial offering period under our employee
stock purchase plan will begin on the effective date of this offering, and the
subsequent offering periods will begin on the first trading day on or after May
1 and November 1 of each year. Each participant will be granted an option on
the first day of the offering period and the option will be automatically
exercised on the date six months later, the end of a purchase period,
throughout the offering period. If the fair market value of our common stock on
any purchase date is lower than such fair market value on the start date of
that offering period, then all participants in that offering period will be
automatically withdrawn from such offering period and re-enrolled in the
immediately following offering period. The purchase price of our common stock
under our 2000 employee stock purchase plan will be 85% of the lesser of the
fair market value per share on the start date of the offering period or at the
end of the purchase period. Employees may end their participation in an
offering period at any time, and their participation ends automatically on
termination of employment with our company.
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<PAGE>
Our 2000 employee stock purchase plan will terminate in April 2010, unless
our board of directors terminates it sooner.
2000 Director Option Plan
Our 2000 director option plan was adopted by our board of directors and our
shareholders in April 2000 and will become effective upon the effective date of
this offering. The 2000 director option plan was amended most recently in
October 2000. We have reserved a total of 100,000 shares of common stock for
issuance under the 2000 director option plan, together with an annual increase
in the number of shares of common stock reserved thereunder beginning on the
first day of our fiscal year commencing January 1, 2001 equal to the lowest of:
. 100,000 shares of common stock;
. fifteen hundredths of 1% of the outstanding shares of our common stock
on the last day of the prior fiscal year; or
. an amount determined by the board of directors.
As a result of these annual increases, a maximum of 900,000 additional
shares of common stock could be issued over the remaining ten year life of the
2000 director option plan.
The option grants under the 2000 director option plan are automatic and
non-discretionary, and the exercise price of the options is 100% of the fair
market value of our common stock on the grant date.
Nonemployee directors who do not hold or represent the holder of 10% or
more of our capital stock are eligible for grants under our 2000 director
option plan. The 2000 director option plan provides for an initial grant to a
new nonemployee director of an option to purchase 40,000 shares of common
stock. Subsequent to the initial grants, each nonemployee director will be
granted an option to purchase 10,000 shares of common stock at the next meeting
of the board of directors following the annual meeting of shareholders, if on
the date of the annual meeting, the director has served on the board of
directors for six months.
The term of the options granted under the 2000 director option plan is ten
years, but the options expire three months following the termination of the
optionee's status as a director or twelve months if the termination is due to
death or disability. The initial 40,000 share grants will become exercisable at
a rate of one-fourth of the shares on the first anniversary of the grant date
and at a rate of 1/48th of the shares per month thereafter. The subsequent
10,000 share grants will become exercisable at the rate of 1/48th of the shares
per month.
The 2000 director option plan will terminate in April 2010, unless our
board of directors terminates it sooner.
401(k) Plan
In July 1997, we adopted a Retirement Savings and Investment Plan, the
401(k) Plan, covering our full-time employees located in the United States. The
401(k) Plan is intended to qualify under Section 401(k) of the Internal Revenue
Code, so that contributions to the 401(k) Plan by employees or by us and the
investment earnings thereon are not taxable to the employees until withdrawn.
If our 401(k) Plan qualifies under Section 401(k) of the Internal Revenue Code,
our contributions will be deductible by us when made. Our employees may elect
to reduce their current compensation by up to the statutorily prescribed annual
limit of $10,500 in 2000 and to have those funds contributed to the 401(k)
Plan. The 401(k) Plan permits us, but does not require us, to make additional
matching contributions on behalf of all participants. We have made matching
contributions to the 401(k) Plan equal to one-half of the employee's
contribution of up to four percent of such employee's compensation up to a
maximum of $1,000. Our contributions vest ratably over four years. In 1999 and
the six months ended June 30, 2000, we contributed $120,000 and $114,000,
respectively, of matching funds to the 401(k) Plan.
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<PAGE>
Employment Agreements and Change in Control Arrangements
We have entered into the following employment, noncompete and change in
control arrangements and agreements with our current officers. For a
description of arrangements with our former officers, directors and substantial
shareholders, see "Related Party Transactions" on page 61.
In November 1996, we entered into an employment agreement with Andrew
Haines, our Vice President of Marketing. Pursuant to the agreement, Mr. Haines
received an initial annual salary of $150,000. In addition, Mr. Haines received
options to purchase 226,666 shares of our common stock pursuant to our employee
stock plan, 25% of which vest after one year and 1/48th of which vest every
month thereafter; except that an additional 12 months of options will vest if
Mr. Haines' employment is terminated without cause within six months after a
change in control of our company. Furthermore, if Mr. Haines' employment is
terminated for any reason independent of a change of control, we will pay Mr.
Haines 70% of his salary for three months of continued service. Pursuant to the
agreement, continued service is defined as a ten-hour work week.
In June 1997, we entered into an employment agreement with Bernard Aronson,
our Chief Executive Officer and President. Pursuant to the agreement, Mr.
Aronson received an initial annual salary of $165,000 and was eligible for an
incentive-based performance bonus of $50,000. In 1999, the Board of Directors
increased Mr. Aronson's salary and eliminated his incentive-based performance
bonus. In addition, upon joining our company in 1997, Mr. Aronson received
options to purchase six percent of the fully diluted outstanding shares of our
company as calculated on the day before his first day of employment, 25% of
which vested after one year and 1/48th of which vest every month thereafter;
except that 100% of the option shares will vest if Mr. Aronson's employment is
terminated or constructively terminated without cause within six months after a
change in control of our company. Pursuant to the terms of the agreement, a
change in control is defined as:
. a sale of all or substantially all of our assets or outstanding
shares; or
. a merger with any other corporation, as a result of which our
shareholders do not own more than 50% of the surviving entity.
Furthermore, Mr. Aronson received options to purchase an additional one and
one-half percent of the fully diluted outstanding shares of the company as
calculated on the day before Mr. Aronson's first day of employment, 100% of
which vest upon the fifth anniversary of his employment; provided, however,
that 100% of the option shares will vest upon the earlier of the effective date
of our initial public offering or a change in control which values our company
at $75,000,000 or more, should either occur prior to the fifth anniversary of
Mr. Aronson's employment.
In April 1998, we entered into an employment agreement with Robert
Erickson, our Vice President of Engineering. Pursuant to the agreement, Mr.
Erickson received an initial annual salary of $180,000. In addition, Mr.
Erickson received options to purchase 173,332 shares of our common stock
pursuant to our employee stock plan, 25% of which vest after one year and
1/48th of which vest every month thereafter; except that an additional 12
months of options will vest if Mr. Erickson's employment is terminated or
constructively terminated without cause within 12 months after a change in
control of our company. Furthermore, if Mr. Erickson's employment is terminated
without cause independent of any change in control, we will pay Mr. Erickson a
lump sum of six months' additional base salary.
In October 1998, we entered into an employment agreement with Douglas
Miller, our Vice President of Finance and Chief Financial Officer. Pursuant to
the agreement, Mr. Miller received an initial annual salary of $150,000. In
addition, Mr. Miller received options to purchase 166,666 shares of our common
stock pursuant to our employee stock plan, 25% of which vest after one year and
1/48th of which vest every month thereafter; except that an additional twenty-
four months of options will vest if Mr. Miller's employment is terminated or
constructively terminated without cause within 12 months after a change in
control of our company. Furthermore, if Mr. Miller's employment is terminated
without cause independent of any change in control, we will pay Mr. Miller a
lump sum of six months' additional base salary.
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Limitations of Liability and Indemnification Matters
Our articles of incorporation limit the liability of our directors and
executive officers to the maximum extent permitted by California law.
California law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duties as directors,
except liability for:
. any breach of their duty of loyalty to our company or our shareholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 316(a) of the California
Corporations Code; or
. any transaction from which the director derived an improper personal
benefit.
The limits on a director or officer's liability in our articles of
incorporation do not apply to liabilities arising under the federal securities
laws and do not affect the availability of equitable remedies such as
injunctive relief or rescission.
Our articles of incorporation, together with our bylaws, provide that we
must indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in that capacity,
regardless of whether our bylaws would otherwise permit indemnification. We
believe that the indemnification provisions of our articles of incorporation
and bylaws are necessary to attract and retain qualified persons as directors
and officers. We also maintain directors' and officers' liability insurance.
Prior to the effective time of this offering, we expect to enter into
agreements to indemnify our directors, executive officers and other employees
as determined by the board of directors. These agreements provide for
indemnification for related expenses including attorneys' fees, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as our directors and executive officers.
At present we are not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of our company where
indemnification will be required or permitted. Nor are we aware of any
threatened litigation or proceeding that might result in a claim for
indemnification.
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<PAGE>
RELATED PARTY TRANSACTIONS
All future transactions, other than compensation, stock options pursuant to
the plans and other benefits available to employees generally, including any
loans from us to our officers, directors, principal shareholders or affiliates,
will be approved by a majority of our board of directors, including a majority
of our independent and disinterested members of our board of directors. If
required by law, the future transactions will be approved by a majority of the
disinterested shareholders. These future transactions will be on terms no less
favorable to us than we could obtain from unaffiliated third parties.
Stock Issuances to our Directors, Officers and Principal Shareholders
In March 1994, we issued 11,338,800 shares of common stock at the fair
market value price of $0.004 per share to our founders, Kenneth S. McElvain and
Alisa Yaffa, for aggregate proceeds of $50,000. In September 1995, Mr. McElvain
and Ms. Yaffa contributed 5,466 shares of common stock to capital. In November
1995, we issued 666,666 shares of common stock at the fair market value price
of $0.15 per share to Andreas Bechtolsheim for $100,000.
In July 1997, we sold an aggregate of 1,138,311 shares of common stock upon
the exercise of an option to Bernard Aronson at the fair market value price of
$0.30 per share for aggregate proceeds of $341,492. In January 2000, we sold
53,333 shares of common stock upon the exercise of an option to each of Prabhu
Goel and Kevin G. Hall at the per share price of $5.10 per share.
We have completed the following preferred stock financings:
<TABLE>
<CAPTION>
Series of Preferred Date Number of Shares Sold Per Share Price
------------------- ------------ --------------------- ---------------
<S> <C> <C> <C>
A October 1996 888,885 $2.25
B March 1999 1,754,384 4.28
C March 2000 771,929 7.13
</TABLE>
Upon closing of this offering, all shares of outstanding preferred stock
will be automatically converted into shares of common stock. Listed below are
those persons who participated in our preferred stock and common stock
financings, who are our executive officers, directors or shareholders who
beneficially own 5% or more of our securities.
<TABLE>
<CAPTION>
Series A Series B Series C
Common Preferred Preferred Preferred Aggregate
Shareholder Stock Stock Stock Stock Consideration
------------------------ ---------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Bernard Aronson......... 1,138,311 22,220 -- -- $ 391,492
Andreas Bechtolsheim.... 666,666 433,333 -- 180,000 2,357,500
Prabhu Goel............. 53,333 433,332 105,730 98,161 2,398,395
Kevin G. Hall........... 53,333 -- 58,480 52,838 898,473
Kenneth S. McElvain and
Alisa Yaffa........... 11,338,800 -- -- -- 50,000
Norwest Venture Partners
entities.............. -- -- 1,169,590 70,176 5,500,004
</TABLE>
The entities listed above as Norwest Venture Partners entities include
Itasca VC Partners VII, LLP, its general partner, and Norwest Venture Capital
Management. Mr. Hall, one of our directors, is a limited partner of Itasca VC
Partners VII, LLP. Mr. Hall disclaims beneficial ownership of the shares held
by each entity, except to the extent of his pecuniary interest therein.
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<PAGE>
Option Grants to our Directors and Executive Officers
Stock option grants to directors and executive officers of our company are
described under the captions "Management--Director Compensation" and "--
Executive Compensation." Since our inception, we have granted options to our
directors and current executive officers, including the Named Executive
Officers as follows:
<TABLE>
<CAPTION>
Number
of
Name Shares Grant Date Exercise Price
--------------------------------------- ------- ----------------- --------------
<S> <C> <C> <C>
Bernard Aronson........................ 910,649 July 22, 1997 $0.30
227,662 July 22, 1997 0.30
266,666 December 31, 1999 3.75
Robert J. Erickson..................... 173,332 April 28, 1998 1.80
83,333 December 31, 1999 3.75
33,333 February 18, 2000 5.40
Prabhu Goel............................ 53,333 January 31, 2000 5.10
Andrew Haines.......................... 226,666 December 13, 1996 0.15
40,000 January 30, 1998 0.90
83,333 December 31, 1999 3.75
Kevin G. Hall.......................... 53,333 January 31, 2000 5.10
Gary Meyers............................ 83,333 January 30, 1998 0.90
40,000 January 29, 1999 1.88
43,333 November 30, 1999 2.93
83,332 December 31, 1999 3.75
33,333 February 18, 2000 5.40
Douglas S. Miller...................... 166,666 October 14, 1998 1.88
83,333 December 31, 1999 3.75
19,999 February 18, 2000 5.40
</TABLE>
Loans to Executive Officers
In November 1999, in connection with the purchase of 45,138 shares of our
common stock pursuant to a restricted stock purchase agreement, we loaned Mr.
Miller $84,635 under a secured, full recourse promissory note with an interest
rate of 6.20%, compounded annually. Principal and interest become due and
payable on the earlier of five years from the date of the note, the date when
the corresponding stock is sold or 90 days after Mr. Miller terminates his
employment with us. Additionally, in December 1999, in connection with the
purchase of 38,194 shares of our common stock pursuant to a restricted stock
purchase agreement, we loaned Mr. Miller $71,615 under a secured, full recourse
promissory note with interest at the rate of 6.21%, compounded annually.
Principal and interest become due and payable on the earlier of five years from
the date of the note, the date when the corresponding stock is sold or 90 days
after Mr. Miller terminates his employment with us. To date, Mr. Miller has not
paid any principal or interest on his promissory notes.
In September 1998, in connection with the purchase of 173,332 shares of our
common stock pursuant to a restricted stock purchase agreement, we loaned Mr.
Erickson $312,000 under two secured, full recourse promissory notes with
interest at the rate of 5.54%, compounded annually. Principal and interest
become due and payable on the earlier of five years from the date of the note,
the date the corresponding stock is sold or 90 days after Mr. Erickson
terminates his employment with us. To date, Mr. Erickson has not paid any
principal or interest on his promissory notes.
Loans from Executive Officers
In November 1998, Alisa Yaffa and Kenneth S. McElvain loaned us $125,000
pursuant to a promissory note due upon the earlier of February 28, 1999 or the
close of the next equity financing event for our company,
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<PAGE>
which occurred on March 9, 1999. This note accrued interest at the rate of
prime plus 0.25% per annum. In January 1999, Ms. Yaffa and Mr. McElvain loaned
us an additional $100,000 pursuant to a promissory note due upon the earlier of
April 30, 1999 or the close of the next equity financing event for our company,
which occurred on March 9, 1999. This note accrued interest at the rate of 15%
per annum, compounded annually. Both notes were repaid in full in March 1999.
In November 1998, Bernard Aronson loaned us $125,000 pursuant to a
promissory note due upon the earlier of February 28, 1999 or the close of the
next equity financing event for our company, which occurred on March 9, 1999.
This note accrued interest at the rate of prime plus 0.25% per annum. In
January 1999, Mr. Aronson loaned us an additional $300,000 pursuant to a
promissory note due upon the earlier of April 30, 1999 or the close of the next
equity financing event for our company, which occurred on March 9, 1999. This
note accrued interest at the rate of 15% per annum, compounded annually. Both
notes were repaid in full in March 1999.
Other Relationships
Agreement with iPolicy Networks. We had a Software Development Agreement
with iPolicy Networks dated June 26, 1998, pursuant to which iPolicy Networks
developed certain software for our company for a total fee of $75,000. iPolicy
Networks rendered its services in full, and we paid iPolicy Networks in full
for its services. No existing obligations remain under the agreement. Prabhu
Goel is the Chief Executive Officer of iPolicy Networks and he currently serves
as a member of our board of directors.
Loan from Andreas Bechtolsheim. In October 1995, one of our shareholders,
Andreas Bechtolsheim, loaned us $125,000 pursuant to a promissory note due
October 2002. The promissory note bears interest at a rate of 6.11% simple
interest and requires us to pay interest annually. We intend to retire the
$125,000 loan and accrued and unpaid interest with a portion of the proceeds of
this offering.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of June 30, 2000, and as adjusted
to reflect the sale of 4,300,000 shares of common stock offered hereby by:
. each shareholder known by us to own beneficially more than 5% of our
common stock;
. each of the Named Executive Officers;
. each director of our company; and
. all directors and executive officers as a group.
<TABLE>
<CAPTION>
Percent of Shares
Beneficially
Owned
Shares Beneficially -----------------
Owned Prior to After
Name Prior to Offering Offering Offering
---- ------------------- -------- --------
<S> <C> <C> <C>
Andreas Bechtolsheim................... 1,713,332 8.9% 7.3%
170 W. Tasman
San Jose, CA 95134
Norwest Venture Capital entities....... 1,239,766 6.5 5.3
245 Lytton Avenue, Suite 250
Palo Alto, CA 94306
Bernard Aronson........................ 1,068,457 5.6 4.5
Robert J. Erickson..................... 173,332 * *
Prabhu Goel............................ 1,123,888 5.9 4.8
Andrew Haines.......................... 233,499 1.2 1.0
Kevin G. Hall.......................... 1,404,417 7.3 6.0
Kenneth S. McElvain.................... 11,157,998 58.1 47.5
Gary Meyers............................ 109,333 * *
Douglas S. Miller...................... 83,332 * *
Alisa Yaffa............................ 11,157,998 58.1 47.5
All executive officers and directors as
a group (9 persons).................. 15,354,256 79.6 65.3
</TABLE>
--------
* Less than 1% of the outstanding shares of common stock.
Except as otherwise noted above, the address of each person listed on the
table is 935 Stewart Drive, Sunnyvale, California 94086.
As of June 30, 2000, 19,194,582 shares of our common stock were
outstanding, assuming that each share of series A preferred stock is converted
on a one for two basis to common stock and each share of series B and series C
preferred stock is converted on a one for one basis to common stock. The
columns regarding beneficial ownership before and after this offering assume
that the underwriters' over-allotment option is not exercised. If the over-
allotment option is exercised in full, we will sell an aggregate of 4,745,000
shares of new common stock. If the underwriter's over-allotment is exercised in
full, Mr. McElvain and Ms. Yaffa will sell an aggregate of 200,000 shares.
We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percent ownership of that person, we
have included the shares of common stock subject to options or warrants held by
that person that are currently exercisable or will become exercisable within 60
days after June 30, 2000, but we have not included those shares for purposes of
computing percent ownership of any other person. We have assumed unless
otherwise indicated below that the persons and entities named in the table have
sole voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
The beneficial ownership for Mr. Aronson includes 1,021,052 shares held by
Mr. Aronson's family trust and 47,405 shares held in trust for Mr. Aronson's
step-son. Within 60 days of June 30, 2000, 436,353 of the
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<PAGE>
shares held by Mr. Aronson, are subject to a right of repurchase at cost in the
event Mr. Aronson ceases to be an employee of Synplicity. The right of
repurchase lapses at a rate of approximately 18,972 shares per month.
The beneficial ownership for Mr. Erickson includes 73,554 shares, which
within 60 days of June 30, 2000 are subject to a right of repurchase at cost in
the event Mr. Erickson ceases to be an employee of Synplicity. The right of
repurchase lapses at a rate of approximately 3,611 shares per month.
The beneficial ownership of Dr. Goel includes 257,224 shares held in Dr.
Goel's family trust and 866,664 shares held by Dr. Goel as custodian for his
children. The beneficial ownership for Dr. Goel includes 53,333 shares held in
Dr. Goel's family trust, which within 60 days of June 30, 2000 are subject to a
right of repurchase at cost in the event Dr. Goel ceases to be a member of our
board of directors. The repurchase right lapses at a rate of approximately
1,111 shares per month.
The beneficial ownership reported for Mr. Hall includes 1,239,766 shares
held by Norwest Venture Partners VII over which Mr. Hall disclaims beneficial
ownership except to the extent of his pecuniary interest, 111,813 shares held
by Mr. Hall's family trust and 52,838 shares held by a family limited
partnership of which Mr. Hall is the general partner. The entities listed above
as Norwest Venture Partners entities include Itasca VC Partners VII, LLP, its
general partner, and Norwest Venture Capital Management. Mr. Hall, one of our
directors, is a limited partner of Itasca VC Partners VII, LLP. Mr. Hall
disclaims beneficial ownership of the shares held by each entity, except to the
extent of his pecuniary interest therein. The beneficial ownership for Mr. Hall
includes 53,333 shares held by Mr. Hall's family trust, which within 60 days of
June 30, 2000 are subject to a right of repurchase at cost in the event
Mr. Hall ceases to be a member of our board of directors. The repurchase right
lapses at a rate of approximately 1,111 shares per month.
Mr. McElvain and Ms. Yaffa are married and hold 10,753,932 shares of our
common stock as community property. In addition, the beneficial ownership of
Mr. McElvain and Ms. Yaffa includes 404,066 shares held by a family limited
liability company of which Mr. McElvain and Ms. Yaffa are the managing members.
In the event the underwriters' over-allotment option is exercised in full, Mr.
McElvain and Ms. Yaffa jointly will beneficially own 10,957,998 shares of
common stock representing 46.6% of the outstanding common stock following this
offering.
The beneficial ownership for Mr. Meyers includes 42,847 shares, which
within 60 days of June 30, 2000 are subject to a right of repurchase at cost in
the event Mr. Meyers ceases to be an employee of Synplicity. The right of
repurchase lapses at a rate of approximately 2,278 shares per month.
The beneficial ownership for Mr. Miller includes 6,944 shares, which within
60 days of June 30, 2000 are subject to a right of repurchase at cost in the
event Mr. Miller ceases to be an employee of Synplicity. The right of
repurchase lapses at a rate of approximately 3,472 shares per month.
The beneficial ownership of the persons set forth in the table above
includes the following options or warrants to purchase our common stock that
may be exercised by such person within 60 days of June 30, 2000:
Options Exercisable Within 60 Days of June 30, 2000
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Bernard Aronson.................................................... --
Robert J. Erickson................................................. --
Prabhu Goel........................................................ --
Andrew Haines...................................................... 101,278
Kevin G. Hall...................................................... --
Kenneth S. McElvain................................................ --
Gary Meyers........................................................ --
Douglas S. Miller.................................................. --
Alisa Yaffa........................................................ --
All directors and officers......................................... 101,278
</TABLE>
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, we will be authorized to issue
110,000,000 shares of common stock, no par value, and 10,000,000 shares of
undesignated preferred stock, no par value.
Common Stock
As of June 30, 2000, we had 19,194,582 shares of common stock outstanding
held by approximately 118 shareholders.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably any dividends that may be declared from time to
time by the board of directors out of funds legally available for that purpose.
In the event of our liquidation, dissolution or winding up, the holders of
common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to be issued upon
the closing of this offering will be fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, our board of directors will have the
authority, without action by our shareholders, to designate and issue preferred
stock in one or more series in order to provide us with flexibility in
connection with possible acquisitions and other corporate purposes. The board
of directors may also designate the rights, preferences and privileges of each
series of preferred stock, any or all of which may be superior to the rights of
the common stock. It is not possible to state the actual effect of the issuance
of any shares of preferred stock upon the rights of holders of the common stock
until the board of directors determines the specific rights of the holders of
the preferred stock. However, these effects might include:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; and
. delaying or preventing a change in control of our company without
further action by the shareholders.
We have no present plans to issue any shares of preferred stock.
Warrants
As of June 30, 2000, we had outstanding warrants to purchase 14,035 shares
of series B preferred stock issued to one shareholder at an exercise price of
$4.28 per share.
Our outstanding warrants to purchase preferred stock will convert to
warrants to purchase common stock upon the closing of this offering.
Holders of Registration Rights Can Require Us to Register Shares of Our Stock
for Resale
As of June 30, 2000, the holders of 15,262,081 shares of common stock and
14,035 shares of common stock issuable upon the exercise of warrants and the
conversion of preferred stock or their permitted transferees are entitled to
require us to register their shares under the Securities Act of 1933, as
amended. These rights are
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<PAGE>
provided under the terms of our agreement with the holders of registrable
securities. Under these registration rights, holders of at least a majority of
the then outstanding registrable securities converted from our preferred stock
or a majority of the registrable securities held by Kenneth McElvain and Alisa
Yaffa may require on two occasions that we register their shares for public
resale. We are obligated to register these shares if the requester requests
registration and only if the shares to be registered have an anticipated public
offering price of at least $2,000,000. In addition, holders of registrable
securities may require on two separate occasions per year that we register
their shares for public resale on Form S-3 or similar short-form registration,
if we are eligible to use Form S-3 or similar short-form registration, and the
value of the securities to be registered is at least $2,000,000. If we elect to
register any of our shares of common stock for any public offering, the holders
of registrable securities are entitled to include shares of common stock in the
registration. However, we may reduce the number of shares proposed to be
registered in view of market conditions. We will pay all expenses in connection
with up to three registrations on Form S-3, other than underwriting discounts
and commissions.
Anti-Takeover Effects of Some Provisions of California Law and Our Charter
Documents
A number of the provisions of California law and our articles of
incorporation and bylaws could make the acquisition of our company through a
tender offer, a proxy contest or other means more difficult and could make the
removal of incumbent officers and directors more difficult. These provisions
include cumulative voting for directors as required by the California
Corporations Code and our reservation of 10,000,000 shares of blank check
preferred. We expect these provisions to discourage coercive takeover practices
and inadequate takeover bids and, as a consequence, to inhibit fluctuations in
the market price of our shares that could result from an actual or rumored
takeover attempt. We also expect these provisions to encourage persons seeking
to acquire control of our company to first negotiate with our board of
directors. We believe that the benefits provided by our ability to negotiate
with the proponent of an unfriendly or unsolicited proposal outweigh the
disadvantages of discouraging such proposals. We believe the negotiation of an
unfriendly or unsolicited proposal could result in an improvement of its terms.
California law
Cumulative voting. Under California law, if any shareholder has given
notice of an intention to cumulate votes for the election of directors, that
shareholder as well as any other shareholder of the corporation is also
entitled to cumulate his or her votes at such election. Cumulative voting
provides that each share of stock normally having one vote is entitled to a
number of votes equal to the number of directors to be elected. A shareholder
may then cast all such votes for a single candidate or may allocate them among
as many candidates as the shareholder may choose. In the absence of cumulative
voting, the holders of a majority of the shares present or represented at a
meeting in which directors are to be elected would have the power to elect all
the directors to be elected at such meeting, and no person could be elected
without the support of holders of a majority of the shares present or
represented at such meeting. Cumulative voting enables a minority shareholder
or group of shareholders holding a relatively small number of shares to
disproportionately influence the outcome of the election of directors by
electing a representative or representatives to the board of directors.
However, no individual director may be removed (unless the entire board is
removed) if the number of votes cast against such removal, or not consenting in
writing to removal, would be sufficient to elect the director under cumulative
voting. This limitation on the ability of stockholders to remove members of the
board may make a potential change in control of our company a lengthier and
more difficult process.
California corporations whose stock is held by 800 shareholders of record
or more and included in the Nasdaq National Market can eliminate cumulative
voting with shareholder approval by adopting amendments to their articles of
incorporation or bylaws. We currently have no plans to eliminate cumulative
voting.
Size of the board of directors. Under California law, although changes in
the number of directors must in general be approved by a majority of the
outstanding shares, the board of directors may fix the exact number of
directors within a stated range set forth in the articles of incorporation or
bylaws, if that stated range has been approved by the shareholders. The ability
of the board of directors to alter the size of the board without
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<PAGE>
stockholder approval enables it to respond quickly to a potential opportunity
to attract the services of a qualified director or to eliminate a vacancy for
which a suitable candidate is not available. Our board of directors currently
consists of five members; the board may change the number of our directors
within a range of four to seven directors without the approval of our
shareholders.
Charter documents
Our bylaws establish an advance notice procedure for shareholder proposals
to be brought before an annual meeting of our shareholders, including proposed
nominations of persons for election to the board of directors. At an annual
meeting, shareholders may only consider proposals or nominations specified in
the notice of meeting or brought before the meeting by or at the direction of
the board of directors. Shareholders may also consider a proposal or nomination
by a person who was a shareholder of record on the record date for the meeting,
who is entitled to vote at the meeting and who has given to our Secretary
timely written notice, in proper form, of his or her intention to bring that
business before the meeting. The bylaws do not give the board of directors the
power to approve or disapprove shareholder nominations of candidates or
proposals regarding other business to be conducted at a special or annual
meeting of the shareholders. However, our bylaws may have the effect of
precluding the conduct of that item of business at a meeting if the proper
procedures are not followed. These provisions may also discourage or deter a
potential acquirer from conducting a solicitation of proxies to elect the
acquirer's own slate of directors or otherwise attempting to obtain control of
our company.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is BankBoston, N.A.,
which is located at 150 Royall Street, Canton, Massachusetts 02021. BankBoston,
N.A.'s telephone number is (781) 575-3120.
Nasdaq Stock Market Listing
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol SYNP.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our stock.
Future sales of substantial amounts of our common stock in the public market
following this offering or the possibility of such sales occurring could
adversely affect prevailing market prices for our common stock or could impair
our ability to raise capital through an offering of equity securities.
After this offering, we will have outstanding 23,494,582 shares of common
stock, based upon shares outstanding as of June 30, 2000, assuming no exercise
of the underwriters' over-allotment option and no exercise of outstanding
options or warrants after June 30, 2000. All of the 4,300,000 shares sold in
this offering will be freely tradable without restriction under the Securities
Act, except for any shares purchased by our "affiliates" as that term is
defined in Rule 144 under the Securities Act. The remaining 19,194,582 shares
of common stock held by existing shareholders are "restricted" shares as that
term is defined in Rule 144 under the Securities Act. We issued and sold the
restricted shares in private transactions in reliance upon exemptions from
registration under the Securities Act. Restricted shares may be sold in the
public market only if they are registered under the Securities Act or if they
qualify for an exemption from registration, such as Rule 144 or 701 under the
Securities Act, which are summarized below.
Our officers, directors, employees and other shareholders, who collectively
hold an aggregate of 18,994,582 restricted shares, and the underwriters entered
into lock-up agreements in connection with this offering. These lock-up
agreements provide that, with limited exceptions, our officers, directors,
employees and shareholders have agreed not to offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of any of our shares for a
period of 180 days after the effective date of this offering. Robertson
Stephens, Inc. may, in its sole discretion and at any time without prior
notice, release all or any portion of the shares subject to these lock-up
agreements. We have also entered into an agreement with Robertson Stephens,
Inc. that we will not offer, sell or otherwise dispose of our common stock
until 180 days after the effective date of this offering.
Taking into account the lock-up agreements, the number of shares that will
be available for sale in the public market under the provisions of Rules 144,
144(k) and 701 will be as follows:
<TABLE>
<CAPTION>
Number of
Date of Availability for Sale Shares
----------------------------- ----------
<S> <C>
180 days after the effective date of this offering............... 18,544,576
At various times thereafter upon the expiration of applicable
holding periods and lapse of certain rights of repurchase...... 450,006
</TABLE>
Following the expiration of the lock-up period, shares issued upon exercise
of options granted by us prior to the completion of this offering will also be
available for sale in the public market pursuant to Rule 701 under the
Securities Act unless those shares are held by one of our affiliates, directors
or officers.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for
at least one year, including the holding period of any prior owner except an
affiliate, would be entitled to sell within any three month period a number of
shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which
will equal approximately 234,946 shares immediately after this
offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to manner of sale provisions that
require arm's length sales through a stockbroker, notice requirements with
respect to sales by our officers, directors and greater than five percent
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shareholders and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been an affiliate of our
company at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
including the holding period of any prior owner except an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares under a written compensatory plan
or contract to resell these shares in reliance upon Rule 144. Rule 701 provides
that affiliates may sell their Rule 701 shares under Rule 144 without complying
with the holding period requirement and that non-affiliates may sell these
shares in reliance on Rule 144 without complying with the holding period,
public information, volume limitation or notice provisions of Rule 144.
We intend to file, shortly after the effectiveness of this offering, a
registration statement on Form S-8 under the Securities Act covering all shares
of common stock reserved for issuance under the stock plans and subject to
outstanding options under our 1995 stock option plan and 2000 stock option
plan, if any. See "Management--Incentive Plans." Shares of common stock issued
upon exercise of options under the Form S-8 will be available for sale in the
public market, subject to Rule 144 volume limitations applicable to affiliates
and subject to the contractual restrictions described above. As of June 30,
2000, options to purchase 4,115,377 shares of common stock were outstanding of
which approximately 894,659 options were then vested and exercisable. Beginning
on the date that is 180 days after the effective date of this offering,
approximately 1,518,491 shares issuable upon the exercise of vested stock
options will become eligible for sale in the public market, if such options are
exercised.
Beginning on the date that is 180 days after the effective date of this
offering, approximately 14,035 shares issuable upon the exercise of vested
warrants as of June 30, 2000 will become eligible for sale in the public
market, if such warrants are exercised.
Following this offering, the holders of an aggregate of 15,262,081 shares
of outstanding common stock and 14,035 shares of common stock issuable upon the
exercise of warrants, as of June 30, 2000, have the right to require us to
register their shares for sale upon meeting requirements to which the parties
have previously agreed. See "Description of Capital Stock--Holders of
Registration Rights Can Require Us to Register Shares of Our Stock for Resale"
for additional information regarding registration rights.
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UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of the principal United States
federal income and estate tax consequences of the acquisition, ownership and
disposition of our common stock by a Non-U.S. Holder. As used in this
prospectus, the term "Non-U.S. Holder" is a person who holds our common stock
other than:
. an individual citizen or resident of the United States,
. a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or of any
political subdivision of the United States,
. an estate the income of which is subject to United States federal
income tax regardless of its source, or
. a trust, in general, if it is subject to the primary supervision of a
United States court and the control of one or more United States
persons.
This discussion does not consider:
. state, local or foreign tax consequences,
. specific facts and circumstances that may be relevant to a particular
Non-U.S. Holder's tax position in light of their particular
circumstances,
. the tax consequences for the shareholders or beneficiaries of a Non-
U.S. holder,
. special tax rules that may apply to certain Non-U.S. Holders,
including without limitation, partnerships, banks, insurance
companies, dealers in securities and traders in securities, or
. special tax rules that may apply to a Non-U.S. Holder that holds our
common stock as part of a "straddle," "hedge" or "conversion
transaction."
The following discussion is based on provisions of the United States
Internal Revenue Code of 1986, as amended, also known as the Code, applicable
Treasury regulations and administrative and judicial interpretations, all as of
the date of this prospectus, and all of which are subject to change,
retroactively or prospectively. The following discussion assumes that our
common stock is held as a capital asset. The following summary is for general
information. Accordingly, each Non-U.S. Holder should consult a tax advisor
regarding the United States federal, state, local and foreign income and other
tax consequences of acquiring, holding and disposing of shares of our common
stock.
Dividends
We do not anticipate paying cash dividends on our common tock in the
foreseeable future. See "Dividend Policy." In the event, however, that
dividends are paid on shares of our common stock, dividends paid to a Non-U.S.
Holder of our common stock generally will be subject to withholding of United
States federal income tax at a 30% rate, or such lower rate as may be provided
by an applicable income tax treaty. Non-U.S. Holders should consult their tax
advisors regarding their entitlement to benefits under a relevant income tax
treaty.
Dividends that are effectively connected with a Non-U.S. Holder's conduct
of a trade or business in the United States or, if an income tax treaty
applies, attributable to a permanent establishment in the United States, known
as "United States trade or business income", are generally subject to United
States federal income tax on a net income basis at regular graduated rates, but
are not generally subject to the 30% withholding tax if the Non-U.S. Holder
files the appropriate United States Internal Revenue Service form with the
payor. Any United States trade or business income received by a Non-U.S. Holder
that is a corporation may also, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as specified
by an applicable income tax treaty.
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Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
such country for purposes of the withholding discussed above and for purposes
of determining the applicability of a tax treat rate. For dividends paid after
2000, a Non-U.S. Holder of our common stock who clams the benefit of an
applicable income tax treaty rate generally will be required to satisfy
applicable certification and other requirements.
A Non-U.S. Holder of our common stock that is eligible for a reduced rate
of United States withholding tax under an income tax treaty may obtain a refund
or credit of any excess amounts withheld by filing an appropriate claim for a
refund with the United States Internal Revenue Services.
Gain on Disposition of Common Stock
A Non-U.S. Holder generally will not be subject to United States federal
income tax in respect of gain recognized on a disposition of our common stock
unless:
. the gain is United States trade or business income, which gain must
also be taken into account for purposes of the branch profits tax
described above in the case of a corporate Non-U.S. Holder,
. the Non-U.S. Holder is an individual who holds our common stock as a
capital asset within the meaning of Section 1221 of the Code, is
present in the United States for more than 182 days in the taxable
year of the disposition and meets certain other requirements,
. the Non-U.S. Holder is subject to tax pursuant to the provisions of
the United States tax law applicable to certain United States
expatriates, or
. we are or have been a "United States real property holding
corporation" for United States federal income tax purposes at any time
during the shorter of the five-year period ending on the date of
disposition of the period that the Non-U.S. Holder held our common
stock.
Generally, a corporation is a "United States real property holding
corporation" if the fair market value of its "United States real property
interest," such as interest in real property located in the United States or
the Virgin islands, and certain interests in other United States real property
holding corporations, equals or exceeds 50% of the sum of the fair market value
of its worldwide real property interests plus its other assets used or held for
use in a trade or business. We believe we have never been, are not currently
and are not likely to become a United States real property holding corporation
for United States federal income tax purposes.
Federal Estate Tax
Common stock owned or treated as owned by an individual who is a Non-U.S.
Holder at the time of death will be included in the individual's gross estate
for United States federal estate tax purposes, unless an applicable estate tax
or other treaty provides otherwise.
Information Reporting and Backup Withholding Tax
We must report annually to the United States Internal Revenue Service and
to each Non-U.S. Holder the amount of dividends paid to that holder and the tax
withheld with respect to those dividends. Copies of the information returns
reporting those dividends and withholding may also be made available to the tax
authorities in the country in which the Non-U.S. Holder is a resident under the
provisions of an applicable income tax treaty or agreement.
Under certain circumstances, United States Treasury Regulations require
information reporting and backup withholding at a rate of 31% on certain
payments on our common stock. Under currently applicable law, Non-U.S. Holders
of our common stock, generally will be exempt from these information reporting
requirements and from backup withholding on dividends paid prior to 2001 to an
address outside the United States. For dividends paid after 2000, however, a
Non-U.S. Holder of our common stock that fails to certify its
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Non-U.S. holder status in accordance with applicable United States Treasury
Regulations may be subject to backup withholding at a rate of 31% of dividends.
The payment of the proceeds of the disposition of our common stock by a
holder to or through the United States office of a broker generally will be
subject to information reporting and backup withholding at a rate of 31% unless
the holder either certifies its status as a Non-U.S. Holder under penalties of
perjury or otherwise establishes an exemption. The payment of the proceeds of
the disposition by a Non-U.S. Holder of our common stock to or through a
foreign office of a foreign broker will not be subject to backup withholding or
information reporting unless the foreign broker will not be subject to backup
withholding or information reporting unless the foreign broker is a "United
States related person." In the case of the payment of proceeds from the
disposition of our common stock by or through a foreign office of a broker that
is a United States person or a "United States related person," information
reporting, but currently not backup withholding, on the payment applies unless
the broker receives a statement from the owner, signed under penalty of
perjury, certifying its foreign status or the broker has documentary evidence
in its files that the holder is a Non-U.S. Holder and the broker has no actual
knowledge to the contrary. For this purpose, a "United States related person"
is:
. a "controlled foreign corporation" for United States federal income
tax purposes,
. a foreign person 50% or more of whose gross income from all sources
for the three-year period ending with the close of its taxable year
preceding the payment, or for such part of the period that the broker
has been in existence, is derived from activities that are effectively
connected with the conduct of a United State trade or business,
. effective after 2000, a foreign partnership if, at any time during the
taxable year, (A) at least 50% of the capital or profits interest in
the partnership is owned by United States persons, or (B) the
partnership is engaged in a United States trade or business, or
. certain U.S. branches of foreign banks or insurance companies.
Effective after 2000, backup withholding may apply to the payment of
disposition proceeds by or through a foreign office or a broker that is a
United States person or a United States related person unless certain
certification requirements are satisfied or an exemption is otherwise
established and the broker has no actual knowledge that the holder is a United
States person. Non-U.S. Holders should consult their own tax advisors regarding
the application of the information reporting and backup withholding rules to
them, including changes to these rules that will become effective after 2000.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded, or credited against the holder's United
States federal income tax liability, if any, provided that the required
information is furnished to the United States Internal Revenue Service.
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UNDERWRITING
We are offering the shares of common stock described in this prospectus
through a number of underwriters. Robertson Stephens, Inc., Dain Rauscher
Incorporated and SG Cowen Securities Corporation are the representatives of the
underwriters. We and the selling shareholders have entered into an underwriting
agreement with the representatives. Subject to the terms and conditions of the
underwriting agreement, we agreed to sell to the underwriters, and each
underwriter separately agreed to purchase from us, the number of shares of
common stock listed next to its name below at the public offering price, less
the underwriting discounts and commissions described on the cover page of this
prospectus:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Robertson Stephens, Inc. ..........................................
Dain Rauscher Incorporated.........................................
SG Cowen Securities Corporation....................................
<CAPTION>
International Underwriter
-------------------------
<S> <C>
Robertson Stephens International, Ltd..............................
Dain Rauscher Incorporated.........................................
SG Cowen Securities Corporation....................................
---------
Total............................................................ 4,300,000
=========
</TABLE>
The underwriting agreement provides that the underwriters must buy all of
these shares from us if they buy any of them. The underwriters will sell these
shares to the public when and if the underwriters buy them from us. The
underwriters are offering the common stock subject to a number of conditions,
including:
. the underwriters' receipt and acceptance of the common stock from us;
and
. the underwriters' right to reject orders in whole or in part.
Robertson Stephens, Inc. expects to deliver the shares of common stock to
purchasers on , 2000.
Over-allotment option. We and the selling shareholders have granted the
underwriters an option to buy up to 645,000 additional shares of our common
stock at the same price per share as they are paying for the shares shown in
the table above. We have agreed to sell 445,000 additional shares, and the
selling shareholders have agreed to sell 200,000 shares if the over-allotment
option is exercised in full. The underwriters may exercise this option only to
the extent that they sell more than the total number of shares shown in the
table above. The underwriters may exercise this option at any time within 30
days after the date of this prospectus. To the extent that the underwriters
exercise this option, the underwriters will be obligated to purchase the
additional shares from us and the selling shareholders in the same proportions
as they purchased the shares shown in the table above. If purchased, these
additional shares will be sold by the underwriters on the same terms as those
on which the other shares are sold.
Stock market listing. Our common stock has been approved for quotation on
the Nasdaq National Market under the symbol SYNP.
Determination of offering price. Before this offering, there has been no
public market for our common stock. The initial public offering price will be
determined through negotiations between us and the representatives. In addition
to prevailing market conditions, the factors to be considered in determining
the initial public offering price will include:
. the valuation multiples of publicly-traded companies that the
representatives believe are comparable to us;
. our financial information;
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. our history and prospects and the outlook for our industry;
. an assessment of our management, our past and present operations, and
the prospects for, and timing of, our future revenue;
. the present state of our development and the progress of our business
plan; and
. the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for our shares may not develop. Even if an active
market does develop, the public price at which our shares trade in the future
may be below the offering price.
Underwriting discounts and commissions. The underwriting discount is the
difference between the price the underwriters pay to us and the price at which
the underwriters initially offer the shares to the public. The size of the
underwriting discount is determined through an arms-length negotiation between
us and the representatives. The following table shows the per share and total
underwriting discount we will allow to the underwriters. These amounts are
shown assuming no exercise and full exercise of the underwriters' over-
allotment option described above:
<TABLE>
<CAPTION>
Total
-----------------
No Full
Exercise Exercise
Per of of
Share Option Option
------- -------- --------
<S> <C> <C> <C>
Public offering price............................ $ $ $
Underwriting discount and commissions to be paid
by us.......................................... $ $ $
Proceeds, before expenses, to us................. $ $ $
Underwriting discount and commissions to be paid
by selling shareholders........................ $ $ -- $
Proceeds, before expenses, to selling
shareholders................................... $ $ -- $
</TABLE>
The expenses of this offering, not including the underwriting discount, are
estimated to be approximately $1.6 million and will be paid by us. Expenses
include the SEC filing fee, the NASD filing fee, Nasdaq listing fees, printing
expenses, legal and accounting fees, transfer agent and registrar fees and
other miscellaneous fees and expenses.
Lock-up agreements. We and our executive officers, directors and all of our
shareholders have agreed, with exceptions, not to sell or transfer any shares
of our common stock until the day that is 180 days after the date of final
prospectus issued in connection with this offering, the lock-up period, without
first obtaining the written consent of Robertson Stephens, Inc. Specifically,
we and these other individuals have agreed not to, directly or indirectly:
. offer to sell, contract to sell, or otherwise sell or dispose of any
shares of our common stock;
. loan, pledge or grant any rights with respect to any shares of our
common stock;
. engage in any hedging or other transaction that might result in a
disposition of shares of our common stock by anyone;
. execute any short sale, whether or not against the box; or
. purchase, sell or grant any put or call option or other right with
respect to our common stock or with respect to any security other than
a broad-based market basket or index that includes, relates to or
derives any significant part of its value from our common stock.
These lock-up agreements apply to shares of our common stock and also to
any options or warrants to purchase any shares of our common stock or any
securities convertible into or exchangeable for shares of our
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common stock. These lock-up agreements apply to all such securities that are
owned or later acquired by the persons executing the agreements, except for
securities acquired on the open market. In addition, we have agreed with
Robertson Stephens, Inc. that, to the extent that we have separate lock-up
agreements with some of our shareholders, we will not consent to the
shareholders' disposition of any shares subject to those separate lock-up
agreements prior to the expiration of the lock-up period. However, Robertson
Stephens, Inc. may release any of us and any of the selling shareholders from
these agreements at any time during the lock-up period, in its sole discretion
and without notice, as to some or all of the shares covered by these
agreements. Currently, there are no agreements between the representatives and
us, any of our shareholders and any of the selling shareholders to release any
of us, including, without limitation, any of the selling shareholders, from the
lock-up agreements during the lock-up period.
Indemnification of the underwriters. We will indemnify the underwriters
against some civil liabilities, including liabilities under the Securities Act
and liabilities arising from breaches of our representations and warranties
contained in the underwriting agreement. If we are unable to provide this
indemnification, we will contribute to payments the underwriters may be
required to make in respect of those liabilities.
Dealers' compensation. The underwriters initially will offer our shares to
the public at the price specified on the cover page of this prospectus. The
underwriters may allow to selected dealers a concession of not more than $
per share. The underwriters may also allow, and any other dealers may reallow,
a concession of not more than $ per share to some other dealers. If all the
shares are not sold at the public offering price, the underwriters may change
the public offering price and the other selling terms. A change in the public
offering price will not affect the amount of proceeds that we receive.
Discretionary accounts. The underwriters have advised us that they do not
expect to sell more than 5% of the total number of shares in this offering to
accounts over which they exercise discretionary authority.
Directed share program. At our request, the underwriters have reserved for
sale, at the initial public offering price, up to 215,000 shares, or 5%, of the
shares of our common stock offered by this prospectus for sale to some of our
directors, officers and employees and their family members, and other persons
with relationships with us. The number of shares of our common stock available
for sale to the general public will be reduced to the extent those persons
purchase the reserved shares. Any reserved shares which are not orally
confirmed for purchase within one day of the pricing of this offering may be
offered by the underwriters to the general public on the same terms as the
other shares offered by this prospectus.
Online activities. A prospectus in electronic format may be made available
on the Internet sites or through other online services maintained by one or
more of the underwriters of this offering, or by their affiliates. In those
cases, prospective investors may view offering terms online and, depending on
the particular underwriter, prospective investors may be allowed to place
orders online. The underwriters may agree with us to allocate a specific number
of shares for sale to online brokerage account holders. Any such allocation for
online distributions will be made by the representatives on the same basis as
other allocations.
In particular, a copy of this prospectus in electronic format will be made
available on the Internet web sites hosted by E*OFFERING Corp. and E*TRADE
Securities, Inc. E*TRADE will accept conditional offers to purchase shares from
all of its customers that pass and complete an online eligibility profile. In
the event that the demand for shares from the customers of E*TRADE exceeds the
amounts allocated to E*TRADE, E*TRADE will use a random allocation methodology
to distribute shares in even lots of 100 shares per user. Other than the
prospectus in electronic formation, information on these web sites is not a
part of this prospectus and you should not rely on other information on these
web sites in making a decision to invest in our shares.
Stabilization and other transactions. The rules of the SEC generally
prohibit the underwriters from trading in our common stock on the open market
during this offering. However, the underwriters are allowed to engage in some
open market transactions and other activities during this offering that may
cause the market price of our common stock to be above or below that which
would otherwise prevail in the open market. These
77
<PAGE>
activities may include stabilization, short sales and over-allotments,
syndicate covering transactions and penalty bids.
. Stabilizing transactions consist of bids or purchases made by the lead
representative for the purpose of preventing or slowing a decline in
the market price of our common stock while this offering is in
progress.
. Short sales and over-allotments occur when the representatives, on
behalf of the underwriting syndicate, sell more of our shares than
they purchase from us in this offering. "Covered" short sales are
sales made in an amount not greater than the underwriters' option to
purchase additional shares from us and the selling shareholders in the
offering. The underwriters may close out any covered short position
either by exercising that option to purchase shares from us or by
purchasing shares in the open market. In determining the source of
shares to close out a covered short position, the underwriters will
consider, among other things, the prevailing market price per share
compared to the exercise price per share of their option. "Naked"
short sales are any sales by the underwriters in excess of their
option. The underwriters must close out any naked short position by
purchasing shares in the open market, potentially including purchases
made as stabilizing transactions. For this reason, a naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the
common stock in the open market after pricing that could adversely
affect investors who purchase in the offering.
. Syndicate covering transactions are bids for or purchases of our
common stock on the open market by the representatives on behalf of
the underwriters in order to reduce a short position incurred by the
representatives on behalf of the underwriters. Similar to other
purchase transactions, syndicate covering transactions may have the
effect of raising or maintaining the market price of our common stock
or preventing or retarding a decline in the market price of our common
stock. As a result, the price of our common stock may be higher than
the price than might otherwise exist in the open market.
. A penalty bid is an arrangement permitting the representatives to
reclaim the selling concession that would otherwise accrue to an
underwriter if the common stock originally sold by that underwriter
was later repurchased by the representatives and therefore was not
effectively sold to the public by such underwriter.
If the underwriters commence these activities, they may discontinue them at
any time without notice. The underwriters may carry out these transactions on
the Nasdaq National Market, in the over-the-counter market or otherwise.
Passive market making. Following the pricing of this offering, and until
the commencement of any stabilizing bid, underwriters and dealers who are
qualified market makers on the Nasdaq National Market may engage in passive
market making transactions. Passive market making is allowed during the period
when the SEC's rules would otherwise prohibit market activity by the
underwriters and dealers who are participating in this offering. Passive market
makers must comply with applicable volume and price limitations and must be
identified as such. In general, a passive market maker must display its bid at
a price not in excess of the highest independent bid for our common stock; but
if all independent bids are lowered below the passive market maker's bid, the
passive market maker must also lower its bid once it exceeds specified purchase
limits. Net purchases by a passive market maker on each day are limited to a
specified percent of the passive market maker's average daily trading volume in
our common stock during a specified period and must be discontinued when such
limit is reached. Underwriters and dealers are not required to engage in
passive market making and may end passive market making activities at any time.
Some of the underwriters have in the past and may in the future perform
financial advisory services for us. In particular, in February 2000 we granted
Robertson Stephens, Inc. a two-year right of first refusal to act as our
financial advisor in connection with certain merger or acquisition advisory
assignments.
78
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters related to intellectual property will be
passed on for us by Blakely Sokoloff Taylor & Zafman, Sunnyvale, California.
Legal matters specified by the underwriters in connection with this offering
will be passed upon for the underwriters by O'Melveny & Myers LLP,
San Francisco, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1999, and for each of the three
years in the period ended December 31, 1999, as set forth in their report. We
have included our consolidated financial statements in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered hereby. This prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to our company and our
common stock, reference is made to the registration statement and to the
exhibits and schedules filed therewith. A copy of the registration statement
may be inspected by anyone without charge at the Public Reference Section of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed
fees. The public may obtain information on the operations of the public
reference facilities in Washington, D.C. by calling the Commission at 1-800-
SEC-0330. The Commission maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
79
<PAGE>
SYNPLICITY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statement of Shareholders' Equity (Net Capital Deficiency)... F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Synplicity, Inc.
We have audited the accompanying consolidated balance sheets of Synplicity,
Inc. (the "Company") as of December 31, 1998 and 1999, and the related
consolidated statements of operations, shareholders equity (net capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Synplicity,
Inc. at December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
February 25, 2000
except for Note 12,
as to which the date is
July 27, 2000
F-2
<PAGE>
SYNPLICITY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-----------------
Pro forma
shareholders'
June 30, equity at
1998 1999 2000 June 30, 2000
------- -------- -------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents.......... $ 1,193 $ 2,633 $ 8,248
Accounts receivable, less
allowances of $315, $395 and $407
at December 31, 1998 and 1999 and
June 30, 2000, respectively...... 3,242 3,668 2,627
Other current assets............... 118 469 703
------- -------- --------
Total current assets.............. 4,553 6,770 11,578
Property and equipment, net........ 1,649 1,990 2,005
Other assets....................... 307 359 428
------- -------- --------
Total assets...................... $ 6,509 $ 9,119 $ 14,011
======= ======== ========
Liabilities and Shareholders' Equity
(Net Capital Deficiency):
Current liabilities:
Notes payable to officers.......... $ 250 $ -- $ --
Accounts payable and accrued
liabilities...................... 1,026 2,655 2,259
Accrued compensation............... 852 584 1,460
Deferred revenue................... 3,525 5,439 5,841
Current portion of long-term debt.. 173 455 522
------- -------- --------
Total current liabilities......... 5,826 9,133 10,082
Long-term note payable to
shareholder...................... 125 125 125
Long-term debt..................... 2,218 595 459
Commitments
Shareholders' equity (net capital
deficiency):
Convertible preferred stock, no par
value, issuable in series:
1,333,332, 4,064,911 and
5,222,806 shares authorized at
December 31, 1998, December 31,
1999 and June 30, 2000,
respectively; 888,885, 2,643,269
and 3,415,198 shares issued and
outstanding at December 31, 1998
and 1999, and June 30, 2000,
respectively; (10,000,000 shares
authorized; no shares issued and
outstanding, pro forma).......... 1,974 9,378 14,858 $ --
Common stock, no par value:
110,000,000 shares authorized;
13,766,713, 14,349,607 and
14,890,499 shares issued and
outstanding at December 31, 1998,
December 31, 1999, and June 30,
2000, respectively (19,194,582
shares issued and outstanding,
pro forma)....................... 847 1,290 2,330 17,188
Additional paid-in capital.......... 54 2,451 3,485 3,485
Notes receivable from shareholders.. (312) (468) (468) (468)
Deferred stock-based compensation... -- (2,222) (2,870) (2,870)
Accumulated deficit................. (4,223) (11,163) (13,990) (13,990)
------- -------- -------- --------
Total shareholders' equity (net
capital deficiency)............. $(1,660) $ (734) $ 3,345 $ 3,345
------- -------- -------- ========
$ 6,509 $ 9,119 $ 14,011
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
SYNPLICITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
----------------------------- ------------------
1997 1998 1999 1999 2000
------ ------- ------------ -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
License...................... $4,679 $ 8,373 $13,019 $ 5,898 $ 9,754
Maintenance.................. 775 2,655 5,156 2,184 4,106
------ ------- ------- -------- --------
Total revenue.............. 5,454 11,028 18,175 8,082 13,860
Cost of revenue:
Cost of license............. 97 148 239 126 82
Cost of maintenance......... 64 531 1,187 518 691
------ ------- ------- -------- --------
Total cost of revenue...... 161 679 1,426 644 773
------ ------- ------- -------- --------
Gross profit............... 5,293 10,349 16,749 7,438 13,087
Operating expenses:
Research and development..... 1,054 4,031 8,018 3,459 5,724
Sales and marketing.......... 3,970 8,317 12,903 6,259 8,340
General and administrative... 788 1,620 2,586 1,217 1,541
Stock-based
compensation(/1/).......... -- -- 175 4 386
------ ------- ------- -------- --------
Total operating expenses... 5,812 13,968 23,682 10,939 15,991
------ ------- ------- -------- --------
Loss from operations....... (519) (3,619) (6,933) (3,501) (2,904)
Interest income.............. 58 58 133 53 139
Interest expense............. (11) (77) (140) (100) (62)
------ ------- ------- -------- --------
Net loss................... $ (472) $(3,638) $(6,940) $ (3,548) $ (2,827)
====== ======= ======= ======== ========
Basic and diluted net loss
per common share........... $(0.04) $ (0.29) $ (0.52) $ (0.27) $ (0.20)
====== ======= ======= ======== ========
Shares used in per share
calculation................ 11,954 12,451 13,227 13,054 13,820
====== ======= ======= ======== ========
Pro forma basic and diluted
net loss per common share
(unaudited)................ $ (0.42) $ (0.16)
======= ========
Shares used in pro forma per
share calculation
(unaudited)................ 16,432 17,742
--------
(/1/Amortization)of deferred stock-based compensation relates to the following:
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, ------------------
1999 1999 2000
------------ -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cost of maintenance........ $ 5 $ -- $ 10
Research and development... 113 3 191
Sales and marketing........ 55 1 159
General and
administrative........... 2 -- 26
------- -------- --------
Total..................... $ 175 $ 4 $ 386
======= ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
SYNPLICITY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(in thousands, except share data)
<TABLE>
<CAPTION>
Total
Convertible Notes Shareholders'
Preferred Stock Common Stock Additional Receivable Deferred Equity (Net
----------------- ----------------- Paid-in From Stock-based Accumulated Capital
Shares Amount Shares Amount Capital Shareholders Compensation Deficit Deficiency)
--------- ------- ---------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1996............ 888,885 $ 1,974 11,999,981 $ 150 $ 54 $ -- $ -- $ (113) $ 2,065
Issuance of common
stock to employees
upon exercise of
stock options...... -- -- 1,260,420 346 -- -- -- -- 346
Net loss
(comprehensive
loss).............. -- -- -- -- -- -- -- (472) (472)
--------- ------- ---------- ------ ------ ----- ------- -------- -------
Balance at December
31, 1997............ 888,885 1,974 13,260,401 496 54 -- -- (585) 1,939
Issuance of common
stock to employees
upon exercise of
stock options...... -- -- 506,312 351 -- (312) -- -- 39
Net loss
(comprehensive
loss).............. -- -- -- -- -- -- -- (3,638) (3,638)
--------- ------- ---------- ------ ------ ----- ------- -------- -------
Balance at December
31, 1998............ 888,885 1,974 13,766,713 847 54 (312) -- (4,223) (1,660)
Issuance of Series
B preferred stock,
net of $96 of
issuance costs..... 1,754,384 7,404 -- -- -- -- -- -- 7,404
Issuance of common
stock upon exercise
of stock options... -- -- 582,894 443 -- (156) -- -- 287
Deferred
compensation....... -- -- -- -- 2,397 -- (2,397) -- --
Amortization of
deferred stock-
based
compensation....... -- -- -- -- -- -- 175 -- 175
Net loss
(comprehensive
loss).............. -- -- -- -- -- -- -- (6,940) (6,940)
--------- ------- ---------- ------ ------ ----- ------- -------- -------
Balance at December
31, 1999............ 2,643,269 9,378 14,349,607 1,290 2,451 (468) (2,222) (11,163) (734)
Issuance of Series
C preferred stock,
net of $20 of
issuance costs
(unaudited)........ 771,929 5,480 -- -- -- -- -- -- 5,480
Issuance of common
stock upon exercise
of stock options
(unaudited)........ -- -- 540,892 1,040 -- -- -- -- 1,040
Deferred stock-
based compensation
(unaudited)........ -- -- -- -- 1,034 -- (1,034) -- --
Amortization of
deferred stock-
based compensation
(unaudited)........ -- -- -- -- -- -- 386 -- 386
Net loss
(comprehensive
loss) (unaudited).. -- -- -- -- -- -- -- (2,827) (2,827)
--------- ------- ---------- ------ ------ ----- ------- -------- -------
Balance at June 30,
2000 (unaudited).... 3,415,198 $14,858 14,890,499 $2,330 $3,485 $(468) $(2,870) $(13,990) $ 3,345
========= ======= ========== ====== ====== ===== ======= ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
SYNPLICITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December Six Months Ended
31, June 30,
------------------------ ------------------
1997 1998 1999 1999 2000
------ ------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss........................ $ (472) $(3,638) $(6,940) $ (3,548) $ (2,827)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities:
Depreciation.................. 135 441 946 419 527
Amortization of deferred
stock-based compensation.... -- -- 175 4 386
Loss on disposal of property
and equipment............... -- 29 -- -- --
Changes in operating assets
and liabilities:
Accounts receivable.......... (806) (1,979) (426) 336 1,041
Other current assets......... (115) 17 (350) 28 (234)
Other assets................. (105) (202) (52) (83) (69)
Accounts payable and accrued
liabilities................ 282 641 1,629 438 (396)
Accrued compensation......... 345 371 (267) (318) 876
Deferred revenue............. 816 2,421 1,913 404 402
------ ------- ------- -------- --------
Net cash provided by (used
in) operating
activities............... 80 (1,899) (3,372) (2,320) (294)
------ ------- ------- -------- --------
Investing activities
Purchases of property and
equipment..................... (605) (1,551) (1,287) (593) (542)
Proceeds from sale of property
and equipment................. -- 50 -- -- --
------ ------- ------- -------- --------
Net cash used in investing
activities............... (605) (1,501) (1,287) (593) (542)
------ ------- ------- -------- --------
Financing activities
Borrowing under revolving line
of credit..................... -- -- -- -- 2,000
Repayment of revolving line of
credit........................ -- -- -- -- (2,000)
Payments on long-term debt...... -- (123) (1,341) (1,363) (270)
Proceeds from sale of common
stock......................... 346 39 286 165 1,040
Proceeds from issuance of
preferred stock............... -- -- 7,404 7,404 5,480
Proceeds from notes payable to
officers...................... -- 250 400 400 --
Repayment of notes payable to
officers...................... -- -- (650) (650) --
Proceeds from long-term debt.... 400 2,113 -- -- 201
------ ------- ------- -------- --------
Net cash provided by
financing activities..... 746 2,279 6,099 5,956 6,451
------ ------- ------- -------- --------
Net increase (decrease) in cash
and cash equivalents.......... 221 (1,121) 1,440 3,043 5,615
Cash and cash equivalents at
beginning of period........... 2,093 2,314 1,193 1,193 2,633
------ ------- ------- -------- --------
Cash and cash equivalents at end
of period..................... $2,314 $ 1,193 $ 2,633 $ 4,236 $ 8,248
====== ======= ======= ======== ========
Supplemental disclosure of cash
flow information
Cash paid for interest.......... $ 9 $ 9 $ 136 $ 81 $ 71
====== ======= ======= ======== ========
Supplemental schedule of noncash
financing activities
Issuance of common stock in
exchange for notes receivable
from shareholders............. $ -- $ 312 $ 156 $ -- $ --
====== ======= ======= ======== ========
Deferred compensation related to
stock options................. $ -- $ -- $ 2,397 $ 88 $ 1,034
====== ======= ======= ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
1. Summary of Significant Accounting Policies
Organization and Business
Synplicity, Inc. ("we" or "us") was incorporated on February 1, 1994 in the
State of California. We are a leading provider of software products that enable
the rapid and effective design and verification of semiconductors.
We have incurred operating losses to date and incurred a net loss of
$6,940,000 for the year ended December 31, 1999 and $2,827,000 for the six
months ended June 30, 2000. Our accumulated deficit at June 30, 2000 was
$13,990,000. We believe that available cash and the line of credit will provide
sufficient funding to enable us to meet our obligations through at least
December 31, 2000. If anticipated operating results are not achieved, we intend
and believe we have the ability to delay or reduce expenditures so as not to
require additional financial resources.
Principles of Consolidation
The consolidated financial statements include the accounts of our company
and our wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Foreign Currency Translation
The functional currency for foreign subsidiaries is the United States
dollar. Monetary assets and liabilities denominated in foreign currencies are
translated at the year-end exchange rate. Property and equipment and non-
monetary assets and liabilities denominated in foreign currencies are
translated at historical rates. Adjustments resulting from these translations
are included in the results of operations and to date have been immaterial. We
do not enter into foreign currency forward exchange contracts.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and the accompanying notes. Actual results could differ from these estimates.
Reclassifications
Certain amounts reported in the consolidated financial statements as of
December 31, 1998 have been reclassified to conform with the presentation we
adopted to report our 1999 financial results.
Concentration of Credit Risk
We distribute our products through our direct sales force and third-party
distributors principally in the United States, Europe and Japan. We generally
do not require collateral. We maintain reserves for potential credit losses,
and such losses to date have not been material.
F-7
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
Revenues from distributors and customers representing 10% or more of total
revenue for the years ended December 31, 1997 and 1998 are as follows (no
customer or distributor accounted for 10% or more of total revenues for the
year ended December 31, 1999 or the six months ended June 30, 1999 and 2000):
<TABLE>
<CAPTION>
Years ended
December 31,
--------------
1997 1998
------ ------
<S> <C> <C>
Distributor/User:
A........................................................... 15% 11%
B........................................................... 4% 12%
C........................................................... 10% 7%
</TABLE>
Export sales to customers outside of North America accounted for
$1.2 million, $2.1 million, $3.6 million, $1.5 million and $2.7 million of our
total revenue in the years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 1999 and 2000, respectively.
Cash and Cash Equivalents
We invest our excess cash with major financial institutions in accounts
which bear minimal risk and are available on demand. As of December 31, 1998
and 1999, and June 30, 2000, all investments have maturities of three months or
less at the date of purchase, are considered cash and cash equivalents, and
approximate fair value.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, generally three years to seven years.
Impairment of Long-Lived Assets
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, we review long-lived assets, including
property and equipment, for impairment whenever events or changes in business
circumstances indicate that the carrying amounts of the assets may not be fully
recoverable. Under SFAS 121, an impairment loss would be recognized when
estimated undiscounted future cash flows expected to result from the use of the
asset and its eventual disposition is less than its carrying amount.
Impairment, if any, is assessed using discounted cash flows. Through June 30,
2000, there have been no such losses.
Revenue Recognition
We sell perpetual licenses to use our software products and sell related
maintenance services. For each sale, we defer the recognition of revenue until
a purchase order is received from the customer, delivery of the product and
license key has occurred, the fee is fixed and determinable, collection of the
fee is probable based on completed credit review procedures, and there are no
remaining obligations by us. Once all of the above conditions have been met, we
recognize license revenue based upon the residual method after all elements
other than maintenance have been delivered as prescribed by Statement of
Position 98-9 "Modification of SOP No. 97-2 with Respect to Certain
Transactions." Revenue on arrangements with extended payment terms, which have
met all other required revenue recognition criteria, are recognized as payments
become due. Sales to international distributors are recognized by us when the
international distributor has resold the product to an end user.
F-8
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
Maintenance is offered to customers which requires us to perform continuing
service and support and allows customers to receive unspecified product
upgrades. In accordance with paragraph 10 of Statement of Position 97-2,
"Software Revenue Recognition," vendor specific objective evidence of fair
value of maintenance is determined by reference to the price the customer will
be required to pay when maintenance is sold separately (that is, the renewal
rate), which is based on the price established by us and the history we have
developed of charging our customers for maintenance renewals. In general,
maintenance is priced at 20% of the list license price of the product. Under
the residual method, the list price of the maintenance is deferred and any
discount on the sale is allocated to the delivered elements. The maintenance
term is typically one year in duration and maintenance revenue is recognized
ratably over the maintenance term.
We have also provided a feature limited version of one of our products to
certain FPGA manufacturer for distribution to their customers. As part of these
agreements we have certain maintenance and support obligations to the FPGA
manufacturer. However, we have concluded that we do not have vendor specific
objective evidence of fair value of maintenance on these type of arrangements
as it is not priced or offered separately. As a result, license and maintenance
revenue is recognized ratably over the period of each arrangement.
Product Development Costs
Product development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on our product development
process, technological feasibility is established upon completion of a working
model. Costs we incurred between completion of the working model and the point
at which the product is ready for general release have been insignificant.
Therefore, all product development costs have been charged to operations as
incurred.
Advertising
Costs related to advertising are expensed as incurred. Advertising expense
for the years ended December 31, 1997, 1998 and 1999 was $238,000, $316,000 and
$490,000, respectively, and for the six months ended June 30, 1999 and 2000 was
$194,000 and $447,000, respectively.
Stock-Based Compensation
As permitted by the FASB Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), we account for
employee stock based compensation in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and
related interpretations. Under APB 25, when the exercise price of our employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Any deferred stock compensation calculated according to APB 25 is amortized
over the vesting period of the individual options, generally four years, using
the graded vesting method. The graded vesting method provides for vesting of
portions for the overall awards at interim dates and results in greater vesting
in earlier years than straight-line.
All stock-based awards to non-employees are accounted for at their fair
value, as calculated using the Black-Scholes model, in accordance with FAS 123
and Emerging Issues Task Force Consensus No. 96-18 ("EITF 96-18"). Stock-based
awards to non-employees not immediately vested are subject to periodic
re-valuation over their vesting terms.
F-9
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
Comprehensive Income (Loss)
We apply Financial Accounting Standards Board's Statement No. 130,
Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes
rules for the reporting and display of comprehensive income (loss) and its
components. Our comprehensive loss is the same as net loss as there are no
adjustments reported in shareholders' equity (net capital deficiency) which are
to be included in the computation.
Segment Information
We follow SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information ("SFAS 131"). SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
interim financial reports. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS 131 did not affect results of operations or financial
position, as we operate in only one industry segment.
Unaudited pro forma information
In July 2000, the Board of Directors authorized the management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public. If the initial public offering is consummated under the terms presently
anticipated, all of the preferred stock outstanding will automatically be
converted into common stock. Unaudited pro forma shareholders' equity at June
30, 2000, as adjusted for the assumed conversion of the preferred stock, is set
forth on the balance sheet.
Unaudited Interim Consolidated Financial Information
The consolidated financial information at June 30, 2000 and for the six
months ended June 30, 1999 and 2000 is unaudited, but has been prepared on the
same basis as the annual financial statements and, in the opinion of management
includes all adjustments (consisting only of normal recurring adjustments),
that we consider necessary for a fair presentation of consolidated financial
position at that date and our consolidated results of operations and cash flows
for those periods. Operating results for the interim periods are not
necessarily indicative of results that may be expected for any future periods.
Recently Issued Accounting Standards
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation" ("FIN 44"), which contains
rules designed to clarify the application of APB 25. FIN 44 will be effective
on July 1, 2000 and we will adopt it at that time. We believe the anticipated
impact of adoption of FIN 44 will not be material to our operating results and
financial position.
In December, 1999, the Staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes
certain areas of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. We will be required
to adopt SAB 101 in our fiscal quarter beginning October 1, 2000. We believe
that our current revenue recognition policy complies with SAB 101.
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which will be effective for the year ending December 31, 2001. This
statement establishes accounting and reporting standards requiring that every
F-10
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset of
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. We believe the adoption of SFAS 133 will not have
a material effect on the financial statements, since we currently do not invest
in derivative instruments and engage in hedging activities.
In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
establishes the accounting for costs of software products developed or
purchased for internal use, including when these costs should be capitalized.
The adoption of this pronouncement did not materially impact our results of
operations for the year ended December 31, 1999.
2. Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------- June 30,
1998 1999 2000
------ ------- -----------
(unaudited)
<S> <C> <C> <C>
Computer hardware............................... $1,298 $ 1,839 $ 1,941
Computer software............................... 358 586 650
Furniture and fixtures.......................... 513 791 1,034
Leasehold improvements.......................... 103 239 372
------ ------- -------
2,272 3,455 3,997
Less accumulated depreciation................... (623) (1,465) (1,992)
------ ------- -------
$1,649 $ 1,990 $ 2,005
====== ======= =======
</TABLE>
3. Operating Lease Commitments
We lease our corporate facility in Sunnyvale, California and lease a number
of sales offices in various states as well as in certain other countries. In
October 1999, we entered into a new corporate facility lease expiring in
September 2002. Our old corporate facility lease was canceled without penalty
or further obligation. Rent expense was $199,000, $451,000, and $875,000, for
the years ended December 31, 1997, 1998 and 1999, respectively, and was
$324,000 and $751,000 for the six months ended June 30, 1999 and 2000,
respectively. The future minimum rental commitments under operating leases as
of December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000........................................................... $1,131
2001........................................................... 1,097
2002........................................................... 817
------
$3,045
======
</TABLE>
4. Related Party Notes
In September 1998, we received two full-recourse notes receivable from one
of our officers with a principal amount totaling $312,000. The proceeds were
used to purchase shares of our common stock, which have been pledged as
collateral for the notes. Principal and interest are due and payable upon the
earlier of
F-11
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
September 2003, when the corresponding stock is sold or 90 days after the
termination of the officer's employment with us. The notes accrue interest at
the rate of 5.5% per annum. The notes are accounted for in shareholders' equity
(net capital deficiency).
In November and December 1999, we received two full-recourse notes
receivable from one of our officers with a principal amount totaling $156,250.
The proceeds were used to purchase shares of our stock which have been pledged
as collateral for the notes. Principal and interest are due and payable upon
the earlier of five years from the date of the notes, when the corresponding
stock is sold, or 90 days after the termination of the officer's employment
with us. The notes accrue interest at the rate of 6.2% per annum. The notes are
accounted for in shareholder's equity (net capital deficiency).
In November 1998, we issued two notes payable to two of our officers with
an aggregate principal amount of $250,000. The notes accrue interest at the
rate of prime plus 0.25% per annum. The notes and accrued interest were repaid
in full in March 1999.
In January 1999, we issued two notes payable to two of our officers with a
principal amount totaling $400,000. The notes accrue interest at the rate of
15% per annum, compounded annually. The notes and accrued interest were repaid
in full in March 1999.
In November 1995, we issued a note payable to a shareholder with a
principal amount of $125,000. All principal is due and payable on October 31,
2002. Simple interest of 6.11% is due at the end of each calendar year.
5. Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------- June 30,
1998 1999 2000
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Revolving line of credit......................... $1,300 $ -- $ --
Equipment advance................................ 824 917 913
Straight line of credit.......................... 267 133 68
------ ------ -----
2,391 1,050 981
Less current portion............................. (173) (455) (522)
------ ------ -----
Noncurrent portion............................... $2,218 $ 595 $ 459
====== ====== =====
</TABLE>
In April 1997, we entered into a business loan agreement with a commercial
bank which was amended in September 1998. The agreement provides for a
$3,000,000 revolving line of credit, a $1,000,000 equipment advance, and a
$400,000 term loan. The line of credit and term note are collateralized by
substantially all of our assets other than equipment purchased with the
equipment advance. Under the terms of the agreement, we are required to
maintain certain financial covenants. As of June 30, 2000, we were either in
compliance with or had received a waiver for each of the required covenants.
The revolving line of credit agreement allows us to borrow up to
$3,000,000. Borrowings under the line of credit bear interest at the bank's
prime rate plus 0.25%. The interest rate was 8.75% and 9.75% at December 31,
1999 and June 30, 2000, respectively. There was no outstanding debt related to
this line of credit at December 31, 1999 and June 30, 2000.
F-12
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
The equipment advance allowed us to borrow up to $1,000,000, subject to
certain limits based on financial covenants. We borrowed on this line until
September 1999. Interest accrued from the date of each equipment advance and
was payable monthly until September 1999 at which time all outstanding
equipment advances became payable in 36 equal monthly installments of
principal, plus accrued interest. Borrowings under the equipment advance bear
interest at the bank's prime rate plus 0.25%. We utilized all $1,000,000 of the
equipment advance. At December 31, 1999 and June 30, 2000, the interest rate
was 8.75% and $917,000 and $913,000, respectively, were outstanding.
The line of credit agreement allowed us to borrow up to $400,000 to
purchase equipment. Borrowings under the line of credit bear interest at the
bank's prime rate plus 0.5% and are payable in 36 monthly payments of principal
plus interest beginning January 31, 1998. We utilized $400,000 of this line. At
December 31, 1999 and June 30, 2000, the interest rate was 9.0% and 10% and
$133,000 and $68,000 were outstanding, respectively.
In November 1999, we entered into an equipment lease financing agreement
with a lessor that provides for leasing of up to $1.5 million of equipment,
including up to $450,000 of software and tenant improvements. All scheduled
leases are payable in 36 equal monthly installments. Borrowings under this
agreement bear interest at 8%. Additionally, we granted the lessor fully vested
warrants to purchase up to 14,035 shares of Series B preferred stock at $4.28
per share. There was no outstanding debt related to this agreement as of
December 31, 1999, while $201,000 of debt had been incurred as of June 30,
2000.
Future principal payments at December 31 under long-term debt are as
follows (in thousands):
<TABLE>
<S> <C>
2000............................................................. $ 455
2001............................................................. 335
2002............................................................. 260
------
$1,050
======
</TABLE>
6. Net Loss Per Share
In accordance with FAS 128, basic net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period, less the weighted-average number of shares of common stock that are
subject to repurchase. Diluted net loss per share includes the impact of
options and warrants to purchase common stock, if dilutive. There is no
difference between our basic and diluted net loss per share as we incurred a
net loss for each period presented. Pro forma basic and diluted net loss per
share, as presented in the statements of operations, has been computed as
described above and also gives effect, under Securities Exchange Commission
guidance, to the conversion of the convertible preferred stock (using the if-
converted method) from the original date of issuance.
F-13
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
The following table presents the calculation of basic and diluted net loss
per share (in thousands, except share and per share data):
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
---------------------------------- ----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss................ $ (472) $ (3,638) $ (6,940) $ (3,548) $ (2,827)
========== ========== ========== ========== ==========
Basic and diluted
weighted average
shares:
Weighted-average shares
of common stock
outstanding.......... 12,095,856 13,547,780 14,098,094 14,001,382 14,673,660
Less: weighted-average
shares subject to
repurchase........... (142,289) (1,096,596) (871,555) (947,164) (853,822)
---------- ---------- ---------- ---------- ----------
Weighted-average shares
used in computing
basic and diluted net
loss per share....... 11,953,567 12,451,184 13,226,539 13,054,218 13,819,838
========== ========== ========== ========== ==========
Basic and diluted net
loss per common
share................. $ (0.04) $ (0.29) $ (0.52) $ (0.27) $ (0.20)
========== ========== ========== ========== ==========
Pro forma:
Shares used above...... 11,953,567 12,451,184 13,226,539 13,054,218 13,819,838
Pro forma adjustment to
reflect weighted
effect of assumed
conversion of
convertible preferred
stock (unaudited).... 1,777,770 1,777,770 3,205,651 2,879,140 3,922,368
---------- ---------- ---------- ---------- ----------
Shares used in
computing pro forma
basic and diluted net
loss per share
(unaudited).......... 13,731,337 14,228,954 16,432,190 15,933,358 17,742,206
========== ========== ========== ========== ==========
Pro forma basic and
diluted net loss per
common share
(unaudited)........... $ (0.03) $ (0.26) $ (0.42) $ (0.22) $ (0.16)
========== ========== ========== ========== ==========
</TABLE>
During all the periods presented, we had securities outstanding which could
potentially dilute basic loss per share in future, but were excluded from the
computation of diluted net loss per share, as their effect would have been
antidilutive. If the offering contemplated by this prospectus is consummated,
all of the convertible preferred stock outstanding will be automatically
converted into common stock. These outstanding securities consist of the
following:
<TABLE>
<CAPTION>
As of December 31, As of June 30,
----------------------------- -------------------
1997 1998 1999 1999 2000
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Convertible preferred
stock..................... 1,777,770 1,777,770 3,532,154 3,532,154 4,304,083
Outstanding options......... 1,401,314 2,889,987 4,009,242 3,077,374 4,115,377
Warrants.................... -- -- 14,035 -- 14,035
--------- --------- --------- --------- ---------
3,179,084 4,667,757 7,555,431 6,609,528 8,433,495
========= ========= ========= ========= =========
Weighted average exercise
price of options.......... $ 0.17 $ 1.10 $ 2.02 $ 1.40 $ 2.87
========= ========= ========= ========= =========
Weighted average exercise
price of warrants......... $ -- $ -- $ 4.28 $ -- $ 4.28
========= ========= ========= ========= =========
</TABLE>
F-14
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
7. Shareholders' Equity
Preferred Stock
Convertible preferred stock is issuable in series, with rights and
preferences designated by series. The shares outstanding were as follows:
<TABLE>
<CAPTION>
June 30, 2000
December 31, 1999 (unaudited)
---------------------------------- ----------------------------------
Shares Shares
Shares Issued and Liquidation Shares Issued and Liquidation
Authorized Outstanding Preference Authorized Outstanding Preference
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series A................ 1,333,332 888,885 $1,999,998 1,333,332 888,885 $ 1,999,998
Series B................ 2,731,579 1,754,384 7,500,000 2,731,579 1,754,384 7,500,000
Series C................ -- -- -- 1,157,895 771,929 5,500,001
--------- --------- ---------- --------- --------- -----------
4,064,911 2,643,269 $9,499,998 5,222,806 3,415,198 $14,999,999
========= ========= ========== ========= ========= ===========
</TABLE>
Convertible Series A Preferred Stock
In October 1996, we sold 888,885 shares to private investors at an
aggregate price of $1,999,998, subject to certain antidilution privileges. We
granted to holders of at least 166,666 shares of Series A preferred stock the
right of first refusal to purchase, pro rata, all or any part of new securities
which we may propose to sell and issue with certain exceptions. The right of
first refusal granted under this agreement expires upon the closing of an
initial public offering of our common stock to the general public.
Each share of Series A preferred stock is convertible into two shares of
common stock at the option of the holder. The conversion rate may be subject to
adjustment in the event of stock splits or combinations. Conversion is
automatic upon the closing of an underwritten public offering of our common
stock at a price per share of not less than $2.25 per share and an aggregate
offering price of more than $7,500,000 or upon agreement of a two-thirds
majority of holders of the then outstanding shares of Series A preferred stock.
The holder of each share of Series A preferred stock is entitled to the
number of votes equal to the number of shares of common stock into which such
share of Series A preferred stock could be converted.
Noncumulative dividends are payable at an annual rate of 8% per share, when
and if declared by the board of directors, in preference to any cash dividends
on the common stock. No dividends have been declared through June 30, 2000.
Upon liquidation, each share of the Series A preferred stock is entitled to
receive, at our option, (a) a per share amount equal to the initial sales price
plus an amount equal to a 40% annual cumulative return on the initial Series A
preferred stock purchase price or (b) an amount equal to the initial Series A
preferred stock purchase price plus all declared but unpaid dividends thereon.
If we elect option (b) above, the holders of Series A preferred stock are also
entitled to share our assets remaining after the payment of all preference
amounts with the holders of the common stock on an as converted basis.
Convertible Series B Preferred Stock
In March 1999, we sold 1,754,384 shares of convertible Series B preferred
stock ("Series B preferred stock") to investors at $4.28 per share for an
aggregate price of $7,500,000. Each share of Series B preferred stock is
convertible into one share of common stock at the option of the holder, and is
subject to certain antidilution adjustments. Conversion is automatic upon the
closing of an underwritten public offering of our
F-15
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
common stock at a price per share of not less than $5.25 and an aggregate
offering amount of not less than $15,000,000, or upon agreement of a majority
of holders of the then outstanding shares of Series B preferred stock.
The holder of each share of Series B preferred stock is entitled to the
number of votes equal to the number of shares of common stock into which such
share of Series B preferred stock could be converted.
The holders of the Series B preferred stock are entitled to 8%
noncumulative annual dividends per share, when and if declared by the board of
directors, in preference to any cash dividends on the common stock or the
Series A preferred stock.
Upon liquidation, the Series B preferred shareholders are entitled to
receive in preference to the holders of common stock, and pari passu to the
holders of Series A and C preferred stock, a per share amount equal to the
initial Series B preferred price, plus any declared but unpaid dividends. In
the event the net proceeds to us upon liquidation are greater than $25,000,000,
then Series B preferred shareholders are also entitled to share our remaining
assets with the holders of the common stock on an as-converted basis. In the
event the net proceeds to us upon liquidation are greater than $75,000,000,
then Series B preferred shareholders are entitled to receive in preference to
the holders of common stock, and pari passu to the holders of Series A and C
preferred stock, a per share amount equal to two times the Series B preferred
purchase price.
We also granted to holders of Series B preferred stock certain rights of
first refusal to purchase, pro rata, all or any part of new securities, which
we may propose to sell with certain exceptions. In addition, the holders of
Series B preferred stock were granted certain information and registration
rights.
Convertible Series C Preferred Stock
In March 2000, we sold 771,929 shares of convertible Series C preferred
stock ("Series C preferred stock") to investors at $7.13 per share for an
aggregate price of $5,500,001.
Each share of Series C preferred stock is convertible into one share of
common stock at the option of the holder, and is subject to certain
antidilution adjustments. Conversion is automatic upon the closing of an
underwritten public offering of our common stock with a price per share of at
least $7.13 and an aggregate offering amount of not less than $15,000,000, or
upon agreement of a majority of holders of the then outstanding shares of
Series C preferred stock.
The holder of each share of Series C preferred stock shall be entitled to
the number of votes equal to the number of shares of common stock into which
such share of Series C preferred stock could be converted.
Noncumulative dividends are payable at an annual rate of 8% per share, when
and if declared by the board of directors, in preference to any cash dividends
on the common stock.
Upon liquidation, holders of the Series C convertible preferred shares are
entitled to receive in preference to the holders of common stock, and pari
passu to the holders of Series A preferred stock and Series B preferred stock,
a per share amount equal to the initial purchase price, plus any declared but
unpaid dividends. In the event the net proceeds to us upon liquidation are
greater than $25,000,000, then Series C preferred shareholders are entitled to
receive in preference to the holders of common stock, and pari passu to the
holders of Series A preferred stock and Series B preferred stock, a per share
amount equal to the initial purchase price and shall also be entitled to share
our remaining assets with the holders of the common stock on an as-converted
basis. In the event the net proceeds to us upon liquidation are greater than
$132,000,000, then Series C preferred shareholders are entitled to receive in
preference to the holders of common stock, and pari passu to the holders of
Series A preferred stock, a per share amount equal to two times the initial
purchase price.
F-16
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
We also granted to holders of Series C preferred stock certain rights of
first refusal to purchase, pro rata, all or any part of new securities which we
may propose to sell with certain exceptions. In addition, the holders of Series
C preferred stock were granted certain information and registration rights.
Common Stock
In November 1995, we sold 666,666 shares of our common stock to a private
investor at an aggregate price of $100,000, subject to certain antidilution
provisions. We granted to the private investor the right of first refusal to
purchase, pro rata, any new securities that we may propose to sell and issue.
The right of first refusal granted under this agreement expires upon initial
closing of the first firmly underwritten public offering of common stock at a
per share price of not less than $1.00 and at an aggregate offering price of
not less than $500,000.
We sold 1,439,479 shares of common stock to employees in connection with
Restricted Stock Purchase Agreements. These agreements allow us to repurchase
unvested shares in the event that the employee is no longer employed by us. As
of December 31, 1999 and June 30, 2000, 750,529 shares and 723,947 shares,
respectively, were subject to repurchase.
We have reserved shares of common stock for issuance as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Stock Options:
Options outstanding.............................. 4,009,242 4,115,377
Reserved for future grants....................... 1,715,794 1,068,767
Convertible preferred stock
Issued and outstanding........................... 3,532,154 4,304,083
Warrants outstanding............................... 14,035 14,035
--------- ---------
9,271,225 9,502,262
========= =========
</TABLE>
Changed in Authorized Shares
In April 2000, our Board of Directors and shareholders approved an
amendment to our articles of incorporation to authorize us to issue up to
110,000,000 shares of our common stock.
Stock Options
We have a 1995 stock option plan (the "Option Plan") under which incentive
stock options or nonstatutory options may be granted to our employees,
consultants, and directors. Options are granted under the Option Plan at prices
not less than the fair value on the date of the grant. The options generally
expire in ten years. However, in the case of incentive stock options granted to
an optionee who, at the time the option is granted, owns stock representing
more than 10% of the voting power of all classes of our stock, the term of the
option is five years from the date of grant. We have authorized 7,400,000
shares of common stock for the grant of options under the Option Plan.
Incentive stock options generally become exercisable 25% after one year and on
a ratable basis over the subsequent 36 months. Nonstatutory stock options
become exercisable ratably over 48 months from the vesting date determined by
the board of directors.
F-17
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
A summary of option activity under the Option Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------
Weighted-
Shares Exercise Average
Available Number of Price Per Exercise
for Grant Shares Share Price
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1996.... 320,009 1,013,325 $0.02-$0.15 $0.11
Additional authorization........ 2,400,000 -- -- --
Options granted................. (1,843,962) 1,843,962 $0.15-$0.30 $0.27
Options exercised............... -- (1,260,420) $0.02-$0.30 $0.27
Options canceled................ 195,553 (195,553) $0.15-$0.30 $0.15
---------- ----------
Balance at December 31, 1997.... 1,071,600 1,401,314 $0.02-$0.30 $0.17
Additional authorization........ 1,666,666 -- -- --
Options granted................. (2,090,710) 2,090,710 $0.90-$2.55 $1.62
Options exercised............... -- (506,312) $0.02-$1.80 $0.71
Options canceled................ 95,725 (95,725) $0.15-$1.80 $0.95
---------- ----------
Balance at December 31, 1998.... 743,281 2,889,987 $0.02-$2.55 $1.10
Additional authorization........ 2,000,000 -- -- --
Options granted................. (1,341,379) 1,341,379 $1.88-$3.75 $2.35
Options exercised............... -- (582,894) $0.02-$2.55 $0.75
Options canceled................ 313,892 (313,892) $0.02-$2.25 $1.04
---------- ----------
Balance at December 31, 1999.... 1,715,794 3,334,580 $0.02-$3.75 $1.67
Options granted (unaudited)..... (900,802) 900,802 $5.10-$6.75 $5.96
Options exercised (unaudited)... -- (540,892) $0.15-$5.10 $1.92
Options canceled (unaudited).... 227,109 (227,109) $0.15-$6.75 $2.48
---------- ----------
Balance at June 30, 2000
(unaudited)................... 1,042,101 3,467,381 $0.15-$6.75 $2.70
========== ==========
</TABLE>
In December 1999, the Company granted options to purchase an aggregate of
674,662 shares of common stock at an exercise price of $3.75 per share, that
were outside of the Option Plan. As of December 31, 1999 and June 30, 2000,
674,662 and 647,996 of these options were outstanding, respectively.
The following table summarizes information about all stock options
outstanding at June 30, 2000 (unaudited):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
------------------------ ----------- ----------- --------- ----------- ---------
(In years)
<S> <C> <C> <C> <C> <C>
$0.15-$0.30............. 418,945 6.68 $0.21 293,298 $0.20
$0.90-$1.50............. 414,573 7.64 $1.09 208,837 $1.06
$1.80-$2.10............. 945,307 8.41 $1.91 279,023 $1.89
$2.25-$2.93............. 874,088 8.98 $2.52 113,390 $2.34
$3.75-$6.00............. 1,113,645 9.60 $4.49 111 $6.00
$6.23-$6.75............. 348,819 9.85 $6.55 -- --
--------- -------
4,115,377 8.73 $2.87 894,659 $1.20
========= =======
</TABLE>
F-18
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
Stock-Based Compensation
During the year ended December 31, 1999 and the six months ended June 30,
2000, we recorded deferred compensation of $2,397,000 and $1,034,000,
respectively, representing the difference between the exercise prices and the
deemed fair value of our common stock on the dates these stock options were
granted. The total deferred compensation of $3,431,000 is being amortized by
charges to operations on a graded vesting method over the vesting periods of
the respective options, generally four years. We recorded amortization of
deferred compensation expense of approximately $175,000 for the year ended
December 31, 1999 and approximately $386,000 to June 30, 2000. At June 30,
2000, we had a total of $2,870,000 remaining to be amortized over the
corresponding vesting period of each respective option, generally four years.
The remaining deferred stock compensation at June 30, 2000 will be
amortized as follows: $512,000 for the six months ending December 31, 2000,
$887,000 for the year ending December 31, 2001, $670,000 for the year ending
December 31, 2002, and $498,000 for the year ending December 31, 2003 and the
balance thereafter. Subsequent terminations of option holders may reduce future
stock-based compensation.
We have elected to follow APB 25 and related interpretations in accounting
for our employee stock-based compensation plans. Because the exercise price of
our employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is generally recognized. Pro forma
information regarding net loss has been determined as if we had accounted for
our employee stock options under the fair value method prescribed by SFAS 123.
The resulting effect on pro forma net loss disclosed is not likely to be
representative of the effects on net loss on a pro forma basis in future years,
due to additional grants and years of vesting in subsequent years. The fair
value of our stock-based awards to employees was estimated at the date of grant
using the minimum value method, which assumes a volatility of zero, and the
following weighted-average assumptions:
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31 June 30,
------------------- ------------------
1997 1998 1999 1999 2000
----- ----- ----- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Expected life (years)............. 4 4 4 4 4
Risk-free interest rate........... 6% 6% 6% 6% 6%
Weighted average fair value of
options granted.................. $0.06 $0.35 $0.72 $ 0.42 $ 1.69
Dividend yield.................... -- -- -- -- --
</TABLE>
For pro forma purposes, the estimated fair value of the Company's stock-
based awards to employees is amortized over the options' vesting period. The
Company's pro forma information follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December Six Months
31, Ended June 30,
------------------------ ----------------
1997 1998 1999 1999 2000
------ ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss:
As reported................... $ (472) $(3,368) $(6,940) $(3,548) $(2,827)
====== ======= ======= ======= =======
Pro forma..................... $ (489) $(3,768) $(7,192) $(3,662) $(3,056)
====== ======= ======= ======= =======
Net loss per share:
As reported................... $(0.04) $ (0.29) $ (0.52) $ (0.27) $ (0.20)
====== ======= ======= ======= =======
Pro forma..................... $(0.04) $ (0.30) $ (0.54) $ (0.28) $ (0.22)
====== ======= ======= ======= =======
</TABLE>
F-19
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
The fair value of options granted to consultants were determined using the
Black-Scholes model with the following weighted average assumptions: risk-free
interest rate of 6%, contractual life of 4-10 years, dividend yield of zero and
expected volatility of 60%. The resulting compensation expense was immaterial.
1995 Stock Option Plan
In April 2000, our Board of Directors approved the termination of the 1995
Stock Option Plan as to future option grants to be effective upon the
completion of an initial public offering of our common stock.
2000 Stock Option Plan
In April 2000, the Board of Directors adopted the 2000 Stock Option Plan
(the "2000 Plan") and reserved 2,666,666 shares for grant under the 2000 Plan.
The terms of 2000 Plan are substantially similar to the 1995 Stock Option Plan.
The reserved amount will be increased on the first business day of each year,
beginning January 1, 2001, equal to the lesser of 2,333,333 shares, 5% of the
outstanding shares of common stock on the last day of the prior fiscal year or
such amount as may be determined by the Board.
2000 Employee Stock Purchase Plan
In April 2000, the Board of Directors adopted the 2000 Employee Stock
Purchase Plan (the "Purchase Plan"). A total of 666,666 shares of our common
stock were reserved for issuance under the Plan. The Purchase Plan permits
eligible employees to purchase common stock at a discount up to a maximum of
12% of compensation through payroll deductions during defined offering periods.
The price at which stock is purchased under the Purchase Plan is equal to 85%
of the fair market value of the common stock on the first or last day of the
offering period, whichever is lower. The initial trading period will commence
on the effective date of our initial public offering and will end in April
2002. In addition, the Purchase Plan provides for annual increases in the
number of shares available for issuance under the Purchase Plan on the first
business day of each year, beginning January 1, 2001, equal to the lesser of
666,666 shares, 2.0% of the outstanding shares of common stock on the last day
of the prior fiscal year or such amount as may be determined by the Board.
2000 Director Option Plan
In April 2000, we adopted the 2000 Director Option Plan (the "Director
Option Plan"). In October 2000, the Director Plan was amended and the common
shares reserved for issuance thereunder was increased to 100,000. Each
nonemployee director who becomes one of our directors will automatically be
granted a nonstatutory stock option to purchase 40,000 shares of common stock
on the date on which such person first becomes a director. At the first board
meeting following each annual shareholders meeting, beginning with the first
board meeting after the first annual shareholders meeting, each nonemployee
director then in office for over six months will automatically be granted a
nonstatutory option to purchase 10,000 shares of common stock. The exercise
price of options under the Director Plan will be equal to the fair market value
of the common stock at the date of the grant. The term of the options is 10
years. The Director Plan will terminate in April 2010, unless terminated
earlier in accordance with the provisions of the Director Plan. In addition,
the Director Option Plan provides for annual increases in the number of shares
available for issuance on the first business day of each year, beginning
January 1, 2001, equal to the lesser of 100,000 shares, fifteen one hundredths
of one percent of the outstanding shares of common stock on the last day of the
prior fiscal year or such amount as may be determined by the Board.
F-20
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
8. Income Taxes
We have incurred losses for both income tax and financial statement
purposes for all periods reported. Accordingly, no provision for income taxes
has been recorded.
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income/(loss) before income taxes. The
sources and tax effects of the difference are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
----- ------- -------
<S> <C> <C> <C>
Expected tax at 35%.................................... $(165) $(1,273) $(2,429)
Unbenefited losses..................................... 165 1,273 2,429
----- ------- -------
Total provision........................................ $ -- $ -- $ --
===== ======= =======
</TABLE>
As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $9,300,000 and $400,000, respectively. The
federal and state net operating loss carryforwards will expire beginning in
2018 and 2002, respectively, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets for financial reporting and the amount
used for income tax purposes. Significant components of the Company's deferred
tax assets at December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................. $ 900 $ 3,200
Research credit carryforwards (federal and state)............ 300 800
Capitalized research expenses................................ -- 500
Other........................................................ 700 300
------- -------
Total deferred tax assets..................................... 1,900 4,800
Valuation allowances.......................................... (1,900) (4,800)
------- -------
Net deferred taxes............................................ -- --
======= =======
</TABLE>
The net valuation allowance increased by $240,000 and $1,160,000 during the
year ended December 31, 1997 and 1998, respectively.
F-21
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
9. Industry and Geographic Segment Information
The following table presents enterprise-wide sales to external customers
and long-lived assets by geographic areas (in thousands):
<TABLE>
<CAPTION>
Years Ended December Six Months
31, Ended June
---------------------- --------------
1997 1998 1999 1999 2000
------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Total revenues:
United States........................... $4,270 $ 8,941 $14,550 $6,620 $11,141
Europe, Middle East..................... 356 725 1,728 771 1,767
Asia.................................... 828 1,362 1,897 691 952
------ ------- ------- ------ -------
$5,454 $11,028 $18,175 $8,082 $13,860
====== ======= ======= ====== =======
Long-lived assets (at period end):
United States........................... $706 $1,904 $2,178 $2,097 $2,051
Europe, Middle East..................... 17 52 166 117 222
Asia.................................... -- -- 5 -- 160
------ ------- ------- ------ -------
$723 $1,956 $2,349 $2,214 $2,433
====== ======= ======= ====== =======
</TABLE>
Revenues by geographic area are based on the location of customers.
10. Employee Benefit Plan
Effective July 1997, we amended our 401(k) Plan and began to match employee
contributions. Under the Plan, all employees age 21 or over are eligible to
participate. Participants may defer up to 12% of their gross salary into the
Plan, subject to certain Plan restrictions. We provide matching contributions
of 50% of the first 4% contributed by the participants up to a maximum of
$1,000 per employee per year, totaling $107,000 and $120,000 for the years
ended December 31, 1998, and 1999, respectively, and $114,000 for the six
months ended June 30, 2000. Our matching contributions vest over four years.
11. Legal Proceedings
From time to time, we are subject to legal proceedings and claims in the
ordinary course of business. We are not currently aware of any legal
proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on our business, results of operations and
financial condition.
12. Subsequent Event
On July 27, 2000, we effected a two-for-three reverse split of our common
stock and preferred stock. All share and per share information included in
these financial statements has been retroactively adjusted to reflect this
reverse stock split.
13. Subsequent Events (unaudited)
Preferred Stock
In April 2000, the Board of Directors and Shareholders approved an
amendment to our articles of incorporation to authorize us to issue up to
10,000,000 shares of blank check preferred stock, with such
F-22
<PAGE>
SYNPLICITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited)
amendment to take effect upon conversion of all currently outstanding shares of
preferred stock to common stock upon an initial public offering of shares of
our common stock.
Initial Public Offering
In July 2000, our board of directors authorized us to file a registration
statement with the SEC for an initial public offering of our common stock.
F-23
<PAGE>
[EDGAR Description: the Synplicity Logo at the bottom of the page]
<PAGE>
[LOGO OF SYNPLICITY]
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 10, 2000.
[LOGO OF SYNPLICITY]
4,300,000 Shares
Common Stock
Synplicity, Inc. is offering 4,300,000 shares of its common stock. This is
our initial public offering and no public market currently exists for our
shares. Our shares have been approved for quotation on the Nasdaq National
Market under the symbol SYNP. We anticipate that the initial public offering
price will be between $10 and $12 per share.
---------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 8.
---------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price.......................................... $ $
Underwriting Discounts and Commissions......................... $ $
Proceeds to Synplicity, Inc.................................... $ $
</TABLE>
The United States Securities and Exchange Commission and state securities
regulators have not approved or disapproved these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
We and our majority shareholders have granted the underwriters a 30 day
option to purchase up to an additional 645,000 shares of common stock to cover
over-allotments.
---------------
Robertson Stephens International
Dain Rauscher Wessels
SG Cowen
The date of this Prospectus is , 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discounts, payable by the Registrant in connection with the sale
of the securities being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market System
listing fee.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 15,666
NASD Filing Fee................................................... 6,434
Nasdaq National Market Listing Fee................................ 95,000
Printing Costs.................................................... 300,000
Legal Fees and Expenses........................................... 650,000
Accounting Fees and Expenses...................................... 450,000
Blue Sky Fees and Expenses........................................ 10,000
Transfer Agent and Registrar Fees................................. 10,000
Miscellaneous..................................................... 62,900
---------
Total............................................................. 1,600,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 204(a) of the California General Corporation Law,
the Registrant's Amended and Restated Articles of Incorporation eliminate a
director's personal liability for monetary damages to the Registrant and its
shareholders arising from a breach or alleged breach of the director's
fiduciary duty, except for liability arising under Sections 310 and 316 of the
California General Corporation Law or liability for (i) acts or omissions that
involve intentional misconduct or knowing and culpable violation of law, (ii)
acts or omissions that a director believes to be contrary to the best interests
of the Registrant or its shareholders or that involve the absence of good faith
on the part of the director, (iii) any transaction from which a director
derived an improper personal benefit, (iv) acts or omissions that show a
reckless disregard for the director's duty to the Registrant or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the Registrant or its shareholders, (v) acts or omissions
that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the Registrant or its shareholders, (vi)
interested transactions between the corporation and a director in which a
director has a material financial interest, and (vii) liability for improper
distributions, loans or guarantees. This provision does not eliminate the
directors' duty of care, and in appropriate circumstances equitable remedies
such as an injunction or other forms of non-monetary relief would remain
available under California law.
Sections 204(a) and 317 of the California General Corporation Law authorize
a corporation to indemnify its directors, officers, employees and other agents
in terms sufficiently broad to permit indemnification (including reimbursement
for expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Amended and Restated Articles of Incorporation and Bylaws contain provisions
covering indemnification to the maximum extent permitted by the California
General Corporation Law of corporate directors, officers and other agents
against certain liabilities and expenses incurred as a result of proceedings
involving such persons in their capacities as directors, officers employees or
agents, including proceedings under the Securities Act or the Securities
Exchange Act of 1934, as amended. Prior to the effective date of this Offering,
the Registrant will enter into indemnification agreements with its directors
and executive officers.
The Registrant has entered into indemnification agreements with each of its
directors and executive officers. Generally, the indemnification agreements
attempt to provide the maximum protection permitted by California law as it may
be amended from time to time. Moreover, the indemnification agreements provide
for
II-1
<PAGE>
certain additional indemnification. Under such additional indemnification
provisions, however, an individual will not receive indemnification for
judgments, settlements or expenses if he or she is found liable to the
Registrant (except to the extent the court determines he or she is fairly and
reasonably entitled to indemnity for expenses), for settlements not approved by
the Registrant or for settlements and expenses if the settlement is not
approved by the court. The indemnification agreements provide for the
Registrant to advance to the individual any and all reasonable expenses
(including legal fees and expenses) incurred in investigating or defending any
such action, suit or proceeding. In order to receive an advance of expenses,
the individual must submit to the Registrant copies of invoices presented to
him or her for such expenses. Also, the individual must repay such advances
upon a final judicial decision that he or she is not entitled to
indemnification.
The Registrant intends to enter into additional indemnification agreements
with each of its directors and executive officers to effectuate these indemnity
provisions and to purchase directors' and officers' liability insurance.
In addition to the foregoing, the Underwriting Agreement contains certain
provisions by which the Underwriters have agreed to indemnify the Registrant,
each person, if any, who controls the Registrant within the meaning of Section
15 of the Securities Act, each director of the Registrant, each officer of the
Registrant who signs the Registration Statement, with respect to information
furnished in writing by or on behalf of the Underwriters for use in the
Registration Statement.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since our incorporation in February 1994, we have sold and issued the
following securities:
1. In March 1994, the Registrant issued and sold 11,338,800 shares of
Common Stock to two of our founders, who are also members of our board of
directors and our executive officers, Kenneth S. McElvain and Alisa Yaffa,
for $50,000 pursuant to Section 4(2) of the Securities Act.
2. In November 1995, the Registrant issued and sold 666,666 shares of
Common Stock to one accredited investor for $100,000 pursuant to Section
4(2) of the Securities Act.
3. In October 1996, the Registrant issued and sold 888,885 shares of
Series A Preferred Stock to three accredited investors, including Prabhu
Goel, who became one of our directors thereafter, for $2.0 million
pursuant to Section 4(2) of the Securities Act.
4. In March 1999, the Registrant issued and sold 1,754,384 shares of
Series B Preferred Stock to five accredited investors, including Prabhu
Goel, one of our directors, and Kevin G. Hall, who became one of our
directors thereafter, for $7.5 million pursuant to Section 4(2) of the
Securities Act.
5. In October 1999, the Registrant issued and sold a warrant to
purchase 14,035 shares of Series B Preferred Stock to one accredited
investor with an exercise price of $4.28 per share pursuant to
Section 4(2) of the Securities Act.
6. In March 2000, the Registrant issued and sold 771,929 shares of
Series C Preferred Stock to eight accredited investors, including Messrs.
Goel and Hall, for $5.5 million pursuant to Section 4(2) of the Securities
Act.
7. Pursuant to Rule 701 promulgated under the Securities Act, from
September 1995 to September 15, 2000, the Registrant issued and sold
3,013,314 shares of Common Stock to employees and consultants for
aggregate consideration of $2,389,090 upon the exercise of stock options
pursuant to the Registrant's 1995 Stock Option Plan.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.1** Articles of Incorporation of the Registrant, as currently in effect
3.1.1** Form of Articles of Incorporation of the Registrant to be filed
after the closing of this offering made under this Registration
Statement
3.2** Bylaws of the Registrant
4.1** Specimen Common Stock Certificate
4.2** Amended and Restated Registration Rights Agreement dated March 31,
2000 by and among the Registrant and certain shareholders of the
Registrant
5.1** Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2** Amended and Restated 1995 Stock Option Plan
10.2.1** Form of Option Agreement under the 1995 Stock Option Plan
10.3** 2000 Stock Option Plan
10.3.1** Form of Option Agreement under the 2000 Stock Option Plan
10.4 2000 Director Option Plan
10.4.1** Form of Option Agreement under 2000 Director Option Plan
10.5** 2000 Employee Stock Purchase Plan
10.5.1** Form of Subscription Agreement under the 2000 Employee Stock
Purchase Plan
10.6** Promissory Note dated November 7, 1995 between Registrant and
Andreas Bechtolsheim
10.7+** Authorized International Distributor Agreement dated February 13,
1996 between Registrant and Pacific Design, Inc.
10.8** Employment Agreement dated November 22, 1996 between Registrant and
Andrew Haines
10.9+** Software OEM License Agreement dated December 23, 1997 by and among
Registrant, Cadence Design Systems, Inc. and Cadence Design Systems
(Ireland) Limited
10.9.1** Amendment 1 to Software OEM License Agreement dated August 1, 1998
by and among Registrant, Cadence Design Systems, Inc. and Cadence
Design Systems (Ireland) Limited
10.9.2+** Amendment 2 to Software OEM License Agreement dated December 17,
1999 by and among Registrant, Cadence Design Systems, Inc. and
Cadence Design Systems (Ireland) Limited
10.10** Employment Agreement dated June 19, 1997 between Registrant and
Bernard Aronson
10.11** Employment Agreement dated April 17, 1998 between Registrant and
Robert J. Erickson
10.12** Promissory Note and Security Agreement dated September 3, 1998
between Registrant and Robert J. Erickson
10.13** Employment Agreement dated October 1, 1998 between Registrant and
Douglas S. Miller
10.14+** Distributor Agreement dated April 1, 1999 between Registrant and
Insight Enterprises Inc.
10.15** Sublease dated August 25, 1999 between Registrant and Proxim, Inc.
for the 935 Stewart Drive, Sunnyvale, California office
10.16** Sublease dated October 18, 1999 between Registrant and HRG, Inc.,
The Human Resource Group for the 17055 Via del Campo, Office 109,
San Diego, California office
10.17** Lease dated July 15, 1999 between Registrant and Anthony Buxton and
R. Robert Reading, Trustees of Tactician Realty Trust for the 305
North Main Street, Andover, Massachusetts office
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.18** Promissory Note and Security Agreement dated November 29, 1999
between Registrant and Douglas S. Miller
10.19** Promissory Note and Security Agreement dated December 28, 1999
between Registrant and Douglas S. Miller
10.20** Lease dated January 27, 2000 between Registrant and Information
Technology Park Ltd. for the International Tech Park, Bangalore,
India office
10.21** Lease dated June 1, 2000 between Registrant and Becker Family
Limited Partnership for the 8217 Shoal Creek Blvd., Austin, Texas
office
10.22+** Distribution Agreement dated April 1, 1999 between Registrant and
Wyle Electronics
10.23** Amended and Restated Loan and Security Agreement dated September 9,
1998 between Registrant and Silicon Valley Bank
10.23.1** Loan Modification Agreement dated December 15, 1999 between
Registrant and Silicon Valley Bank
21.1** Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2** Consent of Counsel (included in Exhibit 5.1)
23.3** Consent of Blakely Sokoloff Taylor & Zafman
24.1** Power of Attorney
27.1** Financial Data Schedule
99.1** Consent of the Semiconductor Industry Association
99.2** Consent of inSearch Research
</TABLE>
--------
**Previously filed.
+ Confidential treatment has been granted or requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately with
the Securities and Exchange Commission.
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts (set forth on page S-1)
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment number 3 to this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Sunnyvale, State of California on October 10, 2000.
/s/ Bernard Aronson
By: _________________________________
Bernard Aronson
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bernard Aronson President, Chief Executive October 10, 2000
____________________________________ Officer and Director
Bernard Aronson (Principal Executive Officer)
/s/ Douglas S. Miller Vice President of Finance October 10, 2000
____________________________________ and Chief Financial Officer
Douglas S. Miller (Principal Accounting
Officer)
Kenneth S. McElvain* Director October 10, 2000
____________________________________
Kenneth S. McElvain
Alisa Yaffa* Director October 10, 2000
____________________________________
Alisa Yaffa
Prabhu Goel* Director October 10, 2000
____________________________________
Prabhu Goel
Kevin G. Hall* Director October 10, 2000
____________________________________
Kevin G. Hall
/s/ Douglas S. Miller
*By: _______________________________
Douglas S. Miller
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and at End
Descriptions of Period Expenses Deductions of Period
------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
December 31, 1997................. $ 21 $238 $(35) $224
December 31, 1998................. 224 100 (9) 315
December 31, 1999................. 315 80 -- 395
June 30, 2000..................... $395 $ 15 $ (3) $407
</TABLE>
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
1.1 Form of Underwriting Agreement
3.1** Articles of Incorporation of the Registrant, as currently in
effect
3.1.1** Form of Articles of Incorporation of the Registrant to be filed
after the closing of this offering made under this Registration
Statement
3.2** Bylaws of the Registrant
4.1** Specimen Common Stock Certificate
4.2** Amended and Restated Registration Rights Agreement dated March 31,
2000 by and among the Registrant and certain shareholders of the
Registrant
5.1** Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Form of Indemnification Agreement between the Registrant and each
of its directors and officers
10.2** Amended and Restated 1995 Stock Option Plan
10.2.1** Form of Option Agreement under the 1995 Stock Option Plan
10.3** 2000 Stock Option Plan
10.3.1** Form of Option Agreement under the 2000 Stock Option Plan
10.4 2000 Director Option Plan
10.4.1** Form of Option Agreement under 2000 Director Option Plan
10.5** 2000 Employee Stock Purchase Plan
10.5.1** Form of Subscription Agreement under the 2000 Employee Stock
Purchase Plan
10.6** Promissory Note dated November 7, 1995 between Registrant and
Andreas Bechtolsheim
10.7+** Authorized International Distributor Agreement dated February 13,
1996 between Registrant and Pacific Design, Inc.
10.8** Employment Agreement dated November 22, 1996 between Registrant
and Andrew Haines
10.9+** Software OEM License Agreement dated December 23, 1997 by and
among Registrant, Cadence Design Systems, Inc. and Cadence Design
Systems (Ireland) Limited
10.9.1** Amendment 1 to Software OEM License Agreement dated August 1, 1998
by and among Registrant, Cadence Design Systems, Inc. and Cadence
Design Systems (Ireland) Limited
10.9.2+** Amendment 2 to Software OEM License Agreement dated December 17,
1999 by and among Registrant, Cadence Design Systems, Inc. and
Cadence Design Systems (Ireland) Limited
10.10** Employment Agreement dated June 19, 1997 between Registrant and
Bernard Aronson
10.11** Employment Agreement dated April 17, 1998 between Registrant and
Robert J. Erickson
10.12** Promissory Note and Security Agreement dated September 3, 1998
between Registrant and Robert J. Erickson
10.13** Employment Agreement dated October 1, 1998 between Registrant and
Douglas S. Miller
10.14+** Distributor Agreement dated April 1, 1999 between Registrant and
Insight Enterprises Inc.
10.15** Sublease dated August 25, 1999 between Registrant and Proxim, Inc.
for the 935 Stewart Drive, Sunnyvale, California office
10.16** Sublease dated October 18, 1999 between Registrant and HRG, Inc.,
The Human Resource Group for the 17055 Via del Campo, Office 109,
San Diego, California office
10.17** Lease dated July 15, 1999 between Registrant and Anthony Buxton
and R. Robert Reading, Trustees of Tactician Realty Trust for the
305 North Main Street, Andover, Massachusetts office
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.18** Promissory Note and Security Agreement dated November 29, 1999
between Registrant and Douglas S. Miller
10.19** Promissory Note and Security Agreement dated December 28, 1999
between Registrant and Douglas S. Miller
10.20** Lease dated January 27, 2000 between Registrant and Information
Technology Park Ltd. for the International Tech Park, Bangalore,
India office
10.21** Lease dated June 1, 2000 between Registrant and Becker Family
Limited Partnership for the 8217 Shoal Creek Blvd., Austin, Texas
office
10.22+** Distribution Agreement dated April 1, 1999 between the Registrant
and Wyle Electronics
10.23** Amended and Restated Loan and Security Agreement dated September 9,
1998 between Registrant and Silicon Valley Bank
10.23.1** Loan Modification Agreement dated December 15, 1999 between
Registrant and Silicon Valley Bank
21.1** Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2** Consent of Counsel (included in Exhibit 5.1)
23.3** Consent of Blakely Sokoloff Taylor & Zafman
24.1** Power of Attorney
27.1** Financial Data Schedule
99.1** Consent of the Semiconductor Industry Association
99.2** Consent of inSearch Research
</TABLE>
--------
**Previously filed.
+ Confidential treatment has been granted or requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately with
the Securities and Exchange Commission.
