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Filed Pursuant to Rule 424(b)(1)
Registration No. 333-95695
5,534,000 Shares
[LOGO OF NUMERICAL APPEARS HERE]
Numerical Technologies, Inc.
Common Stock
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Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "NMTC."
The underwriters have an option to purchase a maximum of 830,100 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 7.
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Underwriting
Discounts and Proceeds to
Price to Public Commissions Numerical
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<S> <C> <C> <C>
Per Share.................................. $14.00 $0.98 $13.02
Total...................................... $77,476,000 $5,423,320 $72,052,680
</TABLE>
Delivery of the shares of common stock will be made on or about April 12,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Chase H&Q
SG Cowen
The date of this prospectus is April 7, 2000.
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TABLE OF CONTENTS
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Page
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Prospectus Summary................... 4
Risk Factors......................... 7
Special Note Regarding Forward-
Looking Statements.................. 16
Use of Proceeds...................... 17
Dividend Policy...................... 17
Capitalization....................... 18
Dilution............................. 19
Selected Financial Data.............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business............................. 27
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Page
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Management..........................42
Related Party Transactions..........51
Principal Stockholders..............58
Description of Capital Stock........60
Shares Eligible for Future Sale.....63
Underwriting........................65
Notice to Canadian Residents........68
Legal Matters.......................69
Experts.............................69
Where You Can Find More
Information........................69
Index to Financial Statements......F-1.
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You should only rely on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only where it is legal
to sell these securities. The information in this document may only be accurate
on the date on this document.
Dealer Prospectus Delivery Obligation
Until May 3, 2000, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to unsold allotments
or subscriptions.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus.
Numerical Technologies, Inc.
We are a leading commercial provider of proprietary technologies and
software products used to produce semiconductors with subwavelength feature
sizes of 0.18 micron and below that enable the design and manufacture of
faster, smaller and more power efficient electronic products. A semiconductor's
"feature size" relates to the size of the integrated circuit, or IC, components
on the semiconductor and is measured in microns, or millionths of a meter. In
semiconductors with "subwavelength" feature sizes, the wavelength of light used
to create the IC features on the semiconductor is larger than the feature sizes
themselves. Our subwavelength solution exceeds the predictions of industry
roadmaps by producing semiconductors with feature sizes of 0.09 micron and
below using existing semiconductor equipment. We believe our patented
technologies and software products are critical to key markets of the
semiconductor industry as they strive to design and manufacture subwavelength
semiconductors.
Our industry partners and customers demonstrate the success of our
proprietary technologies and software products. Motorola used our proprietary
technologies in its 0.18 micron fabrication facilities to produce 0.10 micron
microprocessor features. One of our industry partners announced that it
developed the world's fastest one volt digital signal processor, or DSP, by
reducing feature sizes from 0.25 micron to 0.12 micron using our proprietary
technologies. DSPs manipulate large volumes of video or sound in products such
as cell phones or video cameras. MIT Lincoln Laboratory, a research laboratory,
used our proprietary technologies to achieve the first successful creation of
0.05 micron features. We have industry partner and customer relationships with
leading companies in all key markets of the semiconductor industry, including
vendors of tools used to design semiconductors, such as Cadence Design Systems;
manufacturers of photomasks, or templates used in creating ICs, such as Dupont
Photomask and Photronics; manufacturers of sophisticated equipment used to
manufacture semiconductors, such as Applied Materials and KLA-Tencor; and
semiconductor manufacturers, or foundries, such as TSMC and UMC. Through our
industry partner relationships, our industry partners resell, market, either
jointly with us or unilaterally, and promote our technologies and products to
their own customers. Our customers are the actual users of our technologies and
products.
Our Market and the Subwavelength Challenge
The proliferation of semiconductors in a broad range of electronic products,
including personal computers, mobile phones, Internet appliances, video game
consoles, and high-speed networking and communications products that serve as
the backbone of the Internet, is driving the growth in the worldwide market for
semiconductors. To capitalize on this growing market, electronics manufacturers
must continuously introduce higher-performance products that are cheaper and
more portable. These advanced products must incorporate semiconductors that are
faster and smaller, consume less power and can be manufactured at a lower cost.
As a result, the growth in manufacturing of semiconductors with feature sizes
of less than 0.25 micron is expected to be significantly greater than the
growth for semiconductors with larger feature sizes.
The ability to produce advanced ICs depends on developing technologies that
enable the design and manufacture of devices with increasingly smaller feature
sizes. As a result of advances in semiconductor design and manufacturing
processes, feature sizes decreased from 3.0 micron in 1980 to 0.18 micron in
today's
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advanced fabrication facilities. This progression requires large research and
development investments in sophisticated semiconductor design tools, photomask
manufacturing and semiconductor equipment. In addition, each incremental
reduction in feature size requires significant capital expenditures. The
purchase and installation of new equipment and the construction of new
fabrication facilities can require billions of dollars and several years before
becoming operational.
At 0.18 micron and smaller, traditional technology approaches are no longer
adequate. The wavelength of light used in production semiconductor equipment to
manufacture these features is significantly larger than the features
themselves. This is like trying to paint a one-inch wide line with a four-inch
wide paint brush. This growing disparity between feature sizes and the
wavelength of light is referred to as the "subwavelength gap." We do not expect
alternative manufacturing processes that can bridge the subwavelength gap will
be commercially viable for many years. We believe advances in manufacturing
equipment technology alone can no longer enable the progression to smaller
feature sizes.
Our Solution
We provide patented phase shifting and proprietary optical proximity
correction and process modeling technologies that are integral to our
subwavelength solution. Phase-shifting technologies manipulate light wave
patterns to create high-resolution images of IC features. Optical proximity
correction technologies, or OPC, help to reduce distortions in IC features.
Process modeling technologies allow semiconductor designers and manufacturers
to accurately translate IC designs to photomasks and then to the actual
semiconductor. These technologies enable the progression to subwavelength
feature sizes.
Our comprehensive subwavelength solution allows our industry partners and
customers to produce smaller, faster and more power efficient semiconductors
with existing semiconductor equipment. This saves them the time and cost
necessary to establish a more advanced fabrication facility. As a result, our
industry partners and customers can earn revenues more quickly and increase
their return on invested capital.
We license our proprietary technology and software products to semiconductor
designers, design tool vendors, photomask manufacturers, semiconductor
equipment manufacturers and foundries. By providing a subwavelength solution
employable in every key stage of the semiconductor design and manufacturing
process, our technologies and products integrate the entire subwavelength
"design-to-silicon flow." We believe that we can capitalize on the pressing
need for proven subwavelength solutions by leveraging our technology leadership
and our relationships with leading companies within the semiconductor industry
to drive the adoption of our solution as the industry standard.
Our company incorporated in California in October 1995 and reincorporated in
Delaware in April 2000. Our principal executive office is located at 70 West
Plumeria Drive, San Jose, CA 95134. Our telephone number is (408) 919-1910.
Unless otherwise indicated, information in this prospectus assumes the
following:
. a three-for-two forward stock split of preferred stock and common stock
completed in April 2000;
. the automatic conversion of all outstanding shares of preferred stock
into shares of common stock immediately prior to the completion of this
offering;
. our reincorporation in Delaware in April 2000; and
. no exercise of the underwriters' over-allotment option.
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The Offering
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Common stock offered by us.................. 5,534,000 shares
Common stock to be outstanding after the
offering................................... 29,082,005 shares
Use of proceeds............................. For the repayment of outstanding promissory
notes issued pursuant to our acquisition of
Transcription Enterprise Limited and for
general corporate purposes.
Nasdaq National Market Symbol............... NMTC
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The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of February 15, 2000 and
excludes:
. 1,238,155 shares outstanding under our stock option plans with a
weighted average exercise price of $1.40 per share and 2,412,911
additional shares that we could issue under our stock option plans; and
. 300,000 shares issuable under our employee stock purchase plan.
Summary Financial Information
(in thousands, except per share data)
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Years Ended
December 31,
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1997 1998 1999
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Statement of Operations Data:
Revenue............................................. $ 620 $ 736 $ 5,492
Total costs and expenses............................ 1,239 7,469 14,693
Loss from operations................................ (619) (6,733) (9,201)
Net loss............................................ (584) (6,551) (8,828)
Pro forma net loss per common share, basic and
diluted (unaudited)................................ $ (0.64)
Pro forma weighted average common shares, basic and
diluted (unaudited)................................ 13,885
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December 31, 1999
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Pro Forma
Actual Pro Forma As Adjusted
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Balance Sheet Data:
Cash and cash equivalents........................ $13,486 $ 8,236 $ 43,688
Working capital.................................. 10,499 (3,469) 40,734
Total assets..................................... 17,605 99,119 134,571
Notes payable, including short-term portion...... -- 35,000 --
Total stockholders' equity....................... 12,405 57,825 128,278
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See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
The pro forma balance sheet data reflects our acquisition of Transcription
Enterprises Limited effected in January 2000 and the conversion of
approximately 11,913,000 shares of preferred stock into shares of common stock.
The pro forma as adjusted amounts give effect to the sale of 5,534,000 shares
of common stock in this offering at an assumed initial public offering price of
$14.00 per share after deducting estimated underwriting discounts and
commissions and estimated offering expenses and the application of the net
proceeds from this offering. See Note 9 of Notes to Financial Statements.
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RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
If the key markets within the semiconductor industry, especially semiconductor
manufacturers, do not adopt our proprietary technologies and software products,
we may be unable to generate sales of our products.
The four key markets within the semiconductor industry are semiconductor
designers and design tool vendors, photomask manufacturers, semiconductor
equipment manufacturers and semiconductor manufacturers. If these key markets
do not adopt our proprietary technologies and software products, our product
sales could decline. We design our technologies and products so that each key
market within the semiconductor industry can work efficiently with the other
markets. For example, if designers do not adopt our technologies and products,
it will be more difficult for them to design semiconductors which are
understood and processed efficiently by mask manufacturers that do adopt our
technologies and products. In addition, we believe semiconductor manufacturers
need to adopt our proprietary technologies and software products first in order
to drive adoption by the other three markets. Semiconductor manufacturers
define and develop the manufacturing process. While designers, mask
manufacturers and equipment manufacturers are not required to adopt our
technologies and products in order to work with semiconductor manufacturers
that do adopt them, the efficiency of the entire manufacturing process is
greatly diminished if they do not. If each key market of the semiconductor
industry does not perceive our proprietary technologies and software products
as the industry standard, our technologies and products could become less
valuable and more difficult to license. Factors that may limit adoption of our
subwavelength solution within the markets include:
. our current and potential industry partners and customers may fail to
adopt our technologies and products;
. semiconductor designers may not need subwavelength processes if there is
a slowdown in semiconductor manufacturing or a decrease in the demand for
smaller semiconductor feature sizes; and
. the industry may develop alternative methods to produce subwavelength
features with existing capital equipment due to a rapidly evolving market
and the likely emergence of new technologies.
In order for potential industry partners and customers to adopt, and expend
their own resources to implement, our technologies and products, we must expend
significant marketing resources, with no guarantee of success.
Our proprietary technologies and software products involve a new approach to
the subwavelength gap problem. As a result, we must employ intensive and
sophisticated marketing and sales efforts to educate prospective industry
partners and customers about the benefits of our technologies and products,
with no guarantee of success. Our sales and marketing expenses increased from
$1.4 million in 1998 to $4.3 million in 1999. In addition, even if our industry
partners and customers adopt our proprietary technologies and software
products, they must devote the resources necessary to fully integrate our
technologies and products into their operations. This is especially true for
our industry partners so that they can begin to resell and market our solution
to their customers. If they do not make these expenditures, establishing our
technologies and products as the industry standard to the subwavelength gap
problem will be difficult.
Our limited operating history and dependence on new technologies make it
difficult to evaluate our future prospects.
We only have a limited operating history on which you can base your
evaluation of our business. We face a number of risks as an emerging company in
a new market. For example, the key markets within the
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semiconductor industry may fail to adopt our proprietary technologies and
software products, or we may not be able to establish distribution channels.
Our company incorporated in October 1995. In February 1997, we shipped our
initial software product, IC Workbench. We have only recently begun to expand
our operations significantly. For example, we grew from 47 employees as of
January 1, 1999 to 105 employees as of January 1, 2000.
We have a history of losses, we expect to incur losses in the future and we may
be unable to achieve profitability.
We may not achieve profitability if our revenue increases more slowly than
we expect or not at all. In addition, our operating expenses are largely fixed,
and any shortfall in anticipated revenue in any given period could cause our
operating results to decrease. We have not been profitable in any quarter, and
our accumulated deficit was approximately $16.2 million as of December 31,
1999. We expect to continue to incur significant operating expenses in
connection with increased funding for research and development and expansion of
our sales and marketing efforts. In addition, we expect to incur additional
noncash charges relating to amortization of intangibles and deferred stock
compensation. As a result, we will need to generate significant revenue to
achieve and maintain profitability. If we do achieve profitability, we may be
unable to sustain or increase profitability on a quarterly or annual basis. Any
of the factors discussed above could cause our stock price to decline.
We recently acquired Transcription Enterprises Limited and if we are not
successful in integrating Transcription's products and operations with ours,
our revenue and operating results could decline.
Our recent acquisition of Transcription Enterprises Limited will only be
successful if we are able to integrate its operations with ours, which could
substantially divert management's attention from the day-to-day operations of
the combined company. If we encounter any difficulties in the transition
process, the revenue and operating results of the combined company could
decline. We must successfully integrate Transcription's products with ours. We
must also coordinate our research and development and sales and marketing
efforts to realize the technological benefits of this combination.
We may find it difficult to integrate personnel with disparate business
backgrounds and combine two different corporate cultures. In addition, the
process of combining our company with Transcription could interrupt the
activities of either or both of the companies' businesses. It is possible that
we will not be able to retain key Transcription management, technical and sales
personnel.
In addition, the acquisition of Transcription could cause our industry
partners and customers to be uncertain about our ability to support the
combined companies' products and the direction of the combined companies'
product development efforts. As a result, they may delay or cancel product
orders, which could significantly decrease our revenue and limit our ability to
implement our combined business strategy.
Our acquisition of Transcription may increase the focus of the semiconductor
industry on the manufacturing data preparation market, which could lead to a
rapid and substantial increase in competition.
Our recent acquisition of Transcription may increase the semiconductor
industry's awareness of the market for manufacturing data preparation software,
which could lead to a substantial increase in the number of start-up companies
that focus on software solutions for data preparation. Manufacturing data
preparation software translates semiconductor designs into instructions that
control manufacturing equipment. Potential competitors could pursue and execute
partnership agreements with key industry partners we intend to pursue, which
could make it difficult or impossible for us to develop relationships with
these potential industry partners. In addition, some of our current competitors
may increase their own research and development budgets relating to data
preparation, or may more aggressively market competing solutions.
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If we do not continue to introduce new technologies and software products or
product enhancements ahead of rapid technological change in the market for
subwavelength solutions, our operating results could decline and we could lose
our competitive position.
We must continually devote significant engineering resources to enable us to
introduce new technologies and software products or product enhancements to
address the evolving needs of key markets within the semiconductor industry in
solving the subwavelength gap problem. We must introduce these innovations and
the key markets within the semiconductor industry must adopt them before
changes in the semiconductor industry, such as the introduction by our current
and potential competitors of more advanced products or the emergence of
alternative technologies, render the innovations obsolete, which could cause us
to lose our competitive position. These innovations are inherently complex,
require long development cycles and a substantial investment before we can
determine their commercial viability. Moreover, designers, mask manufacturers
and equipment manufacturers must each respond to the demand of the market to
design and manufacture masks and equipment for increasingly smaller and complex
semiconductors. Our innovations must be viable and meet the needs of these key
markets within the semicondutor industry before the consumer market demands
even smaller semiconductors, rendering the innovations obsolete. We may not
have the financial resources necessary to fund any future innovations. In
addition, any revenue that we receive from enhancements or new generations of
our proprietary technologies and software products may be less than the costs
of development.
Fluctuations in our quarterly operating results may cause our stock price to
decline.
It is likely that our future quarterly operating results may fluctuate from
time to time and may not meet the expectations of securities analysts and
investors in some future period. As a result, the price of our common stock
could decline. Historically, our quarterly operating results have fluctuated.
We may experience significant fluctuations in future quarterly operating
results. The following factors may cause these fluctuations:
. the timing and structure of our product license agreements;
. changes in our pricing policies or those of our competitors; and
. changes in the level of our operating expenses to support our projected
growth.
We intend to pursue new, and maintain our current, industry partner
relationships, which could substantially divert management attention and
resources, with no guarantee of success.
We expect to derive significant benefits, including increased revenue and
customer awareness, from our current and potential industry partner
relationships. In our pursuit to maintain and establish partner relationships
within each of the key markets in the semiconductor industry, we could expend
significant management attention, resources and sales personnel efforts, with
no guarantee of success. To establish and maintain our partner relationships,
we expend our limited financial resources on increasing our sales and business
development personnel, trade shows and marketing within trade publications. If
we did not have to pursue potential industry partners, we could focus these
resources exclusively on direct sales to our customers. In addition, through
our partner relationships, our partners resell, market, either jointly with us
or unilaterally, and promote our technologies and products. If these
relationships terminate, such as due to our material breach of the contracts or
the partners' election to cancel the contract, which generally is permissible
with prior notice to us, we would have to increase our own limited marketing
and sales resources for these activities. Further, we may be unable to enter
into new industry partner relationships if any of the following occur:
. current or potential industry partners develop their own solutions to
the subwavelength gap problem; or
. our current or potential competitors establish relationships with
industry partners with which we seek to establish a relationship.
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We have only recently entered into many of our current partner
relationships. These relationships may not continue or they may not be
successful. We also may be unable to find suitable additional industry
partners. To date, we have entered into agreements with industry partners,
including:
. Cadence in the design market;
. DuPont Photomask and Photronics in the mask manufacturing market; and
. Applied Materials, KLA-Tencor and Zygo Corporation in the semiconductor
equipment market.
Many of our current competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we do and as a result, they may acquire a significant market share before we
do.
Our current competitors, or alliances among these competitors, may rapidly
acquire significant market share. These competitors may have greater name
recognition and more customers which they could use to gain market share to our
detriment. We encounter direct competition from other direct providers of phase
shifting, OPC and manufacturing data technologies. These competitors include
such companies as Avant! and Mentor Graphics. We also compete with companies
that have developed or have the ability to develop their own proprietary phase
shifting and OPC solutions, such as IBM. These companies may wish to promote
their internally developed products and may be reluctant to purchase products
from us or other independent vendors. Our competitors may offer a wider range
of products than we do and thus may be able to respond more quickly to new or
changing opportunities, technologies and customer requirements. These
competitors may also be able to undertake more extensive promotional
activities, offer more attractive terms to customers than we do and adopt more
aggressive pricing policies. Moreover, our competitors may establish
relationships among themselves or with industry partners to enhance their
services, including industry partners with which we may desire to establish a
relationship.
The market for software solutions that address the subwavelength gap problem is
new and rapidly evolving. We expect competition to intensify in the future,
which could slow our ability to grow or execute our strategy.
We believe that the demand for solutions to the subwavelength gap problem
may encourage many competitors to enter into our market. As the market for
software solutions to the subwavelength gap problem proliferates, if our
competitors are able to attract industry partners or customers on a more
accelerated pace than we can and retain them more effectively, we would not be
able to grow and execute our strategy as quickly. In addition, if customer
preferences shift away from our technologies and software products as a result
of the increase in competition, we must develop new proprietary technologies
and software products to address these new customer demands. This could result
in the diversion of management attention or our development of new technologies
and products may be blocked by other companies' patents. We must offer better
products, customer support, prices and response time, or a combination of these
factors, than those of our potential competitors.
We are growing rapidly and must effectively manage and support our growth in
order for our business strategy to succeed.
We have grown rapidly and will need to continue to grow in all areas of
operation. If we are unable to successfully integrate and support our existing
and new employees into our operations, we may be unable to implement our
business strategy in the time frame we anticipate, or at all. Due to our rapid
growth in headcount, we outgrew our principal office facilities earlier than we
expected. As a result, we recently relocated to San Jose, California and may
need to relocate to a larger facility in the future, which could be difficult
in the very competitive Silicon Valley office leasing market. In addition,
building and managing the support necessary for our growth places significant
demands on our management as well as our limited revenue. These demands have,
and may continue to, divert these resources away from the continued growth of
our business and
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implementation of our business strategy. Further, we must adequately train our
new personnel, especially our technical support personnel, to adequately, and
accurately, respond to and support our industry partners and customers. If we
fail to do this, it could lead to dissatisfaction among our partners or
customers, which could slow our growth.
We must continually attract and retain engineering personnel or we will be
unable to execute our business strategy.
We have experienced, and we expect to continue to experience, difficulty in
hiring and retaining highly skilled engineers with appropriate qualifications
to support our rapid growth and expansion. We must continually enhance and
introduce new generations of our phase shifting and OPC technologies. As a
result, our future success depends in part on our ability to identify, attract,
retain and motivate qualified engineering personnel with the requisite
educational background and industry experience. If we lose the services of a
significant number of our engineers, it could disrupt our ability to implement
our business strategy. Competition for qualified engineers is intense,
especially in the Silicon Valley where we are located.
Our chief executive officer and chief technology officer, as well as the co-
founders of Transcription, are critical to our business and they may not remain
with us in the future.
Our future success will depend to a significant extent on the continued
services of Y. C. (Buno) Pati, our President and Chief Executive Officer, Yao-
Ting Wang, our Chief Technology Officer, Roger Sturgeon, one of our directors
and a senior executive of Transcription and Kevin MacLean, Vice President and
General Manager of Transcription. If we lose the services of any of these key
executives, it could slow our product development processes and searching for
their replacements could divert our other senior management's time and increase
our operating expenses. In addition, our industry partners and customers could
become concerned about our future operations, which could injure our
reputation. We do not have long-term employment agreements with these
executives and we do not maintain any key person life insurance policies on
their lives.
If we fail to protect our intellectual property rights, competitors may be able
to use our technologies which could weaken our competitive position, reduce our
revenue or increase our costs.
Our success depends heavily upon proprietary technologies, specifically our
patent portfolio. The rights granted under our patents and patent applications
may not provide competitive advantages to us. In addition, litigation may be
necessary to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. As a result of any such
litigation, we could lose our proprietary rights and incur substantial
unexpected operating costs. Litigation could also divert our resources,
including our managerial and engineering resources. We rely primarily on a
combination of patents, copyrights, trademarks and trade secrets to protect our
proprietary rights and prevent competitors from using our proprietary
technologies in their products. These laws and procedures provide only limited
protection. We have been issued two U.S. patents, have five U.S. patent
applications currently pending in the U.S. and nine foreign patent applications
currently pending in selected foreign countries. Our pending patent
applications may not result in issued patents, and our existing and future
patents may not be sufficiently broad to protect our proprietary technologies.
Also, patent protection in foreign countries may be limited or unavailable
where we have filed for and need such protection. Furthermore, if we fail to
adequately protect our trademark rights, this could impair our brand identity
and ability to compete effectively. If we do not successfully protect our
trademark rights, this could force us to incur costs to re-establish our name
or our product names, including significant marketing activities.
If third parties assert that our proprietary technologies and software products
infringe their intellectual property rights, this could injure our reputation
and limit our ability to license or sell our proprietary technologies or
software products.
Third parties, for competitive or other reasons, could assert that our
proprietary technologies and software products infringe their intellectual
property rights. These claims could injure our reputation and decrease or
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block our ability to license or sell our software products. For example, on
March 14, 2000, ASML MaskTools, Inc. filed a complaint alleging we infringe two
U.S. patents and have committed unfair or fraudulent business practice under
the California Business and Professions Code. We are currently investigating
the patents and allegations. The defense of these claims could divert
management's attention from the day to day operations of our company, as well
as divert resources from current planned uses, such as hiring and supporting
additional engineering personnel. Litigation is inherently uncertain, and an
adverse decision could limit our ability to offer some features in our OPC
product. Third parties have advised us of literature which they believe to be
relevant to our patents. We have not reviewed all of the information contained
in this literature. It is possible that this literature or literature we may be
advised of in the future could negatively affect the scope or enforceability of
our present or future patents, and/or result in costly litigation. In addition,
we are aware of and are evaluating certain patents with which our products,
patents or patent applications may conflict. If any of these patents are found
to be valid, and we are unable to license such patents on reasonable terms, or
if our products, patents, or patent applications are found to conflict with
these patents, we could be prevented from selling our products, our patents may
be declared invalid or our patent applications may not result in issued
patents. In addition, a company could invite us to take a patent license. If we
do not take the license, the requesting company could contact our industry
partners or customers and suggest that they not use our software products
because we are not licensed under their patents. This action by the requesting
company could affect our relationships with these industry partners and
customers and may prevent future industry partners and customers from licensing
our software products. The intensely competitive nature of our industry and the
important nature of our technologies to our competitors' businesses may
contribute to the likelihood of being subject to third party claims of this
nature. Please see "Business--Intellectual Property."
Any potential dispute involving our patents or other intellectual property
could include our industry partners and customers, which could trigger our
indemnification obligations with them and result in substantial expense to us.
In any potential dispute involving our patents or other intellectual
property, our licensees could also become the target of litigation. This could
trigger our technical support and indemnification obligations in some of our
license agreements which could result in substantial expense to us. In addition
to the time and expense required for us to supply such support or
indemnification to our licensees, any such litigation could severely disrupt or
shut down the business of our licensees, which in turn could hurt our relations
with our customers and cause the sale of our proprietary technologies and
software products to decrease.
Defects in our proprietary technologies and software products could decrease
our revenue and our competitive market share.
If our industry partners and customers discover any defects after they
implement our proprietary technologies and software products, these defects
could significantly decrease the market acceptance and sales of our software
products, which could decrease our competitive market share. Any actual or
perceived defects with our proprietary technologies and software products may
also hinder our ability to attract or retain industry partners or customers,
leading to a decrease in our revenue. These defects are frequently found during
the period following introduction of new products or enhancements to existing
products. Despite testing prior to introduction, our software products may
contain software errors not discovered until after customer implementation. If
our software products contain errors or defects, it could require us to expend
significant resources to alleviate these problems, which could result in the
diversion of technical and other resources from our other development efforts.
We face operational and financial risks associated with international
operations.
We derive a significant portion of our revenue from international sales. We
have only limited experience in developing, marketing, selling and supporting
our proprietary technologies and software products
12
<PAGE>
internationally and may not succeed in maintaining or expanding our
international operations, which could slow our revenue growth. We are subject
to risks inherent in doing business in international markets. These risks
include:
. fluctuations in exchange rates which may negatively affect our operating
results;
. greater difficulty in collecting accounts receivable resulting in longer
collection periods;
. compliance with and unexpected changes in a wide variety of foreign laws
and regulatory environments with which we are not familiar;
. export controls which could prevent us from shipping our software
products into and from some markets;
. changes in import/export duties and quotas could affect the competitive
pricing of our software products and reduce our market share in some
countries; and
. economic or political instability.
We may be unable to continue to market our proprietary technologies and
software products successfully in international markets.
We may need to raise additional funds to support our growth or execute our
strategy and if we are unable to do so, we may be unable to develop or enhance
our proprietary technologies and software products, respond to competitive
pressures or acquire desired businesses or technologies.
We currently anticipate that our available cash resources, combined with the
net proceeds from this offering, will be sufficient to meet our presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months. However, we may need to raise additional funds in order to:
. support more rapid expansion;
. develop new or enhanced products;
. respond to competitive pressures; or
. acquire complementary businesses or technologies.
These factors will impact our future capital requirements and the adequacy
of our available funds. We may need to raise additional funds through public or
private financings, strategic relationships or other arrangements.
We may be unable to consummate other potential acquisitions or investments or
successfully integrate them with our business, which may slow our ability to
expand the range of our proprietary technologies and software products.
To expand the range of our proprietary technologies and software products,
we may acquire or make investments in additional complementary businesses,
technologies or products if appropriate opportunities arise. We may be unable
to identify suitable acquisition or investment candidates at reasonable prices
or on reasonable terms, or consummate future acquisitions or investments, each
of which could slow our growth strategy. If we do acquire additional companies
or make other types of acquisitions, we may have difficulty integrating the
acquired products, personnel or technologies. These difficulties could disrupt
our ongoing business, distract our management and employees and increase our
expenses.
Management will have broad discretion as to the use of proceeds from this
offering and, as a result, we may not use the proceeds to the satisfaction of
our stockholders.
Our board of directors and management will have broad discretion in
allocating the net proceeds of this offering. They may choose to allocate such
proceeds in ways that do not yield a favorable return or are not
13
<PAGE>
supported by our stockholders. We have designated only limited specific uses
for the net proceeds from this offering. Please see "Use of Proceeds."
The concentration of our capital stock ownership with insiders upon the
completion of this offering will likely limit your ability to influence
corporate matters.
The concentration of ownership of our outstanding capital stock with our
directors and executive officers after this offering may limit your ability to
influence corporate matters. Prior to the completion of this offering, our
directors and executive officers, and their affiliates, beneficially own 67.0%
of our outstanding capital stock, and we expect them to remain significant
stockholders upon the completion of this offering. As a result, these
stockholders, if acting together, will have the ability to control all matters
submitted to our stockholders for approval, including the election and removal
of directors and the approval of any corporate transactions.
We have anti-takeover defenses that could delay or prevent an acquisition of
our company.
Provisions of our certificate of incorporation and bylaws in effect after
completion of this offering and Delaware law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. Please see "Description of Capital Stock."
Negotiations between the underwriters and us determined the initial public
offering price, but the market price may be less or may be volatile, and you
may not be able to resell your shares at or above the initial public offering
price.
This initial public offering price may vary from the market price of our
common stock after the offering. The market price of our common stock may
fluctuate significantly in response to factors, some of which are beyond our
control, including:
. actual or anticipated fluctuations in our operating results;
. changes in market valuations of other technology companies;
. conditions or trends in the semiconductor industry;
. announcements by us or our competitors of significant technical
innovations, contracts, acquisitions or partnerships;
. additions or departures of key personnel;
. any deviations in net revenue or in losses from levels expected by
securities analysts;
. volume fluctuations, which are particularly common among highly volatile
securities of technology related companies; and
. sales of substantial amounts of our common stock or other securities in
the open market.
General political or economic conditions, such as recession or interest rate
or currency rate fluctuations in the United States or abroad, also could cause
the market price of our common stock to decline. Please see "Underwriting."
Our stock price is likely to be extremely volatile as the market for technology
companies' stock has recently experienced extreme price and volume
fluctuations.
Volatility in the market price of our common stock could result in
securities class action litigation. Any litigation would likely result in
substantial costs and a diversion of management's attention and resources.
Despite the strong pattern of operating losses of technology companies, the
market demand, valuation and trading prices of these companies have been high.
At the same time, the share prices of these companies' stocks have been highly
volatile and have recorded lows well below their historical highs. As a result,
investors
14
<PAGE>
in these companies often buy the stock at very high prices only to see the
price drop substantially a short time later, resulting in an extreme drop in
value in the stock holdings of these investors. Our stock may not trade at the
same levels as other technology stocks. In addition, technology stocks in
general may not sustain current market prices.
An active public market for our common stock may not develop.
An active public market for our common stock may not develop or be sustained
after this offering. The initial public offering price for the shares has been
determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market.
A large number of shares becoming eligible for sale after this offering could
cause our stock price to decline.
Sales of a substantial number of shares of our common stock after this
offering could cause our stock price to fall. Our current stockholders hold a
substantial number of shares, which they will be able to sell in the public
market in the near future. Please see "Shares Eligible for Future Sale."
You will incur immediate and substantial dilution in the book value of the
stock you purchase.
The initial public offering price is substantially higher than the book
value per share of our outstanding common stock immediately after the offering.
This is referred to as dilution. Accordingly, if you purchase common stock in
the offering, you will incur immediate dilution of approximately $12.41, at an
initial public offering price of $14.00 per share, in the book value per share
of our common stock from the price you pay for our common stock. Please see
"Dilution."
If we raise additional capital through the issuance of new securities at a
price lower than the initial public offering price, you will incur additional
dilution.
If we raise additional capital through the issuance of new securities at a
lower price than the initial public offering price of $14.00 per share, you
will be subject to additional dilution. If we are unable to access the public
markets in the future, or if our performance or prospects decreases, we may
need to consummate a private placement or public offering of our capital stock
at a lower price than the initial public offering price. In addition, any new
securities may have rights, preferences or privileges senior to those
securities held by you.
Exercise of registration rights after this offering could adversely affect our
stock price.
If holders of registration rights exercise those rights after this offering,
a large number of securities could be registered and sold in the public market,
which could result in a decline in the price of our common stock. If we were to
include in a company-initiated registration shares held by these holders
pursuant to the exercise of their registration rights, our ability to raise
needed capital could suffer. After this offering, the holders of 17,476,825
shares of our common stock, which will represent a total of approximately 60.1%
of our outstanding stock after completion of this offering, are entitled to
rights with respect to registration under the Securities Act of 1933.
15
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements in "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and elsewhere. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks
outlined under "Risk 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 or activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the 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
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results.
16
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of 5,534,000 shares of common stock in this
offering at the initial public offering price of $14.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses, will be approximately $70.5 million. If the underwriters' over-
allotment option is exercised in full, we estimate that our net proceeds will
be approximately $81.3 million.
In connection of our acquisition of Transcription Enterprises Limited, we
issued promissory notes in the aggregate principal amount of $40 million, $35
million of which is outstanding. Interest on the notes accrues at 8.0% per
annum. These notes are payable in 16 equal quarterly payments of $2.2 million,
plus interest, commencing on April 1, 2000. We expect to pay the balance of
principal and accrued interest under the notes with a portion of the net
proceeds from this offering. The remaining proceeds will be used for working
capital and general corporate purposes. We may use a portion of the net
proceeds to acquire businesses, products and technologies that are
complementary to our business. However, we have no present plans or
committments and are not engaged in any negotiations with respect to any
transactions of this type. Pending these uses, we will invest the net proceeds
from this offering in short-term, interest-bearing, investment grade
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities. We currently anticipate that we will retain all of our future
earnings for use in the expansion and operation of our business and do not
anticipate paying any cash dividends for the foreseeable future.
17
<PAGE>
CAPITALIZATION
The following table sets forth our total capitalization as of December 31,
1999:
. on an actual basis after giving effect to the three-for-two forward stock
split of our preferred stock and common stock;
. on a pro forma basis to reflect our acquisition of Transcription
Enterprises Limited effected in January 2000 and the automatic conversion
of all outstanding shares of preferred stock into common stock upon the
closing of this offering; and
. on a pro forma as adjusted basis to reflect the sale of the 5,534,000
shares of common stock at an assumed initial public offering price of
$14.00 per share in this offering, after deducting estimated underwriting
discounts and commissions and estimated offering expenses to be paid by
us and the repayment of the remaining $35.0 million of notes issued in
connection with the acquisition of Transcription Enterprises Limited.
You should read this information together with the consolidated financial
statements and the notes to these statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------ ------------ --------------
(in thousands, except per share data)
<S> <C> <C> <C>
Notes payable, including current
portion............................ $ -- $ 35,000 $ --
------------ ------------ ------------
Stockholders' equity:
Convertible preferred stock,
$0.0001 par value: 12,253 shares
authorized, 8,103 issued and
outstanding, actual; 5,000 shares
authorized, no shares issued or
outstanding, pro forma and pro
forma as adjusted................ 1 -- --
Common stock, $0.0001 par value:
30,000 shares authorized, actual,
pro forma and pro forma as
adjusted; 9,570 shares issued and
outstanding, actual; 21,483
shares issued and outstanding,
pro forma; 100,000 shares
authorized, 27,017 shares issued
and outstanding, pro forma as
adjusted......................... 1 2 3
Additional paid in capital......... 50,100 95,820 166,272
Receivable from stockholders....... (315) (315) (315)
Deferred stock compensation........ (21,220) (21,220) (21,220)
Accumulated deficit................ (16,162) (16,462) (16,462)
------------ ------------ ------------
Total stockholders' equity ....... 12,405 57,825 128,278
------------ ------------ ------------
Total capitalization............ $ 12,405 $ 92,825 $ 128,278
============ ============ ============
</TABLE>
18
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999, after giving
effect to our acquisition of Transcription Enterprises Limited effected in
January 2000 and the conversion of our outstanding preferred stock into common
stock, was $(27.6) million or $(1.28) per share of common stock. Pro forma net
tangible book value per share represents total tangible assets less total
liabilities, divided by the number of outstanding shares of common stock.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of our common stock in this
offering and the net tangible book value per share of our common stock
immediately afterwards. After giving effect to our sale of the 5,534,000 shares
of common stock offered by this prospectus and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our net tangible book value at December 31, 1999 would have been
$42.9 million or $1.59 per share. This represents an immediate increase in net
tangible book value to existing stockholders of $2.87 per share and an
immediate dilution to new public investors of $12.41 per share. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C> <C>
Assumed initial public offering price per share............. $14.00
Pro forma net tangible book value per share as of December
31, 1999................................................. $(1.28)
Increase per share attributable to new public investors... 2.87
------ ---
Pro forma net tangible book value per share after offering.. 1.59
------ ---
Dilution per share to new public investors.................. $12.41
======
</TABLE>
The following table sets forth on a pro forma basis as of December 31, 1999,
after giving effect to the conversion of our preferred stock and the
acquisition of Transcription Enterprises Limited, and assuming a three-for-two
forward stock split of all the outstanding common stock, the differences
between the number of shares of common stock purchased from us, the total price
paid, and the average price per share paid by the existing stockholders and new
public investors, deducting estimated underwriting discounts and commissions
and offering expenses to be paid by us, using an assumed initial public
offering price of $14.00 per share:
<TABLE>
<CAPTION>
Total Cash
Shares Purchased Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 21,483,450 79.5% $23,688,000 25.2% $ 1.10
New public investors....... 5,534,000 20.5 70,453,000 74.8 12.73
---------- ----- ----------- -----
Total.................... 27,017,450 100.0% $94,141,000 100.0%
========== ===== =========== =====
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors increase to 6,364,100, or 22.9%, of the total
shares of common stock outstanding after this offering.
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data are qualified by reference to, and
should be read in conjunction with, Management's Discussion and Analysis of
Financial Condition and Results of Operations and the financial statements and
notes thereto and other information contained in this prospectus. The selected
balance sheet data as of December 31, 1998 and 1999 and selected statements of
operations data for the years ended December 31, 1997, 1998 and 1999 have been
derived from our audited financial statements and the notes thereto included
elsewhere in this prospectus. The selected balance sheet data as of December
31, 1996 and 1997 and the selected statement of operations data for the year
ended December 31, 1996 were derived from financial statements not included in
this prospectus.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1996 1997 1998 1999
------- ------ ------- -------
(in thousands, except per
share data)
<S> <C> <C> <C> <C>
Statement of Operations Data
Revenue.................................... $ 51 $ 620 $ 736 $ 5,492
------- ------ ------- -------
Costs and expenses:
Cost of revenue.......................... 9 57 127 307
Research and development................. 202 993 2,721 4,816
Sales and marketing...................... 2 58 1,404 4,277
General and administrative............... 43 131 2,355 1,303
Amortization of deferred stock
compensation(*)......................... -- -- 862 3,990
------- ------ ------- -------
Total costs and expenses............... 256 1,239 7,469 14,693
------- ------ ------- -------
Loss from operations....................... (205) (619) (6,733) (9,201)
Interest income, net....................... 6 35 182 373
------- ------ ------- -------
Net loss................................... $ (199) $ (584) $(6,551) $(8,828)
======= ====== ======= =======
Net loss per common share, basic and
diluted................................... $ (0.04) $(0.08) $ (0.89) $ (1.26)
======= ====== ======= =======
Weighted-average common shares, basic and
diluted................................... 4,722 7,397 7,373 7,019
======= ====== ======= =======
Pro forma net loss per common share, basic
and diluted (unaudited)................... $ (0.64)
=======
Pro forma weighted-average common share,
basic and diluted (unaudited)............. 13,885
=======
<CAPTION>
As of December 31,
---------------------------------
1996 1997 1998 1999
------- ------ ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents.................. $ 615 $ 656 $ 4,973 $13,486
Working capital............................ 309 377 2,320 10,499
Total assets............................... 647 1,081 6,611 17,605
Total stockholders' equity................. 340 474 2,815 12,405
<CAPTION>
Years ended December 31,
---------------------------------
1996 1997 1998 1999
------- ------ ------- -------
(in thousands)
<S> <C> <C> <C> <C>
(*) Amortization of Deferred Stock
Compensation:
Cost of revenue.......................... -- -- $ 22 $ 117
Research and development................. -- -- 465 1,836
Sales and marketing...................... -- -- 361 1,444
General and administrative............... -- -- 14 593
------- ------ ------- -------
-- $ -- $ 862 $ 3,990
======= ====== ======= =======
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our actual results could differ materially from those discussed in the
forward-looking statements contained in this section. The following discussion
and analysis of our financial condition and results of operations should be
read in conjunction with "Selected Financial Data" and our financial statements
and notes thereto appearing elsewhere in this prospectus.
Overview
We design and develop proprietary technologies and software products that
enable the design and manufacture of semiconductors with subwavelength feature
sizes. From our incorporation in October 1995 through February 1997, we
primarily focused our activities on conducting research and development and
establishing markets and distribution channels for our proprietary technologies
and software products. In February 1997, we shipped our first software product,
IC Workbench.
In January 2000, we acquired Transcription Enterprises Limited for
approximately $45.7 million in Series E preferred stock and $40.0 million in
notes payable, resulting in goodwill and other intangible assets of $85.4
million which will be amortized on a straight-line basis over two to five
years. We will account for the acquisition under the purchase method of
accounting and, as a result, our historical results of operations do not
include the results of operations of Transcription.
Had the acquisition taken place on January 1, 1999, we would have had
combined revenues of $16.6 million in 1999 after giving effect to reduction of
pro forma combined revenues related to deferred revenues on Transcription
contracts. Our pro forma combined costs and expenses for the year ended
December 31, 1999 would have been $37.0 million, including $4.4 million of
costs and expenses from Transcription and amortization of intangible assets
associated with the acquisition of $18 million. Pro forma net interest expense
for the year would have been $2.8 million, and the pro forma net loss would
have been $20.7 million, or $(2.95) per share.
Because of the significance of the acquisition, we do not believe the
discussion and analysis of our historical financial condition and results of
operations set forth below are indicative, nor should they be relied upon as an
indicator, of our future performance.
We derive revenue from intellectual property and software licenses,
maintenance and related technical services. To date, we have derived a
significant portion of our revenue from research and development licenses to
integrated device manufacturers, or IDMs, and foundries of our phase shifting
technologies and software and OPC software licenses, as well as licenses of
photomask verification software to semiconductor resellers. An IDM is a
traditional semiconductor company that designs and manufactures its own ICs.
Our research and development licenses limit the use of our proprietary
technologies for pre-production purposes.
We expect to enter into production licenses with semiconductor manufacturers
as they adopt our proprietary technologies for production. Production licenses
grant licensees the right to use our phase shifting intellectual property and
software to design and manufacture subwavelength ICs. We entered into our first
production license with Motorola, an IDM, in March 2000. We expect production
licenses to account for a significant portion of our revenue in the future and
that fees for production licenses will be time-based, and structured on a per
fabrication facility or per device basis.
We license our intellectual property and software products through our
direct sales force and to resellers. To date, our direct sales force has
primarily focused on selling research and development licenses to semiconductor
manufacturers. We anticipate an increase in direct sales efforts related to
converting these manufacturers to production licensees. Our reseller licensees
are primarily leading semiconductor equipment manufacturers that integrate our
software products with their equipment.
21
<PAGE>
In October 1999 and March 2000, we entered into agreements with Cadence, a
major design tool vendor, that provide Cadence with limited exclusivity to
distribution rights of our OPC and phase shifting technologies, and under which
Cadence has agreed to integrate portions of our OPC and phase shifting software
products with its physical design and verification tools. Under the terms of
the agreements, we granted Cadence a non-exclusive license to our phase
shifting products for the purpose of performing the joint development work, and
to our phase shifting and OPC products for marketing, distributing and
sublicensing the products. Under the phase shifting agreement, we will jointly
develop phase shifting design products in accordance with the specifications
and milestones included in the agreement. Generally, the agreements can be
terminated for breach of performance obligations by either party. Under the OPC
agreement, in the event Cadence does not meet its production release milestones
on the dates of June 30, 2000 and July 31, 2000, as described in the agreement,
we will either continue to receive all fees under the agreement or have the
ability to enter into similar agreements with other companies. In addition,
under the OPC agreement, in the event of our material breach, Cadence has the
ability to reduce the amount of license fees paid to us. Under the phase
shifting agreement, in the event we breach certain of the exclusivity
provisions of the agreement, Cadence has the ability to reduce the amount of
license fees paid to us. Under the agreements, we will receive fees totaling
$26 million over the initial terms of three years. The term of each agreement
may be extended by Cadence for an additional two-year period for additional
fees totaling $24 million. As stated above, these amounts could decrease if we
materially breach or breach certain of the exclusivity provisions under the OPC
agreement or phase shifting agreement, respectively.
In January 1998, we entered into an agreement with KLA-Tencor under which we
granted licenses to our photomask inspection and measurements products, and
provided certain development services, training services, maintenance and
support. Through 1999, KLA-Tencor paid approximately $1.3 million under the
agreement, of which $720,000 represented royalty payments. KLA-Tencor will pay
additional amounts to the extent that additional units, if any, are ordered
under the contract. The contract has an initial term of two years after
acceptance of the product, which occurred in March 1999, and is automatically
renewed for one-year terms thereafter, unless either party provides written
notice of its intent to terminate 60 days prior to the expiration of the
existing term.
In October 1991, Transcription entered into an agreement with KLA
Instruments, the predecessor to KLA-Tencor, which granted KLA the exclusive
right to distribute certain mask data preparation software products. Under the
agreement, Transcription provides standard maintenance to customers for an
annual maintenance fee. In addition, KLA has the ability to provide support
services to customers for which it would charge Transcription an agreed upon
fee. In 1999, we recognized revenues of approximately $889,000 under this
agreement, of which approximately $427,000 represented royalties. Generally,
either party may terminate the agreement upon 90 days written notice.
In December 1997, we entered into a distribution agreement with Zygo under
which we granted Zygo a worldwide license to market, distribute and sublicense
our photomask inspection and measurement products. Through 1999, we recognized
revenues of approximately $1.3 million under the agreement, all of which are
constitute minimum commitment fees. Although we are entitled to royalty
payments under this agreement, we have not recieved any royalty payments to
date. Zygo will pay additional amounts to the extent that additional units, if
any, are ordered under the contract. The contract had an initial term of two
years and six months, but was amended to extend it to March 31, 2001. Zygo has
the right to renew the agreement for a period ending March 1, 2002 provided
that it has paid for at least 100 copies of our TVS product during the period
from March 1, 1999 to March 1, 2001.
Revenue from existing research and development licenses is recognized
ratably over a related service period. Maintenance revenue is typically priced
based on a percentage of the license fee and is recognized ratably over the
term of the agreement, typically 12 months. We typically recognize revenue from
technical services as the services are performed. For licenses to resellers and
licenses of our manufacturing data preparation software, where the license fee
is fixed or determinable and the collection of the fee is probable, revenue is
recognized upon delivery if no significant post delivery obligations remain. We
record billed
22
<PAGE>
amounts due from customers in excess of recognized revenue as deferred revenue.
The timing and amounts billed to customers can vary significantly depending on
specific contract terms and can therefore have a significant impact on the
amount of deferred revenue in any given period.
We have adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." This statement requires enterprises to report
information about operating segments in annual financial statements and
selected information about reportable segments in interim financial reports. It
also establishes standards for related disclosures about products, geographic
areas and major customers. The method for determining what information to
report is based upon the "management" approach. This method requires us to
report certain financial information related to continuing operations that is
provided to our chief operating decision-maker for the purpose of evaluating
financial performance and resource allocation. Our chief operating decision-
maker reviews revenue by both geography and customer. We allocate resources and
generate revenue based on requirements of our customers in the semiconductor
industry. We are not organized into business units nor do we capture expenses
or allocated resources based on segmentation of our business. Thus, we operate
in a single segment.
Since inception, we have incurred substantial costs to develop our
proprietary technologies and software products, to recruit and train personnel
for our engineering, sales and marketing and technical support departments, and
to establish an administrative organization. As a result, we have incurred net
losses in each year since inception and had an accumulated deficit of $16.2
million as of December 31, 1999. We anticipate that our operating expenses will
increase substantially in future years as we increase sales and marketing
operations, increase research and development, broaden technical support
services and expand international operations. In addition, we expect to incur
additional non-cash operating expenses relating to amortization of deferred
stock compensation and goodwill associated with our acquisition of
Transcription Enterprises Limited. Accordingly, we expect to incur additional
losses for the foreseeable future. In addition, our limited operating history
makes it difficult for us to predict future operating results and, accordingly,
there can be no assurance that we will achieve or sustain revenue growth or
profitability.
Results of Operations
Years 1998 and 1999
Revenue. Revenue increased from $736,000 in 1998 to $5.5 million in 1999.
The increase in 1999 was primarily due to increased research and development
licenses to foundries and IDMs and increased reseller sales.
Costs and Expenses
Cost of revenue. Cost of revenue includes primarily salary and related costs
for engineers associated with maintenance and technical services. Cost of
revenue increased from $127,000 in 1998 to $307,000 in 1999. This increase was
due primarily to an increase in the time spent on service and integration
efforts by our engineering personnel. Cost of revenue decreased as a percentage
of sales from 17.0% of revenue in 1998 to 6.0% of revenue in 1999. We
anticipate that cost of revenue will increase in dollar amount as we support
our expanding number of industry partners and customers and assist our research
and development licensees to transition into production. We expect, however,
that cost of revenue will continue to decrease as a percentage of revenue in
the long term.
Research and development. Research and development expenses consist
primarily of personnel and related costs. Research and development expenses
increased from $2.1 million in 1998, exclusive of a $600,000 bonus paid to one
of our founders and executive officers, to $4.8 million in 1999. The increase
in dollar amounts reflects our expanding research and development efforts in
subwavelength technologies and products. Research and development expenses
decreased as a percentage of revenue from 285.3% of revenue in 1998, exclusive
of the $600,000 bonus, to 87.3% of revenue in 1999. A significant portion of
the increase was due to the addition of personnel and personnel-related costs
for enhancement of existing applications and development of new products. We
anticipate that we will continue to commit substantial resources to research
and development in the future. We expect that research and development expenses
will increase in dollar amounts to support increased research and development
efforts, but decline as a percentage of revenue in the long term.
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Sales and marketing. Sales and marketing expenses consist primarily of
salaries and related costs for sales and marketing personnel, sales
commissions, tradeshows and other marketing activities. Sales and marketing
expenses increased from $1.4 million in 1998 to $4.3 million in 1999. This
increase was primarily due to the hiring of additional sales and marketing
personnel, increased sales commissions and higher tradeshow expenses. Sales and
marketing expenses decreased as percentage of revenue from 190.2% of revenue in
1998 to 77.8% of revenue in 1999. We expect that sales and marketing expenses
will increase in dollar amounts to support increased sales efforts, but decline
as a percentage of revenue in the long term.
General and administrative. General and administrative expenses consist
primarily of salaries and related costs for operations and finance employees
and legal and accounting services. General and administrative expenses
increased, exclusive of the $1.4 million bonus to a founder and officer in
1998, from $1.0 million in 1998 to $1.3 million in 1999. Exclusive of the
bonus, general and administrative expenses increased in 1999 primarily as a
result of increased spending in personnel and personnel-related costs. General
and administrative expenses decreased as a percentage of revenue from 129.8% of
revenue in 1998, exclusive of the $1.4 million bonus, to 23.6% of revenue in
1999. We expect that general and administrative will increase in dollar amounts
to support increased administrative efforts, but decline as a percentage of
revenue in the long term.
Amortization of deferred stock compensation. Amortization of deferred stock
compensation represents the amount of amortization related to the difference
between the exercise price of options granted and the estimated fair market
value of the underlying common stock on the date of the grant. We recognized
stock-based compensation of $2.8 million in 1998 and $23.3 million in 1999
related to the grant of stock options. We are amortizing these amounts over the
vesting periods of the individual options, using the multiple option method.
Amortization of deferred stock-based compensation totaled $862,000 and $4.0
million for 1998 and 1999, respectively. Outstanding options will continue to
vest over the next four years. Future compensation expense from options granted
through December 31, 1999 is estimated to be $11.2 million for 2000, $5.9
million for 2001, $3.0 million for 2002 and $1.1 million for 2003.
On February 1, 2000, we granted stock options to purchase an aggregate of
2,029,000 shares of common stock. In connection with the grant of these stock
options, we recognized deferred stock compensation totaling $17.0 million,
which will be amortized over the four year vesting period of the stock options.
Interest income. Interest income increased from $182,000 in 1998 to $373,000
in 1999 primarily due to higher average cash and short-term investment
balances.
Years 1997 and 1998
Revenue. Revenue increased from $620,000 in 1997 to $736,000 in 1998. This
increase was primarily attributable to increased reseller sales, as well as
maintenance and support on an increased number of customers.
Costs and Expenses
Cost of Revenue. Cost of revenue increased from $57,000 in 1997 to $127,000
in 1998. This increase was due primarily to increased service and integration
efforts by our engineering personnel.
Research and development. Research and development expenses increased from
$1.0 million in 1997 to $2.7 million in 1998. This increase was due to the
addition of personnel and higher personnel-related costs to enhance and expand
our product offerings and a $600,000 bonus paid to a founder and officer.
Sales and marketing. Sales and marketing expenses increased from $58,000 in
1997 to $1.4 million in 1998. This increase was primarily due to the addition
of personnel and higher personnel-related costs resulting from the continued
growth of our sales and marketing organizations, as well as costs associated
with the sales and marketing of our products.
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General and administrative. General and administrative expenses increased
from $131,000 in 1997 to $2.4 million in 1998. General and administrative
expenses increased in 1998 partly as a result of increased spending in legal,
accounting and human resources professional services. General and
administrative expenses also included a bonus of $1.4 million to one of our
founders and executive officers in 1998.
Interest income. Interest income increased from $35,000 in 1997 to $182,000
in 1998 primarily due to higher average cash and short-term investment
balances.
Net Operating Losses and Tax Credit Carryforwards
As of December 31, 1999, we had federal net operating losses and research
and development credit carryforwards of approximately $6.9 million and
$217,000, respectively. The net operating loss and research and development
credit carryforwards will expire at various dates, beginning in 2010, if not
utilized. Under the provisions of the Internal Revenue Code of 1986, as
amended, substantial changes in our ownership may limit the amount of net
operating loss carryforwards that can be utilized annually in the future to
offset taxable income. A valuation allowance has been established to fully
reserve the potential benefits of these carryforwards in our financial
statements to reflect the uncertainty of future taxable income required to
utilize available tax loss carryforwards and other deferred tax assets.
Liquidity and Capital Resources
Since inception, we have funded our operations primarily through the private
sale of our equity securities in aggregate net proceeds of approximately $24.5
million. As of December 31, 1999 we had $10.5 million in working capital and
$13.5 million in cash and cash equivalents. We anticipate using available cash
to fund growth in operations, invest in capital equipment, acquire businesses,
and license technologies or software products related to our line of business.
Net cash used in operating activities was $3.3 million in 1998, compared to
$4.4 million in 1999. Net cash used in operating activities in 1999 primarily
reflects a net loss of $8.8 million, partly offset by amortization of deferred
stock compensation costs of $4.0 million.
Net cash provided by financing activities was approximately $719,000 in
1997, $8.0 million in 1998 and $14.4 million in 1999. Net cash provided by
financing activities includes proceeds from the issuance of preferred and
common stock and stock warrants.
Capital expenditures were approximately $82,000 in 1997, $455,000 in 1998
and $1.5 million in 1999. Our capital expenditures consisted of purchases of
computer hardware and software, office furniture and equipment and leasehold
improvements. Purchases of computer equipment represent the largest component
of our capital expenditures. We expect to invest approximately $2.0 million in
2000 mainly for computer equipment, facilities and business systems upgrades.
On January 1, 2000, we acquired Transcription Enterprises Limited. In
connection with the acquisition, we issued $40.0 million in promissory notes.
Shortly after issuance of the notes, we repaid $5.0 million of the principal,
leaving a balance of $35.0 million outstanding under the notes. The remaining
principal amount, plus interest at 8% per annum, is payable in 16 equal
quarterly payments of $2.2 million, plus interest commencing on April 1, 2000.
We expect to repay these notes in full with the net proceeds of this offering.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business strategy. As a result, we
anticipate that such operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In
addition, we may utilize cash resources to fund acquisitions of, or investments
in, complementary businesses, technologies or product lines. We believe that
the net proceeds from the sale of the common stock in this offering, together
with funds generated from operations,
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will be sufficient to meet our working capital requirements for at least the
next 12 months. Thereafter, we may find it necessary to obtain additional
equity or debt financing. In the event additional financing is required, we may
not be able to raise it on acceptable terms or at all.
Recent Accounting Pronouncements
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities", which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, collectively referred to as derivatives, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. This statement does not apply to us as we currently do not
have any derivative instruments or hedging activities.
Disclosures About Market Risk
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates,
particularly since the majority of our investments are in short-term debt
securities issued by corporations. We place our investments with high quality
issuers and limit the amount of credit exposure to any one issuer. Due to the
nature of our short-term investments, we believe that we are not subject to any
material market risk exposure.
Year 2000 Compliance
As of March 2, 2000, we had not experienced, nor do we expect to experience,
any Year 2000-related disruption in the operation of our systems. To our
knowledge, none of our material suppliers or vendors experienced any material
Year 2000 problems or had any difficulty resolving the so-called "century leap
year" algorithm. Although most Year 2000 problems should have become evident on
January 1, 2000 or February 29, 2000, additional Year 2000-related problems may
become evident in the future.
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BUSINESS
Overview
We are a leading commercial provider of proprietary technologies and
software products that enable the design and manufacture of subwavelength
semiconductors using existing design tools and semiconductor equipment. We
believe we accelerate the semiconductor technology roadmap by at least two
years, enabling the production of semiconductors with feature sizes of 0.09
micron. Our comprehensive solution addresses each key stage of the design-to-
silicon flow, including physical design of semiconductors; verification that
the design is optimal; manufacturing data preparation, manufacturing and
inspection of photomasks, or templates; and the manipulation of light waves to
create images of IC patterns, or photolithography. By offering a subwavelength
solution that is used in every key stage of the semiconductor design and
manufacturing process, we help to integrate the entire design-to-silicon flow
for subwavelength ICs.
Our patented phase shifting, proprietary OPC and process modeling
technologies form the foundation of our subwavelength solution. By enabling our
industry partners and customers to produce smaller, faster and more power
efficient semiconductors with existing semiconductor equipment, our
subwavelength solution allows our industry partners and customers to introduce
new high performance semiconductors more quickly, while significantly
increasing their return on invested capital. Motorola and one of our industry
partners demonstrated success with our proprietary technologies, and MIT
Lincoln Laboratory, a research laboratory, demonstrated the future potential of
our proprietary technologies by creating 0.05 micron features. We believe our
technology leadership and our relationships with leading companies within the
semiconductor industry drive the adoption of our comprehensive subwavelength
solution as the industry standard. Our industry partners and customers include
Applied Materials, KLA-Tencor, DuPont Photomask, Phototronics, Cadence, TSMC
and UMC.
Industry Background
Businesses and individuals increasingly rely on electronic products and
systems powered by semiconductors. These products and systems include desktop
and portable personal computers, mobile phones, Internet appliances, video game
consoles, and high-speed networking and communications products that serve as
the backbone of the Internet. The semiconductor industry could not enhance
these electronic products or continue to introduce new, more sophisticated
products without these advances. Growing recognition of the benefits of
advances in electronics, including enhanced productivity and communications
capability, drives demand for higher performance, lower cost, smaller and more
power efficient products with greater functionality. To meet this demand,
manufacturers of electronic products and systems require an increasing supply
of faster, cheaper and more power efficient semiconductors. The Semiconductor
Industry Association estimated, in its October 1999 report, that the worldwide
market for semiconductors will grow from $144 billion in 1999 to $233 billion
in 2002, or 61.8%. Delivering these advanced semiconductors will require rapid
advances in IC design and manufacturing technologies.
The Historical March to Smaller Feature Sizes and Systems-on-a-Chip
The ability to produce advanced ICs depends on developing technology that
enables the design and manufacture of semiconductors with smaller feature
sizes. A semiconductor's "feature size" relates to the size of circuit
components in the device and is measured in microns, or millionths of a meter.
Advanced semiconductors today have feature sizes of 0.18 to 0.25 micron. To
illustrate how small these features are, when placed side by side, one thousand
0.10 micron transistors can fit within the width of a single human hair.
Smaller feature sizes significantly increase performance while decreasing the
size, cost and power consumption of semiconductors. Smaller feature sizes also
allow multiple components, such as microprocessors, memory, analog components
and digital signal processors, to be integrated into a single semiconductor.
The resulting complex semiconductor, commonly referred to as system-on-a-chip,
offers significant performance, cost, power and reliability benefits over
systems that require multiple semiconductors to perform the same tasks.
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Advances in semiconductor design and manufacturing technologies enabled
reductions in feature sizes from 3.0 micron in 1980 to 0.18 micron in today's
advanced production fabrication facilities. These advances led to significant
improvements in electronic systems and products. For example, today's cellular
phones compared to those of a few years ago have a battery life of days instead
of hours, weigh ounces instead of pounds and can be produced at a fraction of
the price. In addition, today's cellular phones have many times the computing
power of the most advanced personal computer in 1980.
To date, the semiconductor industry relied upon advances in semiconductor
equipment to produce smaller feature sizes on semiconductors. However, to fully
realize the benefits of smaller feature sizes, significant advances have also
been required in each of the following stages of the semiconductor design-to-
silicon flow:
. Semiconductor Design Tools. A variety of complex software programs used
to design, simulate and verify semiconductor designs.
. Photomasks. Transparent templates used to transfer images of electronic
circuits onto silicon wafers.
. Semiconductor Equipment. Sophisticated equipment used to manufacture
semiconductors.
. Semiconductor Manufacturing. Complex processes required to create
semiconductors on silicon.
Historically, leading semiconductor companies designed, manufactured and
tested their semiconductors in their own facilities using internally developed
tools. The growing complexity of the design and manufacturing processes and the
escalating cost of manufacturing facilities resulted in a disaggregation of the
semiconductor industry into companies separately focusing on each individual
stage of the design-to-silicon flow. This disaggregation is fueling the rapid
growth of "fabless" semiconductor companies, which do not own or operate their
own semiconductor fabrication facilities, design tool vendors, semiconductor
equipment manufacturers and third-party semiconductor manufacturers, or
foundries. Each of these industry markets faces significant challenges as
feature sizes continue to decrease.
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The Subwavelength Challenge
Semiconductor manufacturing equipment transmits light at a specific
wavelength through a photomask to create images of IC patterns on a
semiconductor. This process is referred to as photolithography or optical
lithography. At feature sizes below 0.25 micron, the semiconductor industry
reached a critical technology transition. At and above 0.25 micron, the
wavelength of light used is smaller than the IC features. However, at 0.18
micron and below, the wavelength of light used in production semiconductor
manufacturing equipment is significantly larger than the IC features, resulting
in image quality that degrades rapidly. This is like trying to paint a one-inch
line with a four-inch paint brush. This growing disparity between feature sizes
and wavelength of light is referred to as the "subwavelength gap." As a result,
manufacturers in the industry cannot produce semiconductors with feature sizes
of 0.18 micron and smaller with acceptable yield levels using traditional
technologies. Furthermore, as the demand for reduced feature sizes continues to
outpace the reduction in wavelengths used by available equipment, this
subwavelength gap will widen.
[GRAPH APPEARS HERE]
In its 1999 International Technology Roadmap, the Semiconductor Industry
Association predicted that the semiconductor industry would introduce
microprocessors with 0.10 micron feature sizes for semiconductors by the end of
2001 and 0.10 micron DRAM by the end of 2005. Advances in manufacturing
equipment technology alone can no longer enable the progression to smaller
feature sizes and we do not expect alternative non-optical manufacturing
processes to be commercially viable for many years. As a result, the
semiconductor industry must develop and integrate new subwavelength solutions
into all aspects of the design-to-silicon flow.
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Our Solution
We are a leading commercial provider of proprietary technologies and
software products that enable the design and manufacture of subwavelength
semiconductors using existing design tools and semiconductor equipment. We have
accelerated the semiconductor technology roadmap by at least two years,
enabling the production of semiconductors with feature sizes of 0.09 micron.
Our comprehensive solution addresses each key stage of the design-to-silicon
flow, including physical design, design verification, manufacturing data
preparation, photomask manufacturing inspection and photolithography. By
offering a subwavelength solution that is used in every stage of the
semiconductor design and manufacturing process, we integrate the entire design-
to-silicon flow for subwavelength ICs.
[FLOW CHART APPEARS HERE]
Our patented phase shifting and proprietary OPC and process modeling
technologies serve as the foundation for our subwavelength solution. Our
subwavelength solution leverages our expertise in semiconductor and photomask
manufacturing processes, semiconductor equipment, IC design, software
development and subwavelength technologies.
Our proprietary technologies and software products are designed to offer the
following key benefits:
Proven Path to Smaller, Faster, Cheaper and Power Efficient Devices. Our
industry partners and customers demonstrate the success of our proprietary
technologies and software products. For example, Motorola used our phase
shifting technology and software to enable its 0.18 micron wafer fabrication
facilities to produce 0.10 micron features. Similarly, in November 1999, one of
our industry partners announced that it developed the world's fastest digital
signal processor operating at one volt. To create this high-performance digital
signal processor, the partner reduced the feature sizes from 0.25 micron to
0.12 micron using our phase shifting technology software. Further, in February
2000, MIT Lincoln Laboratory, a research laboratory, demonstrated the future
potential of our technologies and products by successfully creating 0.05 micron
features. MIT used our phase shifting technology software and 0.25 micron
semiconductor manufacturing equipment.
Accelerate Time to Market. In today's economy, semiconductor manufacturers
can achieve a significant market advantage by being the first to introduce more
advanced semiconductors. Introducing next generation
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semiconductors has historically required the semiconductor industry to install
new equipment or to construct new manufacturing facilities, which may take up
to three years to complete. Our phase shifting technology and software products
enable companies to use existing equipment to produce smaller, faster and more
power efficient semiconductors, thereby enabling them to introduce new products
more rapidly.
Increase Return on Capital Equipment Investment. We design our proprietary
technologies and software products to enable existing semiconductor
manufacturing equipment to produce subwavelength ICs. Using our technologies
and products, semiconductor manufacturers will not be required to spend
billions of dollars to produce ICs with smaller and smaller feature sizes. As a
result, these semiconductor manufacturers can significantly increase their
return on invested capital. Furthermore, we believe that the use of our
proprietary technologies and software products results in higher manufacturing
yields.
Integrate the Key Stages of the Design-to-Silicon Flow. We design our
proprietary technologies and software products on a common platform and
architecture and are implemented in key stages of the design-to-silicon flow.
Our software products utilize a common process modeling and simulation
technique that allows the tools and equipment used in subsequent stages to
understand and process the results generated by each of the prior stages. For
example, the separate tools and equipment used to design, verify and
manufacture semiconductors can coordinate with each other to ensure an accurate
design-to-silicon flow. This coordination is particularly critical in the
semiconductor industry, which disaggregated into different companies that
specialize in separate key stages of the design-to-silicon flow. We believe
this is necessary to the successful production of subwavelength semiconductors.
Our Strategy
Our objective is to establish our proprietary technologies and software
products as the industry standard for the design and manufacture of
subwavelength semiconductors. Key elements of our strategy include:
Drive Continued Adoption of Our Subwavelengh Solution. We seek to
proliferate our proprietary technologies and software products as the solution
to the subwavelength gap problem. As part of this strategy, we intend to
continue to expand our relationships with leading integrated device
manufacturers, or IDMs, such as Lucent and Motorola, and leading foundries such
as TSMC and UMC. Due to the increasing proportion of semiconductors
manufactured at foundries, we intend to increasingly focus our efforts on
establishing our patented phase shifting technologies as the standard at TSMC,
UMC and other foundries to further drive the adoption of our subwavelength
solution by each of the other participants in the design-to-silicon flow.
Expand Relationships with Our Industry Partners. We intend to strengthen and
expand our industry partner relationships with the leading companies within
each stage of the design-to-silicon flow. To date, we have developed
relationships with semiconductor design tool vendors such as Cadence, photomask
manufacturers such as Dupont Photomask and Photronics, and semiconductor
equipment manufacturers such as Applied Materials and KLA-Tencor. We believe
that these broad-based industry relationships will help to proliferate our
proprietary technologies and software products as the industry standard.
Leverage Our Comprehensive Platform. We intend to leverage the common
platform of our proprietary technologies and software products to aggressively
market our products to each key market in the semiconductor industry. This
common platform enables data and information regarding subwavelength designs to
be shared by participants in each key stage of the design-to-silicon flow.
Because our proprietary technologies and software products ensure the accurate
and consistent communication of subwavelength design and process data, each
participant in the design-to-silicon flow benefits from their use.
Leverage Our Dominant Market Position in Manufacturing Data Preparation
Products. The vast majority of semiconductor, photomask and semiconductor
equipment manufacturers and foundries use our manufacturing data preparation
software as the essential link between the design and production stages of the
design-to-silicon flow. We intend to build on this dominant market position in
manufacturing data preparation to market our subwavelength proprietary
technologies and software products to these customers.
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Extend Technology Leadership Position. We believe we were among the first to
recognize that the subwavelength gap would represent a significant challenge to
continued advances in semiconductor technology. To capitalize on this business
opportunity, we engaged in significant research and development activities over
the past four years, pioneering proprietary and manufacturable phase shifting
technologies that we believe are the key to bridging the subwavelength gap. We
assembled a strong team of subwavelength experts, more than half of which have
graduate technical degrees, and we intend to continue expanding our research
and development efforts to further enhance our proprietary technologies.
Maintain Time-Based Software and Intellectual Property Licensing Models. Our
business model allows us to build on the sales and marketing efforts of our
industry partners, which resell, market and promote our technologies and
products. We seek to generate the majority of our future revenue through time-
based license fees, intellectual property licensing agreements and other
innovative, ongoing agreements with IDMs, foundries and reseller licensees.
Technology
As feature sizes decreased to dimensions smaller than the wavelength of
light used in optical lithography equipment, phase shifting and OPC
technologies became critical to the continued growth of the semiconductor
industry. Widespread deployment of subwavelength technologies requires the
industry to create an efficient and integrated IC design and manufacturing
process and introduce new technologies into several stages of the design-to-
silicon flow. Our proprietary technologies and software products allow IC
designers, as well as manufacturers of photomasks, semiconductor equipment and
semiconductor devices, to successfully deploy phase shifting and OPC
technologies. We believe we are the only company exclusively focused on
delivering a comprehensive solution that enables the design and manufacture of
subwavelength ICs.
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Phase Shifting
The foundation of our subwavelength process technologies lies in our phase
shifting technology, which manipulates light waves to produce high-resolution
images of subwavelength IC features. Our phase shifting technology sequences
positive and negative light wave patterns to prevent interfering waves from
causing the image on silicon to blur or disappear entirely. This enables
designers and manufacturers to create IC features that are less than half the
size of those that can be produced using conventional optical lithography
techniques. Our phase shifting technology also dramatically reduces sensitivity
to variations in the manufacturing process such as focus deviations and lens
imperfections, significantly improving manufacturing yields. We developed the
industry's first production-worthy, commercial phase shifting technology by
combining the multidisciplinary expertise of our scientists and engineers and
investing significantly in joint research and development activities with
leading photomask and semiconductor manufacturers.
[CHART APPEARS HERE]
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Optical Proximity Correction
Our OPC technologies embed corrective features in the IC design and
photomask to reduce image distortions caused by interfering light waves. We
developed these technologies in close collaboration with photomask and
semiconductor manufacturers to improve photomask manufacturability without
sacrificing performance. Our OPC technologies focus on correcting distortions
in semiconductor features that would most affect the semiconductor's
performance. OPC makes it possible to obtain an IC pattern that more closely
resembles the original desired design. However, as feature sizes continue to
decrease, OPC is no longer sufficient to ensure acceptable manufacturing
yields. At these smaller feature sizes, semiconductor manufacturers will employ
both OPC and phase shifting process technologies.
[4 CHARTS APPEAR HERE]
Process Modeling and Simulation
Historically, the designed layout of a semiconductor, its representation on
the photomask and the corresponding features on the semiconductor were
essentially identical. At subwavelength feature sizes, this relationship no
longer exists. As a result of distortions created during the manufacturing
process and the application of phase shifting and OPC, the design of a
semiconductor, its representation on the photomask and the pattern transferred
to the semiconductor all look different. We developed proprietary process
modeling and simulation technologies that recharacterize the relationship
between device design, photomask pattern and semiconductor features. This
recharacterized relationship allows designers and manufacturers to accurately
translate designs and photomasks to final semiconductors. Semiconductor
manufacturers can calibrate our process models to accurately characterize their
specific processes and use them in our software products throughout the design-
to-silicon flow. Manufacturers can use a common process model throughout the
design-to-silicon flow to facilitate consistency in the communication of
process and design data.
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Implementation Technologies
We developed several technologies necessary to implement the mainstream
design and manufacturing use of phase shifting and OPC technologies. These
include:
. design automation algorithms for phase shifting and OPC;
. hierarchical design data management technologies;
. subwavelength design verification technologies;
. photomask defect analysis technologies;
. high-performance process simulation algorithms and process model
calibration technologies; and
. algorithms for manufacturing data preparation.
Products
We offer technology products, software products and services that together
provide a comprehensive subwavelength design-to-silicon solution.
Technology Products
Phase Shift Technology. Our phase shifting technology licenses allow the
licensee to produce subwavelength semiconductor devices using our proprietary
technology. We offer limited use research and development licenses that allow
the licensee to use our proprietary technology for pre-production purposes. We
also offer production licenses of our phase shifting technology that are time
based, or are licensed per fabrication facility or per device produced.
Subwavelength Process Development. We offer a comprehensive implementation
package that includes a development plan, calibration and test photomasks and
on-site customer assistance to develop advanced subwavelength manufacturing
processes using our phase shifting and OPC technologies and software products.
Our engineers and scientists work on-site at our customers' fabrication
facilities to develop these processes and generate design rules, calibrated
models and associated design-to-silicon flows.
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Software Products
We offer a comprehensive suite of complex, tightly integrated software
products that all of the key markets within the semiconductor industry can use.
These markets use our software products independently or integrate them with IC
design tools, and photomask and semiconductor manufacturing equipment. Our
products address the needs of subwavelength design and manufacture in four key
sectors of the design-to-silicon flow:
<TABLE>
<CAPTION>
Sector Products Applications
<S> <C> <C>
Physical Design and iNPhase . Ensure compatability of semiconductor
Post-
Layout Data Processing TROPiC designs with subwavelength processes
iMagic . Create phase shifted and OPC device
SiVL design layout
. Verify silicon performance of designs
- ---------------------------------------------------------------------------------------
Manufacturing Data CATS . Process design data required to
Preparation and iNMask fabricate and inspect photomasks
Photomask Manufacturing iNMask-MRC . Verify input data, manufacturing data
processing and photomask layout
. Convert photomask design data to
formats required by specific photomask
manufacturing equipment
. Verify photomask and wafer
manufacturability
- ---------------------------------------------------------------------------------------
Photomask Inspection Virtual Stepper . Characterize located photomask defects
and Measurement iNSpect . Transcribe and transfer design data to
photomask and wafer inspection and
measurement equipment
- ---------------------------------------------------------------------------------------
IC Fabrication and IC Workbench . Optimize fabrication process
Process parameters
Development ModelCal . Generate calibrated process models and
RuleGen design rules for phase shift and OPC
CheckIt processes and our products
. Verify silicon performance of designs
</TABLE>
Each of these products is described below.
Physical Design and Post-Layout Data Processing Products
iNPhase. Our iNPhase product automates and integrates the design,
verification and OPC functions of our phase shifting technology. iNPhase also
verifies that the semiconductor design is free of "phase conflicts," or design
configurations that could result in manufacturing failures.
TROPiC. This integrated product automatically corrects designs for process-
induced distortions of subwavelength features. TROPiC implements our OPC
technologies that control photomask complexity to lower photomask cost without
sacrificing semiconductor performance.
iMagic. Our process simulation software product uses process models that are
calibrated to individual semiconductor manufacturers' processes. iMagic is used
by designers to simulate the final IC features that correspond to their
designs.
SiVL. Our silicon-versus-layout product utilizes our proprietary process
simulation technologies to verify that conventional, phase shifting and OPC
designs produce printed IC patterns within specified tolerances. By
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accurately predicting "silicon level" failures, SiVL reduces or eliminates the
need to repeat the design and manufacturing process. SiVL integrates with tools
used to verify that the IC patterns are within specified tolerances.
Manufacturing Data Preparation and Photomask Manufacturing Products
CATS. This family of products includes products that automatically create
different photomask layers by sizing and combining design layers. Our CATS
products allow users to view the input and output data of the manufacturing
data preparation process and verify photomask design accuracy using a
combination of graphical algorithmic and query analyses.
iNMask. Our iNMask formatting product automatically transcribes photomask
layout data into input data formats optimized for specific photomask
manufacturing equipment. iNMask supports leading photomask equipment
manufacturers, including Etec, Hitachi and Leica.
iNMask-MRC. This product verifies that the photomask data files produce
manufacturable photomasks and wafers. The data is checked for variations from
manufacturing requirements, including minimum widths, spacing and layer to
layer errors.
Photomask Inspection and Metrology Products
Virtual Stepper. This product allows photomask manufacturers to accurately
assess the impact of photomask defects on the silicon wafer. Photomask
manufacturers using Virtual Stepper can quickly determine photomask quality,
improving their productivity and yield. The Virtual Stepper takes direct input
from defect inspection and review equipment manufactured by leading equipment
companies including Applied Materials, KLA-Tencor and Zygo.
iNSpect. Our iNSpect product automatically transcribes photomask layout data
into input data formats optimized for specific photomask and wafer inspection
equipment. iNSpect also identifies measurement locations for photomask and
wafer measurement equipment. This product supports leading equipment
manufacturers, including Applied Materials, KLA-Tencor, Leica and Zygo.
Semiconductor Fabrication and Process Development
IC Workbench. IC Workbench is an interactive process simulation, analysis
and optimization tool. This product includes a powerful graphical user
interface, design data viewer and editor with real-time simulation feedback.
This allows users to rapidly evaluate the impact of design and process
parameters on the final silicon results while optimizing subwavelength
processes.
ModelCal. This product enables users to automatically calibrate process
models using empirical measurement data from specific semiconductor
manufacturers' processes. ModelCal implements our proprietary model calibration
technology to produce extremely accurate process models using our calibration
photomask designs for both phase shifting and OPC applications.
RuleGen. This product automatically generates design rules and parameters
for phase shifting and OPC processes using our calibrated process models. The
output of RuleGen is fully compatible with the input requirements of InPhase
and TROPiC.
CheckIt. This product performs accurate, exhaustive, silicon-level
verification for phase shifting and OPC designs prior to IC production. CheckIt
accurately predicts potential failures in the manufacture of semi-conductors
and marginal locations on phase shifting and OPC designs.
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<PAGE>
Services
Design Services. We assist our industry partners and customers with
semiconductor designs that use our phase shifting and OPC technologies. Our
design services include creating phase shifted designs, applying OPC technology
to designs and verifying the final design layout. Our design services help
industry partners and customers rapidly adopt our technologies.
Technology Integration Services. We offer technology integration services to
allow our industry partners to integrate our software products with their
products for marketing to their customers. We develop software interfaces to
semiconductor design tools and equipment to enable the necessary data
communication to integrate the operation of the combined products.
Customers and Industry Partners
We license our proprietary technologies and software products to companies
in key markets within the semiconductor industry. Our customers include
licensees of our phase shifting technology and software, manufacturing data
preparation software and silicon verification and photomask verification
software. Our industry partners integrate our technologies and software into
their products and act as resellers. The following customers and/or industry
partners accounted for license, maintenance and technical service revenues of
more than $100,000 in 1999:
<TABLE>
<S> <C>
IDMs and Foundries Design Tool Vendors
CNet Cadence Design Systems
Conexant
Fujitsu Semiconductor Equipment
IBM Manufacturers
LG International Applied Materials
Lucent KLA-Tencor
Matsushita Ultrabeam
Motorola Zygo
National Semiconductor
NEC Mask Manufacturers
OKI Align Rite
Samsung Compugraphics
Siemens Dai Nippon Printing
ST Microelectronics DuPont Photomask
Texas Instruments Hoya
Tokyo University Photronics
Toshiba Precision Semiconductor
TSMC Mask Corporation
UMC Taiwan Mask Corporation
VLSI Technology Toppan
World Semiconductor
Manufacturing Company
</TABLE>
All of the companies listed above are our customers. In addition, Lucent,
Motorola, Toshiba, TSMC, UMC, Cadence, Applied Materials, KLA-Tencor, Zygo,
DuPont Photomask, Photronics and Taiwan Mask Corporation are our industry
partners.
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<PAGE>
Sales and Marketing
We rely on our direct sales force and on our industry partner relationships
to penetrate each key market of the semiconductor industry. Domestically, our
direct sales force operates primarily out of our headquarters in California. We
also employ sales personnel in Minnesota and Texas. In addition, we maintain
sales personnel and support staff who work closely with resellers and partners
in Korea, Japan, The Netherlands and Taiwan. We intend to continue to expand
our sales and support personnel both domestically and internationally. As of
January 1, 2000, we had 28 employees involved in sales and marketing.
Our marketing personnel focus on developing our relationships with industry
partners. Our industry partners include leading semiconductor equipment
manufacturers, such as Applied Materials and KLA-Tencor, and design tool
companies, such as Cadence. We also entered into joint-marketing relationships
with leading photomask manufacturers, such Dupont Photomask and Photronics. Our
direct sales efforts have focused primarily on licensing to foundries and IDMs.
To date, we have concentrated our sales and marketing efforts on selling
research and development licenses. We expect to extend these efforts to
generate production licenses as semiconductor manufacturers move into
production of subwavelength ICs. We have already entered into a production
license with a leading IDM. We believe that our broad-based sales and marketing
efforts will facilitate the adoption of our subwavelength technologies as the
industry standard.
Research and Development
Our future success will depend to a large extent on our ability to rapidly
develop and introduce new proprietary technologies and software products and
enhancements to our existing products. We have made and expect to continue to
make substantial investments in research and development. The complexity of
phase shifting and OPC technologies requires expertise in physical IC design
and layout, photomask manufacturing, optical lithography, numerical algorithms
and software development. We believe that the multidisciplinary expertise of
our team of scientists and engineers will continue to advance our market and
technological leadership.
As of January 1, 2000, our engineering group consisted of 51 employees, 67%
of whom have advanced degrees, including 35% who have Ph.D.s. These employees
are focused on the following objectives:
Product Development. Our product development group is organized in teams
around the different products we offer. A separate team within this group
develops our common core technology and ensures that each product fits into
this common architecture.
Advanced Research. Our advanced research group works independently from our
product development group to assess and develop new technologies that meet the
evolving needs of subwavelength design and manufacturing.
Product Engineering. Our product engineering group is primarily focused on
product release, platform support, quality assurance and product documentation.
Competition
The semiconductor industry is highly competitive and characterized by
rapidly changing design and process technologies. The market for phase shifting
and OPC solutions is rapidly evolving and we expect competition to continue to
increase. We face direct competition from other providers of phase shifting,
OPC and manufacturing data preparation solutions, including Avant! and Mentor
Graphics. We also compete with companies that have developed or have the
ability to develop their own proprietary phase shifting and OPC enabling
solutions, such as IBM. Many of these companies are larger than we are, have
greater financial or other resources than we do and therefore can withstand
adverse market or economic conditions more readily than we can. We may also
face competition from alternatives to current photolithography systems. In
addition, commercially viable manufacturing processes that provide alternatives
to our subwavelength solution may be developed in the future by existing or
potential competitors. We believe that the principal competitive factors in
39
<PAGE>
our market include technology viability, product availability, performance,
reliability, functionality, cost and customer service. We believe we compete
favorably with respect to each of these factors.
Intellectual Property
Our future success and competitive position depend upon our continued
ability to develop and protect proprietary technologies. We rely significantly
on a combination of patents, copyrights, trademarks and trade secrets to
protect our proprietary technologies and prevent competitors from using our
technologies in their products. We have been issued two U.S. patents and have
five U.S. patent applications currently pending in the U.S. and nine foreign
patent applications currently pending in selected foreign countries. In the
future, we may seek additional patent protection when we feel it is necessary.
Our existing or future patents may be circumvented, blocked, licensed to
others or challenged as to inventorship, ownership, scope, validity or
enforceability. Third parties have advised us of literature which they believe
to be relevant to our patents. We have not yet reviewed all of the information
contained in this literature. It is possible that this literature or literature
we may be advised of in the future could negatively affect in the future the
scope or enforceability of either our present or future patents. We may not
receive competitive advantages from the rights granted under our patents. In
addition, our future patent applications may not be issued with the scope of
the claims sought by us, if at all. Furthermore, others may develop
technologies that are similar or superior to our proprietary technologies,
duplicate our proprietary technologies or design around the patents owned or
licensed by us. We are aware of and are evaluating certain patents with which
our products, patents or patent applications may conflict. If any of these
patents are found to be valid, and we are unable to license such patents on
reasonable terms, or if our products, patents or patent applications are found
to conflict with these patents, we could be prevented from selling our
products, our patents may be declared invalid or our patents applications may
not result in issued patents. In addition, in foreign countries, we may not
receive effective patent and trademark protection. We cannot be sure that steps
we take to protect our proprietary technologies will prevent misappropriation
of our technologies.
In addition, we generally enter into confidentiality agreements with our
employees, industry partners and customers, as well as generally control access
to and distribution of our documentation and other proprietary information.
Despite this protection, unauthorized parties may copy aspects of our current
or future software products or obtain and use information that we regard as
proprietary.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions. There are also numerous
patents in the semiconductor industry and new patents are being issued at a
rapid rate. This often results in significant and often protracted and
expensive litigation. From time to time third parties may notify us of
intellectual property infringement claims. If it is necessary or desirable, we
may seek licenses under these third party patents or intellectual property
rights. However, we cannot be sure that third parties will offer licenses to us
or that we accept the terms of any offered licenses.
If we fail to obtain a license from a third party for proprietary
technologies that we use, we could incur substantial liabilities, or suspend
sales of our software products or our use of processes requiring the
technologies. Litigation could cause us to incur significant expenses, harm our
sales of the challenged technologies or software products and divert the
efforts of our technical and management personnel, whether or not a court
decides the litigation is in our favor. In the event we receive an adverse
result in any litigation, we could be required to pay substantial damages,
cease sale of infringing products, expend significant resources to develop or
acquire non-infringing technology and discontinue the use of processes
requiring the infringing technology or obtain licenses to the infringing
technology. We may not be successful in the development or acquisition of
intellectual property, or the necessary licenses may not be available under
reasonable terms, and any development, acquisition or license could require us
to expend a substantial amount of time and other resources. Any of these
developments would harm our business.
40
<PAGE>
Employees
As of January 1, 2000, we employed 98 individuals in the United States, of
which 96 were located in the Silicon Valley. As of January 1, 2000, we also
employed seven individuals abroad to provide technical support to customers in
Asia and Europe, two of which were located in Korea, two in Taiwan, one in
Japan and two in The Netherlands. None of our employees is represented by a
labor union or is subject to a collective bargaining agreement. We believe that
our relationship with our employees is good.
Facilities
Our executive offices and principal operations are currently located in
approximately 39,300 square feet of office space in San Jose, California under
a lease that expires in May 2004. We also lease approximately 2,400 square feet
of office space in Los Gatos, California under a lease that expires in January
2001. We believe that our existing facilities are adequate for our current
needs.
Legal Proceedings
We are not currently party to any material legal proceedings.
41
<PAGE>
MANAGEMENT
The following table sets forth information regarding our executive officers
and directors as of January 24, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
William H. Davidow(b)..... 64 Chairman of the Board
Y. C. (Buno) Pati......... 35 President, Chief Executive Officer and
Director
Yao-Ting Wang............. 36 Chief Technology Officer and Director
Richard Mora.............. 53 Chief Financial Officer and Vice President,
Operations
Atul Sharan............... 40 Vice President, Marketing and Business
Development
Lars Herlitz.............. 35 Vice President, Engineering
John Traub................ 53 Vice President, Worldwide Sales
Kevin MacLean............. 37 Vice President and General Manager,
Transcription
Roger Sturgeon............ 55 Director and Fellow
Thomas Kailath(b)......... 64 Director
Narendra K. Gupta(a)...... 51 Director
Abbas El Gamal(a)......... 49 Director
Harvey Jones(a)(b)........ 47 Director
</TABLE>
- --------
(a) Member of the Audit Committee
(b) Member of the Compensation Committee
William H. Davidow has served as our Chairman of the Board since January
2000 and as a director of our company since June 1998. Mr. Davidow has served
as a partner at Mohr, Davidow Ventures since May 1985 and has been a high-
technology industry executive and a venture investor for over 20 years. From
August 1973 to January 1985, Mr. Davidow was at Intel Corporation where he was
Senior Vice President of marketing and sales, Vice President of the
microcomputer division and Vice President of the microcomputer systems
division. Mr. Davidow received a Ph.D. in electrical engineering from Stanford
University, an M.S. in electrical engineering from the California Institute of
Technology, an M.S. in electrical engineering from Dartmouth College and a B.S.
in electrical engineering from Dartmouth. Mr. Davidow is chairman of the board
at both Rambus Corporation and Viant Corporation. Mr. Davidow also serves on
the boards of several other start-up companies.
Dr. Y. C. (Buno) Pati has served as our President and Chief Executive
Officer and a director since he co-founded our company in October 1995. From
October 1995 to December 1996, Dr. Pati served as an assistant professor of
electrical engineering and computer science at Harvard University. From October
1992 to October 1995, Dr. Pati conducted research efforts in computational and
system sciences applied to integrated circuit manufacturing at Stanford
University. Dr. Pati has published numerous articles in signal processing,
communications, fast lithography simulations and automated phase shifting
photomask design. Dr. Pati received a B.S., an M.S. and a Ph.D. in electrical
engineering from the University of Maryland at College Park.
Dr. Yao-Ting Wang has served as our Chief Technology Officer and a director
since he co-founded our company in October 1995. Dr. Wang's doctoral
dissertation research was on automated design of phase shifting photomasks
using fast algorithms and signal processing techniques. Dr. Wang is active in
the areas of fast lithography simulations and automated advanced photomask
designs, with specific interests in communications, signal processing and
lithographic techniques. Dr. Wang received a B.S. degree from National Taiwan
University and a Ph.D. in Electrical Engineering from Stanford University.
Richard Mora has served as our Chief Financial Officer and Vice President,
Operations since May 1999. From August 1994 to April 1999, Mr. Mora was Chief
Financial Officer and Vice President of Finance at Mattson Technologies, Inc.,
a semiconductor equipment manufacturer. From June 1998 to May 1999, Mr. Mora
was also Vice President and General Manager of the High Temp Products Division
at Mattson. From
42
<PAGE>
September 1988 to August 1994, Mr. Mora served as Chief Financial Officer and
Vice President of Finance at Actel Corporation, a semiconductor manufacturer.
From June 1985 to August 1988, Mr. Mora was Chief Financial Officer and Vice
President of Finance at HHB Systems. Mr. Mora received a B.S. in Accounting
from Santa Clara University and is a Certified Public Accountant.
Atul Sharan has served as our Vice President, Marketing and Business
Development since October 1998. From April 1997 to October 1998, Mr. Sharan was
director of strategic business development at Ambit Design Systems where he
helped establish and manage key partner relationships with LSI Logic and
Cadence. From May 1991 to March 1997, Mr. Sharan held senior sales and
marketing management positions at Compass Design Automation. While at Compass
as General Manager-Compass India Operations, Mr. Sharan helped establish a
software development center in India. From December 1984 to May 1991, Mr.
Sharan worked in semiconductor manufacturing operations at VLSI Technology and
Integrated Device Technology. While at IDT, Mr. Sharan helped initiate the
company's first overseas test and assembly plant in Penang, Malaysia.
Mr. Sharan received an M.B.A. from the University of California at Berkeley, an
M.S. in engineering from the University of Houston, Texas and a B.Tech. Degree
in engineering from the Indian Institute of Technology in Kanpur, India.
Lars Herlitz has served as our Vice President, Engineering since December
1998. From March 1994 to November 1998, Mr. Herlitz served in various positions
at Escalade Corporation, an engineering design automation company focused on
system-on-chip design. Mr. Herlitz culminated his career at Escalade as Vice
President of Engineering from 1997 to 1998. From December 1987 to March 1994,
Mr. Herlitz served in various positions at Cadence, including as Director of
Engineering from 1993 to 1994. Mr. Herlitz received an M.S. in electrical
engineering and computer science from the University of Linkoping in Sweden.
John Traub has served as our Vice President, Worldwide Sales since September
1999. From December 1998 to September 1999, Mr. Traub served as Vice President
of Worldwide Sales at Ultratech Stepper, Inc. From June 1997 to December 1998,
he was President and Chief Executive Officer of Cyberspace Inc., a technology
consulting company which he founded. From June 1989 to June 1997, Mr. Traub
held various positions at Systems Chemistry, Inc., a manufacturer of ultra-high
parity chemical systems, including Vice President of Worldwide Sales, Chairman,
President and Chief Executive Officer. From April 1982 to June 1989, he was
founder and Managing Director and Vice President of Business Development of
Align-Rite Ltd. in Wales, where he successfully expanded the U.S. company's
business into the European market.
Kevin MacLean has served as our Vice President and General Manager,
Transcription since January 2000. In June 1986, Mr. MacLean co-founded
Transcription Enterprises Limited, where he served as Vice President until we
acquired the company in January 2000. Mr. MacLean received a B.S. in mechanical
engineering from Cornell University.
Roger Sturgeon has served as a director of our company and a Fellow since
January 2000. In June 1986, he co-founded Transcription Enterprises Limited,
where he served as President until we acquired the company in January 2000. Mr.
Sturgeon received an M.S. in electrical engineering and computer science from
the University of California at Berkeley and a B.S. in engineering sciences
from the University of California at Berkeley.
Dr. Thomas Kailath is a co-founder of our company and has served as a
director since October 1995 and was Chairman of the Board from October 1995 to
January 2000. Dr. Kailath has served as the Hitachi American Professor of
Engineering at Stanford University since 1987. From January 1981 to June 1987,
Dr. Kailath was Associate Department Chairman of the Department of Electrical
Engineering at Stanford University and served as Director of the Information
Systems Laboratory from January 1971 to January 1981. In February 1980,
Dr. Kailath co-founded Integrated Systems Inc., a leading developer of embedded
software, and has served as a director of Integrated Systems since its
inception. Dr. Kailath received an Sc.D. in Electrical Engineering from the
Massachusetts Institute of Technology, an S.M. in Electrical Engineering from
MIT and a B.E. in telecommunications from the University of Poona, India. Dr.
Kailath is a member of the
43
<PAGE>
National Academy of Engineering and the American Academy of Arts and Sciences.
Dr. Kailath serves on the board of Excess Bandwidth Corporation.
Dr. Narendra K. Gupta has served as director of our company since April
1997. Dr. Gupta co-founded Integrated Systems in 1980 and has served as its
Chairman since November 1992. He was the President and Chief Executive Officer
of Integrated Systems from its inception until May 1994. Dr. Gupta received a
Ph.D. in engineering from Stanford and an M.S. in engineering from the
California Institute of Technology. Dr. Gupta also received a B. Tech. Degree
in mechanical engineering from the Indian Institute of Technology. Dr. Gupta
was elected a Fellow of the Institute for Electrical and Electronics in 1991.
Dr. Abbas El Gamal has served as a director of our company since April 1997.
Dr. El Gamal has been on the faculty of the Electrical Engineering department
at Stanford University since September 1981. In December 1990, Dr. El Gamal co-
founded Silicon Architects, which was acquired by Synopsis in 1995 and served
as its Chief Technical Officer until May 1995. In July 1986, Dr. El Gamal co-
founded Actel Corporation and served as its Chief Scientist until November
1990. From July 1984 to July 1986, Dr. El Gamal served as a director of LSI
Logic's Research Lab, where he developed silicon compilation technology, DSP
and image processing ASICs. Dr. El Gamal's research interests include CMOS
image sensors and digital cameras, image processing, photomask programmable
gate arrays and information theory. He has authored or co-authored over 100
papers and 20 patents in these areas. Dr. El Gamal received a Ph.D. in
electrical engineering from Stanford, an M.S. in Statistics from Stanford and a
B.S. in Electrical Engineering from Cairo University, Egypt. Dr. El Gamal is a
Fellow of The Institute of Electrical and Electronics Engineers and serves on
the boards of Lightspeed Semiconductor and PiXIM, Inc.
Harvey Jones has served as a director of our company since June 1998. From
December 1987 to February 1998, Mr. Jones was employed by Synopsys, an
electronic design automation software company. Mr. Jones served as President
and Chief Executive Officer of Synopsys from December 1987 to January 1995, and
as its Executive Chairman of the Board from January 1995 to February 1998. From
April 1981 to November 1987, Mr. Jones served in various positions at Daisy
Systems, a computer-aided engineering company he co-founded, most recently as
President and Chief Executive Officer. From August 1974 to March 1981, Mr.
Jones served in various positions at Calma, a computer-aided design company,
most recently as Vice President of Marketing. In addition to his operational
roles, Mr. Jones has been an investor and active board member of such ventures
as Remedy Corporation, an enterprise software company, and NVIDIA Corporation,
a 3-D graphics processor company. Mr. Jones received an M.S. degree from MIT's
Sloan School of Management and a B.S. in mathematics and computer sciences from
Georgetown University.
Classified Board
Immediately following the offering, our board of directors will consist of
eight directors divided into three classes with each class serving for a term
of three years as follows:
<TABLE>
<CAPTION>
Class Expiration Member
----- ---------- ------
<S> <C> <C>
Class I............. 2001 El Gamal, Jones and Wang
Class II............ 2002 Kailath and Sturgeon
Class III........... 2003 Davidow, Gupta and Pati
</TABLE>
At each annual meeting of stockholders, directors will be elected by the
holders of common stock to succeed those directors whose terms are expiring. In
addition, our bylaws provide that the authorized number of directors may be
changed only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the total number of directors. This classification
of the board of directors may have the effect of delaying or preventing changes
in control of our company.
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<PAGE>
Board Committees
The board of directors has a compensation committee and an audit committee.
The compensation committee, currently comprised of Mr. Davidow, Mr. Jones and
Mr. Kailath, administers the 1997 stock plan, the 2000 stock plan, the 2000
employee stock purchase plan and all matters concerning executive compensation
and employee agreements. The audit committee, currently comprised of Mr. El
Gamal, Mr. Gupta and Mr. Jones, performs the following functions:
. monitors our system of internal controls;
. corporate financial reporting and internal and external audits;
. provides the board of directors with the results of its examinations and
recommendations;
. outlines to the board of directors the improvements made or to be made in
internal accounting controls;
. nominates independent auditors; and
. provides the board of directors with other information and materials
necessary to make the board of directors aware of significant financial
matters.
Each of the audit committee and compensation committee was established in
January 2000.
Director Compensation
We do not currently pay compensation to directors for serving in that
capacity, nor do we reimburse directors for expenses incurred in attending
board meetings. In November 1999, Mr. Davidow received an option to purchase an
aggregate of 150,000 shares of common stock at an exercise price per share of
$1.00. On February 1, 2000, Mr. Sturgeon received an option to purchase an
aggregate of 225,000 shares of common stock at an exercise price per share of
$2.67. Please see "Related Party Transactions--Restricted Stock Purchase
Agreements." On February 1, 2000, each of Mr. Davidow, Mr. El Gamal, Mr. Gupta,
Mr. Jones and Mr. Kailath received an option to purchase 7,500 shares of common
stock at an exercise price per share of $2.67 in consideration for their prior
services on the board of directors. The board has the discretion to grant
options to non-employee directors under the 2000 stock plan. See "Employee
Benefit Plans--2000 Stock Plan."
Compensation Committee Interlocks and Insider Participation
The compensation committee is currently comprised of Mr. Davidow, Mr. Jones
and Mr. Kailath. None of these committee members has at any time been an
officer or employee of our company. No interlocking relationship exists between
our board of directors or compensation committee and the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
Limitation on Liability and Indemnification Matters
Our amended and restated certificate of incorporation limits the personal
liability of directors for breach of fiduciary duty to the maximum extent
permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable to us or our stockholders for
monetary damages for breach of their fiduciary duties as directors, except for:
. any breach of the director's duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases, redemptions
or other distributions; or
. any transaction from which the director derived an improper personal
benefit.
Our bylaws require that we indemnify our directors and officers to the
extent permitted by Delaware law. We may, in our discretion, indemnify other
employees and agents to the extent permitted by Delaware law. We believe that
indemnification under our bylaws covers at least negligence and gross
negligence on the part of
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<PAGE>
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any of our officers, directors, employees or other agents for any liability
incurred in that capacity or arising out of that status, regardless of whether
indemnification is permitted under Delaware law.
We have also entered into agreements to indemnify our directors and
officers. These agreements indemnify our directors and officers for some
expenses, including attorneys' fees, judgments, fines and settlement amounts
incurred by them in any action or proceeding, including any action by or in the
right of our company, arising out of their services as one of our directors or
officers, any of our subsidiaries or any other company or enterprise to which
the person provides services at our request. In addition, we have obtained
directors' and officers' insurance providing indemnification for some of our
directors, officers and employees for certain liabilities. We believe that
these provisions, agreements and insurance are necessary to attract and retain
qualified directors and officers.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. Moreover, a stockholder's investment in us may be adversely
affected to the extent we pay the costs of settlement or damage awards against
our directors and officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification.
Executive Compensation
The following table sets forth information concerning the compensation that
we paid during the fiscal year ended December 31, 1999 to our Chief Executive
Officer and our three other most highly compensated officers who earned more
than $100,000 during that fiscal year. All option grants were made under our
1997 stock plan. The amounts listed under "All Other Compensation" represent
the dollar value of term life insurance premiums paid by us on behalf of the
named executive officer during the fiscal year ended December 31, 1999. There
is no cash surrender value under the life insurance policy.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation Long Term Compensation
---------------- ----------------------------
Securities
Salary Bonus Underlying All Other
Name and Principal Position ($) ($) Options (#) Compensation ($)
- --------------------------- -------- ------- ----------- ----------------
<S> <C> <C> <C> <C>
Buno Pati........................ $104,000 $ -- -- $ 91
President and Chief Executive
Officer
Richard Mora..................... 80,095 25,962 412,500 78
Chief Financial Officer and Vice
President, Operations
Atul Sharan...................... 130,000 52,000 277,500 101
Vice President, Marketing and
Business Development
Lars Herlitz..................... 130,000 37,250 255,000 101
Vice President, Engineering
</TABLE>
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Option Grants in Last Fiscal Year
The following table sets forth information with respect to stock options
granted to our Chief Executive Officer and our three most highly compensated
executive officers during the fiscal year ended December 31, 1999. We have
never granted any stock appreciation rights. All option grants were made under
our 1997 stock plan. The exercise price per share was equal to the fair market
value of the common stock on the date of grant as determined by the board of
directors. Percentage of total options is based on an aggregate of
3,019,050 shares of common stock granted under the 1997 stock plan in the year
ended December 31, 1999. The potential realizable value is calculated based on
the term of the ten-year option and assumed rates of stock appreciation of 5%
and 10%, compounded annually. These assumed rates comply with the rules of the
Securities and Exchange Commission and do not represent our estimate of future
stock price. Actual gains, if any, on stock option exercises will be dependent
on the future performance of our common stock.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
------------------------------------------------ Value at Assumed
Number Annual Rates of Stock
of Securities % of Price Appreciation
Underlying Total Options Exercise for Option Term ($)
Options Granted in Price Per Expiration ----------------------
Name Granted (#) 1999 (%) Share ($) Date 5% 10%
- ---- ------------- ------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Buno Pati............... -- -- -- -- -- --
Richard Mora............ 195,000 6.5 0.50 05/26/09 61,317 155,390
Richard Mora............ 217,500 7.2 1.00 12/27/09 136,785 346,639
Atul Sharan............. 90,000 3.0 0.33 03/31/09 18,865 47,807
Atul Sharan............. 187,500 6.2 1.00 12/27/09 117,918 298,827
Lars Herlitz............ 172,500 5.7 0.33 02/03/09 36,158 91,631
Lars Herlitz............ 82,500 2.7 1.00 12/27/09 51,884 131,484
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth our Chief Executive Officer and our three
other most highly compensated executive officers information concerning shares
acquired upon exercise of stock options in fiscal year ended December 31, 1999
and exercisable and unexercisable options held as of December 31, 1999. All
options were granted under our 1997 stock plan. The value realized is based on
the initial public offering price of $14.00, minus the per share exercise
price, multiplied by the number of shares issued upon exercise of the option.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at December 31, In-the-Money Options at
Shares 1999 (#) December 31, 1999 ($)
Acquired on Value ------------------------- -------------------------
Name Exercise (#)(a) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Buno Pati............... -- -- -- -- -- --
Richard Mora............ 412,500 5,460,000 -- -- -- --
Atul Sharan............. 73,500 1,004,500 339,000 -- 101,000 --
Lars Herlitz............ 198,282 2,692,666 56,718 -- -- --
</TABLE>
- --------
(a) The shares acquired by each of Mr. Mora, Mr. Sharan and Mr. Herlitz were
acquired pursuant to restricted stock purchase agreements. We have the
right to repurchase any unvested shares at their cost in the event of any
of such employees termination of employment. As of December 31, 1999,
approximately 412,500 shares held by Mr. Mora, 17,250 shares held by Mr.
Sharan and 155,157 shares held by Mr. Herlitz were unvested and subject to
our repurchase.
47
<PAGE>
Employment Agreements
Mr. Sturgeon.
On January 1, 2000, Mr. Sturgeon entered into an employment agreement with
Transcription. Pursuant to the employment agreement, Mr. Sturgeon is to serve
as Fellow for a term of two years. Mr. Sturgeon is entitled to a base salary of
$205,000 per year and a bonus for the year 2000 of up to approximately $50,000,
based upon the achievement of mutually agreed upon performance objectives.
Simultaneously with the execution of his employment agreement, Mr. Sturgeon
entered into a non-competition agreement with us and Transcription. Pursuant to
the non-competition agreement, Mr. Sturgeon agreed not to compete against or
solicit the employees of either us or Transcription for, generally, a period of
two years after his termination of employment.
Mr. MacLean.
On January 1, 2000, Mr. MacLean entered into an employment agreement with
Transcription. Pursuant to the employment agreement, Mr. MacLean is to serve as
Vice President and General Manager of Transcription for a term of two years.
Mr. MacLean is entitled to a base salary of $200,000 per year and a bonus for
the year 2000 of up to approximately $100,000, based upon the achievement of
mutually agreed upon revenue quotas. Simultaneously with the execution of his
employment agreement, Mr. MacLean entered into a non-competition agreement with
us and Transcription substantially similar to the non-competition agreement
executed by Mr. Sturgeon described above.
Generally.
We require each of our employees to enter into confidentiality agreements
prohibiting the employee from disclosing any of our confidential or proprietary
information. In addition, the agreements generally provide that upon
termination, the employee will not solicit our employees for a period of twelve
months. At the time of commencement of employment, our employees also generally
sign offer letters specifying certain basic terms and conditions of employment.
Other than as described above, in general, our employees are not subject to
written employment agreements.
Employee Benefit Plans
2000 Stock Plan.
Our 2000 stock plan provides for the granting to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code
and for the granting to employees, directors, and consultants of nonstatutory
stock options and stock purchase rights. As of February 15, 2000, 3,000,000
shares were authorized under the plan, no shares were subject to outstanding
options and approximately 1,450,001 shares remain available for future grant.
The 2000 stock plan provides for annual increases on the first day of each
fiscal year beginning 2001 equal to the lesser of:
. 3,000,000 shares;
. 5% of our outstanding shares as of such date; or
. a lesser amount determined by the board of directors.
The 2000 stock plan may be administered by the board of directors or a
committee of the board. The board has the power to determine the terms of the
options granted, including the exercise price, the number of shares subject to
each option, the exercisability of the option grant and the form of
consideration payable upon such exercise. The board also has the authority to
amend, suspend or terminate the 2000 stock plan, provided that no such action
may affect any share of common stock previously issued and sold or any option
previously granted under the plan. The 2000 stock plan terminates in 2010.
48
<PAGE>
The 2000 stock plan provides that in the event we merge with or into another
corporation, or we sell substantially all of our assets, each option may be
assumed or substituted by the successor corporation. If the outstanding options
are not assumed or substituted by the successor corporation, each outstanding
option will fully vest and become exercisable, and the optionee will have 15
days to exercise the option, after which such time the option will terminate.
Non-Employee Director Stock Program. Pursuant to the 2000 stock plan, the
board has the discretion to grant options to non-employee directors. The
director option component of the 2000 stock plan will not become effective
until the date of this offering. Each non-employee director who first becomes a
board member after the date of this offering may be granted options for up to
30,000 shares. In addition, each non-employee director may be granted options
for up to 7,500 shares annually.
The exercise price of all options granted to non-employee directors under
the 2000 stock plan is required to be 100% of the fair market value per share
of the common stock, determined with reference to the closing price of the
common stock as reported on the Nasdaq National Market on the date of grant.
In the event of a change of control, each option granted pursuant to the
non-employee director stock program will become fully-vested and exercisable.
1997 Stock Plan. Our 1997 stock plan provides for the granting to employees
of incentive stock options within the meaning of Section 422 of the Internal
Revenue Code and for the granting to employees and consultants of nonstatutory
stock options. The terms of the 1997 stock plan are substantially similar to
those of the 2000 stock plan. As of February 15, 2000, 6,196,500 shares were
authorized under the plan, 1,238,155 shares were subject to outstanding options
and approximately 962,910 shares remain available for future grant. Upon the
completion of this offering, the 1997 stock plan will terminate, no further
option grants will be made under the 1997 stock plan, and any shares reserved
but not yet issued under the 1997 stock plan will be available for future grant
under the 2000 stock plan.
The stock option agreements under the 1997 stock plan provide for the full
acceleration of vesting of options and stock purchase rights if such options or
stock purchase rights are not assumed or substituted by the successor
corporation in a merger or asset sale.
2000 Employee Stock Purchase Plan. As of February 15, 2000, a total of
300,000 shares of common stock have been reserved for issuance under our 2000
employee stock purchase plan, plus annual increases on the first day of each
fiscal year beginning 2001 equal to the lesser of:
. 675,000 shares;
. 2% of our outstanding shares as of such date; or
. a lesser amount determined by the board of directors.
The 2000 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, contains 24 month offering periods.
The offering periods generally start on the first trading day on or after May
15 and November 15 of each year, except for the first such offering period,
which will commence on the first trading day on or after the effective date of
this offering and ends on the last trading day on or before May 14, 2002.
Subsequent offering periods will each have a six-month duration commencing on
the first trading day on or after May 15 and November 15 of each year.
Employees are eligible to participate if they are employed by us or any
participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, the following employees may not be
granted options to purchase stock under the purchase plan:
. any employee who immediately after the grant would own stock possessing
5% or more of the total combined voting power or value of all classes of
our capital stock; or
. any employee whose rights to purchase stock under all of our employee
stock purchase plans accrues at a rate which exceeds $25,000 worth of
stock for each calendar year.
49
<PAGE>
Participants may purchase common stock through payroll deductions of up to
15% of the participant's compensation. The maximum number of shares a
participant may purchase during a six month offering period is 2,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is 85% of the lower of the fair market value
of the common stock at the beginning of the offering period and the fair market
value of the common stock at end of the offering period.
The purchase plan provides that in the event we merge with or into another
company, or we sell substantially all of our assets, each outstanding option
may be assumed or substituted by the successor company. If the successor
company refuses to assume or substitute the options, the offering period then
in progress will be shortened and a new exercise date will be set, which will
occur before the proposed merger or sale.
The purchase plan will become effective on the effective date of this
offering and will terminate ten years thereafter, unless sooner terminated by
the board of directors. The board has the authority to amend or terminate the
purchase plan, except that no such action may adversely affect any outstanding
rights to purchase stock.
401(k) Savings Plan
We sponsor a 401(k) savings in which eligible employees may participate. The
401(k) savings plan is intended to qualify under Sections 401(a) and 401(k) of
the Internal Revenue Code of 1986, as amended. Contributions to the 401(k)
savings plan and income earned on such contributions are not taxable to
employees until withdrawn from the 401(k) savings plan. Subject to restrictions
imposed by the Internal Revenue Code on highly compensated employees, employees
may generally defer up to 15% of their pre-tax earnings up to the statutorily
prescribed annual limit, which is $10,500 for the 2000 calendar year, and to
have the amount of such reduction contributed to the 401(k) savings plan. The
401(k) savings plan permits, but does not require, additional matching
contributions to the 401(k) savings plan. To date, we have not made any
matching contributions to the 401(k) savings plan. The 401(k) savings plan may
be amended or terminated by us at anytime, and in our sole discretion.
50
<PAGE>
RELATED PARTY TRANSACTIONS
Equity Investment Transactions
In October and December 1996, we sold 2,250,006 shares of Series A preferred
stock for $0.24 per share. In June and August 1997, we sold 1,050,000 shares of
Series B preferred stock for $0.67 per share. In June and August 1998, we sold
2,445,089 shares of Series C preferred stock for $3.26 per share. In June and
August 1999, we sold 2,357,906 shares of Series D preferred stock for $5.89 per
share. In January 2000, we issued 3,809,994 shares of Series E preferred stock,
for $10.67 per share, in connection with our acquisition of Transcription. Upon
consummation of this offering, each outstanding share of Series A, Series B,
Series C and Series D preferred stock will automatically convert into one share
of common stock. Listed below are the directors, executive officers, and
stockholders who beneficially own 5% or more of our securities who participated
in these financings.
<TABLE>
<CAPTION>
#/Shares
Series A Series B Series C Series D Series E Aggregate Value of of Common
Directors, Executive Officers Preferred Preferred Preferred Preferred Preferred Cash Transcription Stock upon
and 5% Stockholders Stock Stock Stock Stock Stock Consideration Shares Conversion
- ----------------------------- --------- --------- --------- --------- --------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Entities affiliated with
Mohr, Davidow
Ventures(a)............ -- -- 1,687,116 -- -- $5,500,000 -- 1,687,116
Thomas Kailath(b)....... 416,667 -- 19,500 -- -- 163,579 -- 436,167
Narendra Gupta(c)....... 416,666 -- 338,248 -- -- 1,202,705 -- 754,914
Abbas El Gamal.......... 416,667 -- -- -- -- 100,000 -- 416,667
Roger Sturgeon.......... -- -- -- -- 2,388,715 -- $25,479,632 2,388,715
Kevin MacLean........... -- -- -- -- 1,194,356 -- 12,739,808 1,194,356
</TABLE>
- --------
(a) The Mohr, Davidow Ventures shares include shares purchased by Mohr,
Davidow Ventures V, L.P. and Mohr, Davidow Ventures V, L.P., as nominee
for MDV Entrepreneur's Network Fund II (A), L.P. and MDV Entrepreneur's
Network Fund II (B), L.P. Entities affiliated with Mohr, Davidow Ventures
also hold warrants exercisable for an aggregate of 150,000 shares of
Series C preferred stock, at an exercise price per share of $3.26, for an
additional aggregate cash consideration of $489,000. Mr. Davidow, a
partner of Mohr, Davidow Ventures and a director of our company, disclaims
beneficial ownership of the securities held by these entities except for
his proportional interest in the entities.
(b) Includes shares held by Paul V. Kailath Revocable Trust u/a/d 10/1/89 and
Priya S. Kailath Revocable Trust u/a/d 10/1/89. Includes 145,833 shares of
Series A preferred stock and 19,500 shares of Series C preferred stock
held by a limited number of relatives of Dr. Kailath.
(c) Includes shares held by Dr. Gupta, as custodian, for his minor children.
Includes 31,500 shares of Series C preferred stock held by a limited
number of relatives of Dr. Gupta.
Restricted Stock Purchase Agreements
Mr. Davidow.
In November 1999, Mr. Davidow exercised an option grant to purchase 150,000
shares of common stock and entered into a restricted stock purchase agreement
regarding the shares. Pursuant to the restricted stock purchase agreement, we
have the right to repurchase any of the unvested shares upon termination of his
services. As of February 15, 2000, 93,750 shares held by Mr. Davidow remain
unvested. All 150,000 of Mr. Davidow's shares will be released from our
repurchase option on June 24, 2002. Mr. Davidow paid the $1.00 exercise price
per share for such shares in cash. In addition, Mr. Davidow's stock option
agreement provides that if we enter into any transaction which involves a
change of control, the shares held by Mr. Davidow will automatically vest in
full. Generally, a "change of control" is defined to include mergers, asset
sales or other transactions involving a transfer of at least 50% of our
securities.
51
<PAGE>
Mr. Mora.
In May and December 1999, Mr. Mora exercised option grants to purchase an
aggregate of 412,500 shares of common stock and entered into restricted stock
purchase agreements regarding the shares. Pursuant to the restricted stock
purchase agreements, we have the right to repurchase any of the unvested shares
upon his termination of employment. As of February 15, 2000, an aggregate of
412,500 shares held by Mr. Mora remain unvested. All 412,500 of Mr. Mora's
shares will be released from our repurchase option on December 27, 2003. Mr.
Mora paid the $0.50 exercise price per share for 195,000 of such shares by
delivery of two-year full-recourse promissory note bearing interest at 4.90%
per annum, compounded annually. Mr. Mora paid the $1.00 exercise price per
share for the remaining 217,500 shares by delivery of a two-year full-recourse
promissory note bearing interest at 5.74% per annum, compounded annually. Each
of the notes is secured by the shares of common stock purchased by Mr. Mora. As
of February 15, 2000, approximately $320,226 in unpaid principal and interest
was outstanding in the aggregate under the notes. In addition, each of Mr.
Mora's option agreements provide that:
. upon a change of control of our company, 50% of the shares subject to the
options held by Mr. Mora that have not vested as of six months after the
change of control shall vest in full; as of February 15, 2000, an
aggregate of 412,500 shares have not vested; and
. if Mr. Mora's employment is terminated as a result of an involuntary or
constructive termination within 12 months of the change of control, all
of the shares subject to the options held by Mr. Mora will vest in full.
Mr. Sharan.
In October 1998 and March and December 1999, Mr. Sharan received option
grants to purchase an aggregate of 412,500 shares of common stock and entered
into restricted stock purchase agreements regarding the shares. Pursuant to the
restricted stock purchase agreements, we have the right to repurchase any of
the unvested shares upon his termination of employment. As of February 15,
2000, an aggregate of 342,188 shares held by Mr. Sharan remain unvested. All
342,188 of Mr. Sharan's shares will be released from our repurchase option on
October 21, 2003. Mr. Sharan paid the $0.33 exercise price for 151,500 of such
shares by delivery of a two-year full-recourse promissory note bearing interest
at 5.88% per annum, compounded annually. Mr. Sharan paid the $1.00 exercise
price per share for 187,500 of such shares by delivery of a two-year full-
recourse promissory note bearing interest at 5.88% per annum, compounded
annually. Each of the notes is secured by shares of common stock purchased by
Mr. Sharan. As of February 15, 2000, approximately $238,747 in unpaid principal
and interest was outstanding in the aggregate under the notes. Mr. Sharan paid
the remainder of the exercise price of such shares in cash. In addition, each
of Mr. Sharan's option agreements provided that:
. upon a change of control of our company, 50% of the shares subject to the
options held by Mr. Sharan that have not vested as of six months after
the change of control shall vest in full; as of February 15, 2000, an
aggregate of 342,188 shares have not vested; and
. if Mr. Sharan's employment is terminated as a result of an involuntary or
constructive termination within 12 months of the change of control, all
of the shares subject to the options held by Mr. Sharan will vest in
full.
Mr. Herlitz.
In February and December 1999, Mr. Herlitz received option grants to
purchase an aggregate of 255,000 shares of our common stock. Mr. Herlitz has
exercised and entered into restricted stock purchase agreements regarding all
172,500 shares of the February 1999 option grant and 25,782 shares of the
82,500 shares of common stock subject to the December 1999 option grant.
Pursuant to the restricted stock purchase agreements, we have the right to
repurchase any of the unvested shares upon his termination of employment. As of
February 15, 2000, 129,375 shares of the February 1999 option grant and 25,782
shares of the December 1999 option grant held by Mr. Herlitz remain unvested.
All 198,282 of Mr. Herlitz's shares will
52
<PAGE>
be released from our repurchase option on December 14, 2003. Mr. Herlitz paid
the $0.33 exercise price per share for 172,500 of the shares, and the $1.00
exercise price per share for the remaining 25,782 shares, in cash. The
remaining 56,718 shares subject to the December 1999 option grant held by Mr.
Herlitz have not been exercised, but are exercisable at any time at an exercise
price per share of $1.00. In addition, each of Mr. Herlitz's option agreements
provide that:
. upon a change of control of our company, 50% of the shares subject to the
options held by Mr. Herlitz that have not vested as of six months after
the change of control shall vest in full; as of February 15, 2000, an
aggregate of 211,875 shares have not vested; and
. if Mr. Herlitz's employment is terminated as a result of an involuntary
or constructive termination within 12 months of the change of control,
all of the shares subject to the options held by Mr. Herlitz will vest in
full.
Mr. Traub.
In November and December 1999, Mr. Traub received option grants to purchase
an aggregate of 232,500 shares of common stock. Mr. Traub has exercised and
entered into restricted stock purchase agreements for 37,500 shares of the
150,000 shares of common stock subject to the November 1999 option grant and
20,625 of the 82,500 shares of common stock subject to the December 1999 option
grant. Pursuant to the restricted stock purchase agreements, we have the right
to repurchase any of the unvested shares upon his termination of employment. As
of February 15, 2000, all of the 58,125 shares held by Mr. Traub remain
unvested. All 58,125 of Mr. Traub's shares will be released from our repurchase
option on December 27, 2003. Mr. Traub paid the $1.00 exercise price per share
for all such shares in cash. The remaining 174,375 shares subject to the option
grants held by Mr. Traub have not been exercised, but are exercisable at any
time at an exercise price per share of $1.00. In addition, each of Mr. Traub's
option agreements provide that:
. upon a change of control of our company, 50% of the shares subject to the
options held by Mr. Traub that have not vested as of six months after the
change of control shall vest in full; as of February 15, 2000, an
aggregate of 232,500 shares have not vested; and
. if Mr. Traub's employment is terminated as a result of an involuntary or
constructive termination within 12 months of the change of control, all
of the shares subject to the options held by Mr. Traub will vest in full.
Mr. Jones.
In April 1999, Mr. Jones exercised an option grant to purchase 150,000
shares of common stock and entered into a restricted stock purchase agreement
regarding the shares. Pursuant to the restricted stock purchase agreement, we
have the right to repurchase any of the unvested shares upon termination of his
services. As of February 15, 2000, 93,750 shares held by Mr. Jones remain
unvested. All 150,000 of Mr. Jones' shares will be released from our repurchase
option on June 24, 2002. Mr. Jones paid the $0.33 exercise price per shares for
such shares in cash. In addition, Mr. Jones' stock option agreement provides
that if we enter into any transaction which involves a change of control, the
shares held by Mr. Jones will automatically vest in full.
Mr. Sturgeon.
In February 2000, Mr. Sturgeon exercised an option grant to purchase an
aggregate of 225,000 shares of common stock and entered into a restricted stock
purchase agreement regarding the shares. Pursuant to the restricted stock
purchase agreement, we have the right to repurchase any of the unvested shares
upon his termination of employment from Transcription. As of February 15, 2000,
all 225,000 shares held by Mr. Sturgeon remain unvested. All 225,000 of Mr.
Sturgeon's shares will be released from our repurchase option on January 1,
2004. Mr. Sturgeon paid the $2.67 exercise price per share for such shares in
cash. In addition, Mr. Sturgeon's restricted stock purchase agreement provides
that in the event of Mr. Sturgeon's termination of employment from
Transcription due to death or disability prior to January 1, 2002, 6.25% of the
shares will be
53
<PAGE>
released from our repurchase option for each three month period, measured from
January 1, 2000, for which Mr. Sturgeon completed employment with Transcription
prior to his termination as a result of death or disability. Further:
. upon a change of control of our company, 50% of the shares subject to
options held by Mr. Sturgeon that have not vested as of the later of
January 2, 2002 or six months after the change of control shall vest in
full; as of February 15, 2000, an aggregate of 225,000 shares have not
vested; and
. if Mr. Sturgeon's employment is terminated as a result of an involuntary
or constructive termination within 12 months of the change of control,
all of the shares subject to options held by Mr. Sturgeon will vest in
full.
Mr. MacLean.
In February 2000, Mr. MacLean exercised an option grant to purchase an
aggregate of 225,000 shares of common stock and entered a restricted stock
purchase agreement regarding the shares. Pursuant to the restricted stock
purchase agreement, we have the right to repurchase any of the unvested shares
upon his termination of employment from Transcription. As of February 15, 2000,
all 225,000 shares held by Mr. MacLean remain unvested. All 225,000 of Mr.
MacLean's shares will be released from our repurchase option on January 1,
2004. Mr. MacLean paid the $2.67 exercise price per share for such shares by
delivery of a one-year full-recourse promissory note bearing interest at 8.0%
per annum, compounded annually. The note is secured by the shares of common
stock purchase by Mr. MacLean. As of February 15, 2000, approximately $601,973
in unpaid principal and interest was outstanding under the note. In addition,
in the event Mr. MacLean's employment with Transcription is terminated prior to
January 1, 2002 as a result of death or disability, the shares will be released
from our repurchase option according to the same accelerated schedule described
under Mr. Sturgeon's restricted stock purchase agreement above. Further:
. upon a change of control of our company, 50% of the shares subject to
options held by Mr. MacLean that have not vested as of the later of
January 2, 2002 or six months after the change of control shall vest in
full; as of February 15, 2000, an aggregate of 225,000 shares have not
vested; and
. if Mr. MacLean's employment is terminated as a result of an involuntary
termination within 12 months of the change of control, all of the shares
subject to options held by Mr. MacLean will vest in full.
Mr. Pati.
In February 2000, Mr. Pati exercised an option grant to purchase an
aggregate of 600,000 shares of common stock and entered into a restricted stock
purchase agreement regarding the shares. Pursuant to the restricted stock
purchase agreement, we have the right to repurchase any of the unvested shares
upon his termination of employment. As of February 15, 2000, all 600,000 shares
held by Mr. Pati remain unvested. All 600,000 of Mr. Pati's shares will be
released from our repurchase option on February 1, 2004. Mr. Pati paid the
$2.67 exercise price per share for the shares by delivery of a two-year full-
recourse promissory note bearing interest at 6.20% per annum, compounded
annually. The note is secured by the shares of common stock purchase by Mr.
Pati. As of February 15, 2000, approximately $1,601,696 in unpaid principal and
interest was outstanding under the note. In addition, Mr. Pati's option
agreement provides that:
. upon a change of control of our company, 50% of the shares subject to the
options held by Mr. Pati that have not vested as of six months after the
change of control shall vest in full; as of February 15, 2000, an
aggregate of 600,000 shares have not vested; and
. if Mr. Pati's employment is terminated as a result of an involuntary
termination within 12 months of the change of control, all of the shares
subject to options held by Mr. Pati will vest in full.
54
<PAGE>
Mr. Wang.
In February 2000, Mr. Wang exercised an option grant to purchase an
aggregate of 499,999 shares of common stock and entered into a restricted stock
purchase agreement regarding the shares. Pursuant to the restricted stock
purchase agreement, we have the right to repurchase any of the unvested shares
upon his termination of employment. As of February 15, 2000, all 499,999 shares
held by Mr. Wang remain unvested. All 499,999 of Mr. Wang's shares will be
released from our repurchase option on February 1, 2004. Mr. Wang paid the
$2.67 exercise price per share for the shares by delivery of a two-year full-
recourse promissory note bearing interest at 6.20% per annum, compounded
annually. The note is secured by the shares of common stock purchase by Mr.
Wang. As of February 15, 2000, approximately $1,334,746 in unpaid principal and
interest was outstanding under the note. In addition, Mr. Wang's option
agreement provides that:
. upon a change of control of our company, 50% of the shares subject to the
options held by Mr. Wang that have not vested as of six months after the
change of control shall vest in full; as of February 15, 2000, an
aggregate of 499,999 shares have not vested; and
. if Mr. Wang's employment is terminated as a result of involuntary or
constructive termination within 12 months of the change of control, all
of the shares subject to the options held by Mr. Pati will vest in full.
Mr. Gupta.
In February 2000, Mr. Gupta exercised an option grant to purchase 7,500
shares of common stock and entered into a restricted stock purchase agreement
regarding the shares. Pursuant to the restricted stock purchase agreement, we
have the right to repurchase any of the unvested shares upon termination of his
services. As of February 15, 2000, all 7,500 shares held by Mr. Gupta remain
unvested. All 7,500 of Mr. Gupta's shares will be released from our repurchase
option on February 1, 2004. Mr. Gupta paid the $2.76 exercise price per share
for such shares in cash. In addition, Mr. Gupta's stock option agreement
provides that if we entered into any transaction which involves a change of
control, the shares held by Mr. Gupta will automatically vest in full.
Acquisition of Transcription
Agreement and Plan of Reorganization.
Pursuant to an agreement and plan of reorganization, dated December 21,
1999, among Transcription, Transcription Enterprises Limited, Mr. Sturgeon, Mr.
MacLean and us, we acquired Transcription. The acquisition was effective
January 1, 2000 and, as a result, Transcription is now our wholly-owned
subsidiary.
The consideration paid by us for Transcription Enterprises Limited was a
combination of stock and promissory notes. We issued 3,809,994 shares of our
Series E preferred stock, which the parties agreed had a stated value of $10.67
per share. Mr. Sturgeon received 2,388,715 of such shares, or an aggregate of
$25,479,632, and Mr. MacLean received 1,194,356 of such shares, or an aggregate
of $12,739,808. We also issued an aggregate principal amount of $40,000,000 in
promissory notes, $5,000,000 of which has already been paid by us. As of
January 1, 2000, the aggregate principal amounts of the notes outstanding to
Mr. Sturgeon and Mr. MacLean is approximately $21,943,574 and $10,971,787,
respectively.
As collateral security for the payment of any indemnification obligations of
the former shareholders of Transcription Enterprises Limited, subject to a
deductible of $100,000, 1,904,995 shares of the Series E preferred stock we
issued to such shareholders were pledged to us. Such shares were withheld from
the former shareholders, on a pro rata basis, and are being held in escrow with
an escrow agent. 1,194,357 of the shares of Series E preferred stock issued to
Mr. Sturgeon and 597,178 of the shares of Series E preferred stock issued to
Mr. MacLean have been pledged to us and are in escrow. Generally, all of the
pledged shares to be issued to the former shareholders of Transcription
Enterprises Limited, other than Mr. Sturgeon and Mr. MacLean, or
55
<PAGE>
approximately 113,460 shares, will be released from the escrow upon the closing
of this offering. The remaining pledged shares, approximately 1,791,535 shares,
will be released to Mr. Sturgeon and Mr. MacLean as follows:
. 50% of such shares will be released on January 1, 2001; and
. the remaining 50% of the pledged shares will be released on January 1,
2002.
Pursuant to the reorganization agreement, 55% of a specified amount of the
accounts receivable of Transcription Enterprises Limited is to be distributed
to the former shareholders of the company, on a pro rata basis, as such
receivables are collected by Transcription. We are entitled to retain 45% of
such accounts receivable, plus all fees associated with maintenance, support or
other services rendered by Transcription Enterprises Limited on such accounts.
We currently anticipate that we will collect and retain approximately
$1,126,000 of the accounts receivables and maintenance services and distribute
approximately $1,253,000 of such receivables to the former shareholders of
Transcription Enterprises Limited. Of that $1,253,000 amount, Mr. Sturgeon and
Mr. MacLean are to receive $786,000 and $393,000, respectively.
Promissory Notes.
We issued an aggregate principal amount of $40,000,000 in promissory notes,
with each note dated January 1, 2000, to the ten former shareholders of
Transcription Enterprises Limited. An aggregate principal amount of $5,000,000
under the notes was paid by us to such shareholders shortly after January 1,
2000. The remaining $35,000,000 in unpaid principal amount under the notes
bears interest at a rate of 8.0% per annum. The unpaid principal amount, plus
accrued interest, is due and payable in 16 equal quarterly installments of
approximately $2,187,500, commencing on April 1, 2000, and thereafter on July
1, October 1 and December 31, with the final installments due December 31,
2003. With some limitations, the notes may be prepaid in whole or in part by us
at any time, without penalty.
The holders of a majority of the outstanding aggregate principal amount of
the notes have the option to set-off, on behalf of all holders of the notes,
any indemnification obligations owned to us under the agreement and plan of
reorganization against the outstanding aggregate principal amount of the notes.
Any such set-off is to be on a pro rated basis.
In the event of our default under the notes, the outstanding aggregate
principal amounts of the notes, and all accrued interest on the notes, will be
immediately due and payable. Events of default under the notes include:
. default in the payment of principal or interest on a payment date;
. our general nonpayment of our debts as they become due, or the
institution of bankruptcy proceedings against us which we do not cure
within 60 days;
. the entry of an order for relief relating to bankruptcy, or an order
ordering our liquidation or winding up; or
. our default of a material term under the security agreement which is not
cured within 30 days.
Security Agreement.
Pursuant to the security agreement, dated January 1, 2000, the former
shareholders of Transcription Enterprises Limited were granted a security
interest in the assets of Transcription, including, without limitation, all
software, licenses, intellectual property and receivables. In addition,
Transcription agreed to several standards covenants for such agreements,
including without limitation to preserve and protect the assets and pay all
material taxes on the assets as they become due. Upon our event of default
under the notes, or Transcription's default of a material term of the security
agreement which is not cured within 30 days, the former shareholders of
Transcription Enterprises Limited may foreclose on Transcription's assets.
56
<PAGE>
Other Transactions
We have entered into indemnification agreements with each of our executive
officers and directors.
We have granted options to certain of our executive officers and directors.
Please see "Management--Director Compensation" and "--Option Grants in Last
Fiscal Year" and "Related Party Transactions--Restricted Stock Purchase
Agreements."
Holders of preferred stock are entitled to certain registration rights with
respect to the common stock issued or issuable upon conversion of the preferred
stock. Please see "Description of Capital Stock--Registration Rights."
We believe that all related-party transactions described above were on terms
no less favorable than could have been otherwise obtained from unrelated third
parties.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock, as of February 15, 2000, and as
adjusted to reflect the sale of common stock offered by us in this offering,
for:
. each person who we know beneficially owns more than 5% of the common
stock;
. each of our directors;
. each executive officer named in the Summary Compensation Table; and
. all of our directors and officers as a group.
Unless otherwise indicated, the principal address of each of the
stockholders below is c/o Numerical Technologies, Inc., 70 West Plumeria Drive,
San Jose, California 95134. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and includes voting or
investment power with respect to the securities. Except as indicated by
footnote, and subject to applicable community property laws, each person
identified in the table possesses sole voting and investment power with respect
to all shares of common stock shown held by them. The number of shares of
common stock outstanding used in calculating the percentage for each listed
person includes shares of common stock underlying options or warrants held by
such person that are exercisable within 60 days of February 15, 2000, but
excludes shares of common stock underlying options or warrants held by any
other person. Percentage of beneficial ownership is based on 23,548,005 shares
of common stock outstanding as of February 15, 2000, after giving effect to the
conversion of all outstanding shares of preferred stock upon the closing of
this offering. The numbers shown in the table assume no exercise by the
underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Shares Owned
Prior to the Percentage
Offering Beneficially Owned
------------ ------------------------------
Number Before Offering After Offering
------------ --------------- --------------
<S> <C> <C> <C>
5% Stockholders:
Funds affiliated with Mohr,
Davidow Ventures(a).............. 1,837,116 7.8% 6.3%
Directors and Executive Officers:
Buno Pati(b)...................... 3,118,500 13.2 10.7
Roger Sturgeon(c)................. 2,613,715 11.1 9.0
Yao-Ting Wang(d).................. 2,592,499 11.0 8.9
William H. Davidow(a) (e)......... 1,994,616 8.4 6.8
Kevin MacLean(c).................. 1,419,356 6.0 4.9
Thomas Kailath(f)................. 1,069,914 4.5 3.7
Narendra K. Gupta(g).............. 954,914 4.1 3.3
Abbas El Gamal(h)................. 649,167 2.8 2.2
Richard Mora(i)................... 412,500 1.8 1.4
Atul Sharan(j).................... 412,500 1.8 1.4
Harvey Jones(e)................... 310,873 1.3 1.1
Lars Herlitz(k)................... 255,000 1.1 *
John Traub(l)..................... 236,746 1.0 *
All executive officers and
directors as a group (13)
persons)(m)...................... 16,040,300 67.0 54.4
</TABLE>
- --------
* Less than 1%
(a) Principal address is 2775 Sand Hill Road, Suite 240, Menlo Park, CA 94025.
Number of shares includes 1,569,018 shares held by Mohr, Davidow Ventures
V, L.P., 118,098 shares held by Mohr, Davidow Ventures V, L.P., as nominee
for MDV Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs'
Network Fund II (B), L.P., a warrant issued to Mohr, Davidow Ventures V,
L.P. to purchase 139,500 shares exercisable within 60 days of February 15,
2000 and a warrant issued to
58
<PAGE>
Mohr, Davidow Ventures V, L.P., as nominee for MDV Entrepreneurs' Network
Fund II(A), L.P. and MDV Entrepreneurs' Network Fund II (B), L.P. to
purchase 10,500 shares exercisable within 60 days of February 15, 2000.
Each of the following individuals is a Member, Fifth MDV Partners, L.L.C.,
General Partner of Mohr, Davidow Ventures V, L.P. and Mohr, Davidow
Ventures V, L.P. as nominee for MDV Entrepreneurs' Network Fund II (A),
L.P. and MDV Entrepreneur's Network Fund II (B), L.P., and, as such, each
has the authority to make all decisions concerning the shares held by these
funds, including selling and voting: Jonathan D. Feiber, Nancy J.
Schoendorf and George Zachary. Mr. Davidow, a director of our company, is a
partner at Mohr, Davidow Ventures. Mr. Davidow disclaims beneficial
ownership of the shares held by these entities except to the extent of his
proportional interest in the entities.
(b) Includes 600,000 shares issued upon exercise of a stock option, all of
which are subject to a repurchase option we hold as of February 15, 2000.
(c) Includes 225,000 shares issued upon exercise of a stock option, all of
which are subject to a repurchase option we hold as of February 15, 2000.
(d) Includes 499,999 shares issued upon exercise of a stock option, all of
which are subject to a repurchase option we hold as of February 15, 2000.
(e) Includes 150,000 shares issued upon exercise of stock options, 93,750 of
which are subject to a repurchase option we hold as of February 15, 2000,
153,373 shares held by The Jones Living Trust and an option to purchase
7,500 shares exercisable within 60 days of February 15, 2000.
(f) Includes 671,580 shares held by Thomas and Sarah Kailath Revocable Living
Trust Dated 02/15/89, 185,001 shares held by Thomas Kailath, Trustee of
the Paul V. Kailath Irrevocable Trust UAD 10-1-89, 205,833 shares held by
Thomas Kailath, Trustee of the Priya S. Kailath Irrevocable Trust
UAD 10-1-89, and an option to purchase 7,500 shares exercisable within 60
days of February 15, 2000.
(g) Includes 231,000 shares held directly by Dr. Gupta, all of which were
issued upon exercise of a stock option, 49,688 of which are subject to a
repurchase option we hold as of February 15, 2000, 306,748 shares held by
Naren and Vinita Gupta Living Trust dated 12/2/94, and 416,666 shares held
by Mr. Gupta as custodian for his minor children.
(h) Includes 225,000 shares held by El Gamal Family Partnership, all of which
were issued upon exercise of a stock option by Dr. El Gamal, 42,188 of
which are subject to a repurchase option we hold as of February 15, 2000,
and an option to purchase 7,500 shares exercisable within 60 days of
February 15, 2000.
(i) All of such shares issued upon exercise of stock options, all of which are
subject to a repurchase option we hold as of February 15, 2000. Includes
54,000 shares held by Mr. Mora as custodian for his minor children.
(j) All of such shares issued upon exercise of stock options, 342,188 of which
are subject to a repurchase option we hold as of February 15, 2000.
(k) Includes 198,282 shares issued upon exercise of stock options, 155,157 of
which are subject to a repurchase option we hold as of February 15, 2000,
and options to purchase 56,718 shares exercisable within 60 days of
February 15, 2000.
(l) Includes 58,125 shares issued upon exercise of stock options, all of
which are subject to a repurchase option we hold as of February 15, 2000,
and options to purchase 174,375 shares exercisable within 60 days of
February 15, 2000.
(m) Includes an aggregate of:
. 2,797,345 shares of which are subject to a repurchase option we hold as
of February 15, 2000;
. 3,388,906 shares issued upon exercise of stock options; and
. options and warrants to purchase 411,093 shares exercisable within 60
days of February 15, 2000.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, our authorized capital stock will
consist of 100,000,000 shares of common stock, $0.0001 par value, and 5,000,000
shares of preferred stock, $0.0001 par value.
The following summary of the rights of the common stock and preferred stock
does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of our amended and restated certificate of
incorporation and bylaws which are included as exhibits to the registration
statement of which this prospectus is a part and by the provisions of Delaware
law.
Common Stock
After giving effect to the three for two forward stock split of the all
outstanding common stock and preferred stock and the conversion of all
previously outstanding preferred stock into shares of common stock, as of
February 15, 2000, there were 23,548,005 shares of common stock outstanding
held of record by approximately 191 stockholders. There will be 29,082,005
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of certain outstanding options or
warrants, after giving effect to the sale of common stock in the offering.
Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to the following rights:
. to receive dividends out of assets legally available therefor at such
times and in such amounts as the board of directors from time to time may
determine;
. one vote for each share held on all matters submitted to a vote of
stockholders; and
. upon our liquidation, dissolution or winding-up, to share ratably in all
assets remaining after payment of liabilities and the liquidation of any
preferred stock.
Cumulative voting for the election of directors is not authorized by our
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election. The
common stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Each outstanding share of common stock is, and all
shares of common stock to be outstanding upon completion of this offering will
be, upon payment therefor, duly and validly issued, fully paid and
nonassessible.
Preferred Stock
Upon the consummation of this offering, each outstanding share of Series A,
Series B, Series C, Series D and Series E preferred stock will automatically
convert into one share of common stock. Pursuant to our amended and restated
certificate of incorporation, the board of directors has the authority, without
further action by the stockholders, to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the designations, powers,
preferences, privileges, which may be greater than the rights of the common
stock. The board, without stockholder approval, can issue preferred stock with
voting, conversion or other rights that could adversely affect the voting power
and other rights of the holders of common stock. Preferred stock could thus be
issued quickly with terms calculated to delay or prevent a change in control of
our company or make removal of management more difficult. Additionally, the
issuance of preferred stock may have the effect of decreasing the market price
of the common stock. At present, there are no shares of preferred stock
outstanding, and we have no plans to issue any of the preferred stock.
Registration Rights
Upon completion of the offering, the holders of an aggregate of
approximately 17,481,325 shares of common stock will be entitled to certain
rights with respect to the registration of such shares under the Securities Act
of 1933. Under the terms of the 1999 second amended and restated shareholders
rights
60
<PAGE>
agreement, as amended, if we propose to register any of its securities under
the Securities Act of 1933, either for our own account or for the account of
other security holders, these holders are entitled to notice of such
registration and are entitled to include shares of common stock in the
registration. The rights are subject to conditions and limitations, among them
the right of the underwriters of an offering subject to the registration to
limit the number of shares included in such registration. A limited number of
the holders of these rights may also require us to file a registration
statement under the Securities Act of 1933 with respect to their shares of
common stock and we are required to use our best efforts to effect such
registration, subject to conditions and limitations. Furthermore, stockholders
with registration rights may require us to file additional registration
statements on Form S-3, subject to conditions and limitations.
Delaware Anti-Takeover Law and Certain Charter and Bylaws Provisions
Delaware Anti-Takeover Statute. We are subject to Section 203 of the
Delaware General Corporation Law. In general, these provisions prohibit a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that the
stockholder became an interested stockholder, unless the transaction in which
the person became an interested stockholder is approved in a manner presented
in Section 203 of the Delaware General Corporation Law.
Generally, a "business combination" is defined to include mergers, asset or
stock sales and other transactions resulting in financial benefit to a
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years, did own, 15% or
more of a corporation's outstanding voting stock.
Certificate of Incorporation and Bylaws. Our certificate of incorporation
and bylaws include provisions that:
. allow the board of directors to issue, without further action by the
stockholders, up to 5,000,000 shares of undesignated preferred stock;
. require that any action to be taken by our stockholders be effected at a
duly called annual or special meeting and not by written consent;
. divide the board of directors into three classes, with each class serving
for a term of three years;
. prohibit cumulative voting in the election of directors;
. require that special meetings of our stockholders be called only by the
board of directors, the chairman of the board, the chief executive
officer and the president;
. establish an advance notice procedure for stockholder proposals to be
brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to the board of directors; and
. require that certain amendments to the certificate of incorporation and
the bylaws require the approval of the holders of at least 66 2/3% of the
voting power of all outstanding stock.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the board and in the policies formulated by the
board and to discourage certain types of transactions that may involve an
actual or threatened change of control of our company. These provisions are
designed to reduce our vulnerability to an unsolicited proposal for a takeover
that does not contemplate the acquisition of all of our outstanding shares or
an unsolicited proposal for the restructuring or sale of all or part of our
company. These provisions, however, could discourage potential acquisition
proposals and could complicate, delay or prevent a change in control of our
company. They may also have the effect of preventing changes in our management.
We believe that the benefits of increased protection of our potential ability
to negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure us outweighs the disadvantages of discouraging these
proposals, including proposals that are priced above the then current market
value of our common stock, because, among other things, negotiation of these
proposals could result in an improvement of their terms.
61
<PAGE>
Transfer Agent and Registrar
The transfer agent and registrar for common stock is ChaseMellon Shareholder
Services, L.L.C.
Listing
Our common stock has been approved for listing on the Nasdaq National Market
under the trading symbol "NMTC." We have not applied to list our common stock
on any other exchange or quotation system.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market
following the offering could cause the prevailing market price of our common
stock to fall and impede our ability to raise equity capital at a time and on
terms favorable to us.
Upon completion of the offering, we will have outstanding an aggregate of
29,082,005 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or outstanding
warrants after February 15, 2000. Of these outstanding shares, the 5,534,000
shares sold in the offering will be freely tradable without restriction or
further registration under the Securities Act of 1933, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act of
1933. The remaining 23,548,005 shares of common stock outstanding upon
completion of the offering and held by existing stockholders will be
"restricted securities" as that term is defined in Rule 144 under the
Securities Act of 1933. Restricted shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act of 1933, which rules
are summarized below, or another exemption. Sales of the restricted shares in
the public market, or the availability of such shares for sale, could adversely
affect the market price of the common stock.
All officers, directors and certain other holders of common stock have
entered into contractual "lock-up" agreements providing that they will not
offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of shares of common stock owned by them or that could be purchased by
them through the exercise of options or warrants for a period of 180 days after
the date of this prospectus without the prior written consent of Credit Suisse
First Boston Corporation. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, additional shares will be available beginning 181
days after the effective date of the offering, subject in some cases to certain
volume limitations.
Of the remaining restricted shares:
. 3,655,379 shares are subject to our repurchase option in the event of
termination of employment; and
. 3,809,994 shares will not be eligible for sale pursuant to Rule 144 until
the expiration of a one-year holding period on January 1, 2001.
Beginning 181 days after the date of this prospectus, approximately 102,671
additional shares subject to vested options will be available for sale subject
to compliance with Rule 701 and upon the expiration of agreements not to sell
such shares entered into between the underwriters and such stockholders. Any
shares subject to lock-up agreements may be released at any time without notice
by the underwriters.
In general, under Rule 144 as currently in effect, beginning 91 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned restricted shares for at least one year, including
persons who may be deemed to be our "affiliates", 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 290,820 shares immediately after the offering; or
. the average weekly trading volume of the common stock as reported through
the Nasdaq National Market 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 certain manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned for at least two years the restricted shares proposed to be
sold, 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.
63
<PAGE>
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 permits resales of shares issued
prior to the date the issuer becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, pursuant to certain compensatory benefit
plans and contracts commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirements. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options, including exercises after the date the issuer becomes
so subject. Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 91 days
after the date of this prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year minimum holding period
requirements.
We have agreed not to sell or otherwise dispose of any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock, or enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the common stock, for a
period of 180 days after the date of this prospectus, without the prior written
consent of Credit Suisse First Boston Corporation, subject to limited
exceptions.
We intend to file a registration statement under the Securities Act of 1933
covering the shares of common stock subject to outstanding options or reserved
for issuance under the 2000 stock plan, 1997 stock plan and 2000 employee stock
purchase plan. This registration statement is expected to be filed
simultaneously with the effectiveness of the registration statement covering
the shares of common stock offered in this offering and will automatically
become effective upon filing. Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates and the expiration of a 180-day lockup period, be available for
sale in the open market, except to the extent that such shares are subject to
our vesting restrictions or the contractual restrictions described above.
64
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, dated April 6 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Chase Securities, Inc.
and SG Cowen Securities Corporation are acting as representatives, the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation............................. 2,392,000
Chase Securities, Inc. ............................................ 1,196,000
SG Cowen Securities Corporation.................................... 1,196,000
Banc of America Securities LLC..................................... 75,000
Bear, Stearns & Co. Inc. .......................................... 75,000
Dain Rauscher Incorporated......................................... 75,000
E*OFFERING Corp. .................................................. 75,000
FleetBoston Robertson Stephens Inc. ............................... 75,000
Invemed Associates LLC............................................. 75,000
Lehman Brothers Inc. .............................................. 75,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................. 75,000
Needham & Company, Inc. ........................................... 75,000
Thomas Weisel Partners LLC......................................... 75,000
---------
Total............................................................ 5,534,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase shares of common stock in the offering if any are purchased, other
than those shares covered by the over-allotment option described below. The
underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to an additional 830,100 shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $0.60 per share. The
underwriters and selling group members may allow a discount of $0.10 per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-Allotment Over-allotment Over-Allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $0.98 $0.98 $5,423,320 $6,236,818
Expenses paid by us..... $0.29 $0.25 $1,600,000 $1,600,000
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5.0% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities
65
<PAGE>
Act relating to, any shares of our common stock or securities convertible into
or exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the data of this prospectus.
Our officers and directors and certain other stockholders, including holders
of our preferred stock and warrants, have agreed that they will not offer,
sell, contract to sell pledge or otherwise dispose of, directly or indirectly,
any shares of our common stock or securities convertible into or exchangeable
or exercisable for shares of our common stock, or publicly disclose the
intention to make any such offer, sale, pledge or disposal, without, in each
case, the prior written consent of Credit Suisse First Boston Corporation for a
period of 180 days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to 276,700 shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in the offering. In addition, at our request, the
underwriters will reserve up to 416,667 shares of common stock at the initial
public offering price for sale to KLA-Tencor. There can be no assurance that
any of the reserved shares will be purchased. KLA-Tencor will agree that, if it
purchases any shares of common stock or other securities of Numerical
Technologies, it will not sell or otherwise dispose of or hedge such shares or
securities until 180 days after this offering. The number of shares available
for sale to the general public in the offering will be reduced to the extent
any of the reserved shares are purchased. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same terms as
the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We will list the shares of common stock on The Nasdaq Stock Market's
National Market.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The underwriters may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the representatives of the underwriters to underwriters that may
make Internet distributions on the same basis as other allocations. Other than
the prospectus in electronic format, the information contained on any
underwriter's web site or on any web site maintained by an underwriter is not
part of this prospectus or the registration statement of which this prospectus
forms a part, has not been approved or endorsed by us or any underwriter in its
capacity as an underwriter and should not be relied upon by investors.
Prior to the offering, there has been no public market for the common stock.
The initial public offering price for the common stock was determined by
negotiation between us and the representatives, and does not reflect the market
price for the common stock following the offering. Among the principal factors
considered in determining the initial public offering price was:
. the information in this prospectus and otherwise available to the
representatives;
. market conditions for initial public offerings;
. the history of and prospects for the industry in which we will compete;
. the ability of our management;
. our prospects for future earnings;
. the present state of our development and our current financial condition;
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies; and
. the general condition of the securities markets at the time of this
offering.
66
<PAGE>
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934, as amended.
. Over-allotment involves sales in excess of the offering size, which
creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq Stock Markets National Market or otherwise and, if
commenced, may be discontinued at any time.
67
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that: (i) such purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws; (ii) where
required by law, such purchaser is purchasing as principal and not as agent;
and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against the
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
68
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Certain legal matters in connection with
this offering will be passed upon for the underwriters by Morrison & Forrester,
LLP, Palo Alto, California. WS Investment Company, an investment partnership
composed of certain current and former members of and persons associated with
Wilson Sonsini Goodrich & Rosati, Professional Corporation, as well as an
individual attorney of this firm, beneficially own an aggregate of 87,000
shares of our common stock.
EXPERTS
The balance sheets of Numerical Technologies, Inc. at December 31, 1998 and
1999 and the statements of operations, of stockholders' equity and of cash
flows for each of the three years in the period ended December 31, 1999,
included in this prospectus, have been included herein in reliance upon the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The balance sheets of Transcription Enterprises Limited at December 31, 1998
and 1999 and the statements of operations, of shareholders' equity and of cash
flows for the years then ended, included in this prospectus, have been included
herein in reliance upon the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, under the Securities Act of 1933, a registration statement on Form S-1
relating to the common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits
and schedules thereto. For further information with respect to our company and
the shares we are offering by this prospectus you should refer to the
registration statement, including the exhibits and schedules thereto. You may
inspect a copy of the registration statement without charge at the Public
Reference Section of the Securities and Exchange Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 or at the Securities and Exchange
Commission's regional offices at 5670 Wilshire Boulevard, 11th Floor, Los
Angeles, California 90036. The public may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission.
The Securities and Exchange Commission also maintains an Internet site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's World Wide Web address is
http://www.sec.gov.
We intend to furnish holders of the common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing
unaudited condensed financial information for the first three quarters of each
fiscal year. We intend to furnish such other reports as it may determine or as
may be required by law.
69
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Numerical Technologies, Inc.
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
Unaudited Pro Forma Combined Financial Information
Overview................................................................... F-18
Unaudited Pro Forma Combined Balance Sheet................................. F-19
Unaudited Pro Forma Combined Statement of Operations....................... F-20
Notes to Unaudited Pro Forma Combined Financial Information................ F-21
Transcription Enterprises Ltd.
Report of Independent Accountants.......................................... F-23
Balance Sheets............................................................. F-24
Statements of Operations................................................... F-25
Statements of Shareholders' Equity (Deficit)............................... F-26
Statements of Cash Flows................................................... F-27
Notes to Financial Statements.............................................. F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board or Directors and
Stockholders of
Numerical Technologies, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Numerical Technologies, Inc. at
December 31, 1998 and 1999, and the 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.
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 of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 2, 2000, except as to note
1, as to which the date is April 6,
2000
F-2
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity
----------------- December 31,
1998 1999 1999
------- -------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 4,973 $ 13,486
Accounts receivable......................... 1,083 1,819
Prepaid and other........................... 60 394
------- --------
Total current assets...................... 6,116 15,699
Property and equipment, net................... 456 1,613
Other assets.................................. 39 293
------- --------
$ 6,611 $ 17,605
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 239 $ 613
Accrued expenses............................ 1,341 1,945
Deferred revenue............................ 2,216 2,642
------- --------
Total current liabilities................. 3,796 5,200
------- --------
Commitments (See Note 3)
Stockholders' equity:
Convertible preferred stock, $0.0001 par
value:
Authorized: 12,253 shares in 1998 and 1999;
5,000 shares in pro forma (unaudited)
Issued and outstanding: 5,745 and 8,103
shares in 1998 and 1999, respectively, and
none in pro forma (unaudited).............. 1 1 $ --
Common stock, $0.0001 par value:
Authorized: 100,000 shares;
Issued and outstanding: 7,727 and
9,570 shares in 1998 and 1999,
respectively, and 17,673 in pro forma
(unaudited)................................ 1 1 1
Additional paid in capital.................... 12,090 50,100 50,101
Receivable from stockholders.................. (5) (315) (315)
Deferred stock compensation................... (1,938) (21,220) (21,220)
Accumulated deficit........................... (7,334) (16,162) (16,162)
------- -------- --------
Total stockholders' equity................ 2,815 12,405 $ 12,405
------- -------- ========
$ 6,611 $ 17,605
======= ========
</TABLE>
The accompanying notes are an integral part of financial statements.
F-3
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Revenue............................................. $ 620 $ 736 $ 5,492
------ ------- -------
Costs and expenses:
Cost of revenue................................... 57 127 307
Research and development.......................... 993 2,721 4,816
Sales and marketing............................... 58 1,404 4,277
General and administrative........................ 131 2,355 1,303
Amortization of deferred stock compensation (*)... -- 862 3,990
------ ------- -------
Total costs and expenses........................ 1,239 7,469 14,693
------ ------- -------
Loss from operations................................ (619) (6,733) (9,201)
Interest income..................................... 35 182 373
------ ------- -------
Net loss............................................ $ (584) $(6,551) $(8,828)
====== ======= =======
Net loss per common share, basic and diluted........ $(0.08) $ (0.89) $ (1.26)
====== ======= =======
Weighted average common shares, basic and diluted... 7,397 7,373 7,019
====== ======= =======
Pro forma net loss per common share, basic and
diluted (unaudited)................................ $ (0.64)
=======
Pro forma weighted average common shares, basic and
diluted (unaudited)................................ 13,885
=======
(*) Amortization of Deferred Stock Compensation:
Cost of revenue................................... -- $ 22 $ 117
Research and development.......................... -- 465 1,836
Sales and marketing............................... -- 361 1,444
General and administrative........................ -- 14 593
------ ------- -------
$ -- $ 862 $ 3,990
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Receivable Deferred
Stock Common Stock Additional from Stock
------------- -------------- Paid in Stock- Compen- Accumulated
Shares Amount Shares Amount Capital holders sation Deficit Total
------ ------ ------ ------ ---------- ---------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 2,250 $ -- 7,083 $ 1 $ 538 $ -- $ -- $ (199) $ 340
Exercise of common stock
options................ -- -- 847 -- 23 -- -- -- 23
Issuance of Series B
preferred stock and
warrants, net of
issuance costs of $7... 1,050 -- -- -- 746 (50) -- -- 696
Net loss................ -- -- -- -- -- -- -- (584) (584)
----- ----- ----- --- ------- ----- -------- -------- -------
Balance, December 31,
1997................... 3,300 -- 7,930 1 1,307 (50) -- (783) 475
Exercise of common stock
options................ -- -- 825 -- 61 (5) -- -- 56
Return of common stock.. -- -- (525) -- -- -- -- -- --
Repurchase of common
stock.................. -- -- (503) -- (2) -- -- -- (2)
Issuance of Series C
preferred stock and
warrants, net of
issuance costs of $47.. 2,445 1 -- -- 7,924 -- -- -- 7,925
Repayment of note
receivable............. -- -- -- -- -- 50 -- -- 50
Deferred stock
compensation related to
grants of stock options
and issuance of common
stock.................. -- -- -- -- 2,800 -- (2,800) -- --
Amortization of deferred
stock compensation..... -- -- -- -- -- -- 862 -- 862
Net loss................ -- -- -- -- -- -- -- (6,551) (6,551)
----- ----- ----- --- ------- ----- -------- -------- -------
Balance, December 31,
1998................... 5,745 1 7,727 1 12,090 (5) (1,938) (7,334) 2,815
Exercise of common stock
options................ -- -- 2,001 -- 1,333 (315) -- -- 1,018
Repurchase of common
stock.................. -- -- (158) -- (20) -- -- -- (20)
Issuance of Series D
preferred stock, net of
issuance
costs of $455.......... 2,358 -- -- -- 13,425 -- -- -- 13,425
Repayment of note
receivable............. -- -- -- -- -- 5 -- -- 5
Deferred stock
compensation related to
grants of stock options
and issuance of common
stock.................. -- -- -- -- 23,272 -- (23,272) -- --
Amortization of deferred
stock compensation..... -- -- -- -- -- -- 3,990 -- 3,990
Net loss................ -- -- -- -- -- -- -- (8,828) (8,828)
----- ----- ----- --- ------- ----- -------- -------- -------
Balance, December 31,
1999................... 8,103 $ 1 9,570 $ 1 $50,100 $(315) $(21,220) $(16,162) $12,405
===== ===== ===== === ======= ===== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------
1997 1998 1999
----- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $(584) $(6,551) $(8,828)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................ 24 99 340
Amortization of deferred stock compensation......... 862 3,990
Changes in assets and liabilities:
Accounts receivable............................... (323) (758) (736)
Prepaid and other................................. (4) (67) (334)
Other assets...................................... (7) (31) (254)
Accounts payable.................................. 90 111 374
Accrued expenses.................................. 81 1,244 604
Deferred revenue.................................. 127 1,834 426
----- ------- -------
Net cash used in operating activities........... (596) (3,257) (4,418)
----- ------- -------
Cash flows from investing activities:
Purchases of property and equipment................... (82) (455) (1,497)
----- ------- -------
Net cash used in investing activities........... (82) (455) (1,497)
----- ------- -------
Cash flows from financing activities:
Proceeds from exercise of common stock options........ 23 56 1,018
Proceeds from issuance of preferred stock............. 696 7,925 13,425
Repurchase of common stock............................ -- (2) (20)
Repayment of notes receivable for preferred and common
stock................................................ -- 50 5
Proceeds from related party loan...................... -- 250 --
Repayment of related party loan....................... -- (250) --
----- ------- -------
Net cash provided by financing activities....... 719 8,029 14,428
----- ------- -------
Net increase in cash and cash equivalents............. 41 4,317 8,513
Cash and cash equivalents at beginning of year........ 615 656 4,973
----- ------- -------
Cash and cash equivalents at end of year.............. $ 656 $ 4,973 $13,486
===== ======= =======
Supplemental disclosures noncash financing activities:
Stockholder notes receivable exchanged for common
stock or preferred stock........................... $ 50 $ 5 $ 315
===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Numerical Technologies, Inc. (the "Company") designs and develops
proprietary technologies and software products that enable the design and
manufacture of integrated circuits with subwavelength feature sizes. The
Company markets and sells its products and services to semiconductor
manufacturers, resellers and original equipment manufacturers primarily in
North America, Europe, Japan and the Pacific Rim.
Reincorporation and stock split
In April 2000, the Company reincorporated in the State of Delaware. As a
result of the reincorporation, the Company is authorized to issue 100,000,000
shares of $0.0001 par value Common Stock and 5,000,000 shares of $0.0001 par
value Preferred Stock. In April 2000, the Company effected a three-for-two
share split of the Company's Preferred and Common Stock. All share and per
share information have been adjusted to reflect the reincorporation and the
share split.
Certain risks and concentrations
At December 31, 1999, substantially all of the Company's cash and cash
equivalents were invested with two financial institutions.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The
Company had amounts receivable from one customer representing 86% and four
customers representing 84% of accounts receivable at December 31, 1998 and
1999, respectively. The Company has experienced no losses and does not consider
allowance for doubtful accounts necessary at December 31, 1998 and 1999.
In 1997, four customers accounted for 40%, 29%, 19% and 12% of total
revenues. In 1998, three customers accounted for 37%, 30% and 25% of total
revenues. In 1999, three customers accounted for 23%, 17%, and 16% of total
revenues.
Financial instruments
The carrying amount of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
expenses, approximate fair value due to their short maturities.
Cash and cash equivalents
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase and money market funds to be cash
equivalents. At December 31, 1999, cash and cash equivalents included
restricted cash of $204,000 related to a certificate of deposit issued as
collateral for a Letter of Credit.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated on a straight-line basis over their
estimated useful lives of 2 to 3 years. When assets are sold or retired, the
cost and related accumulated depreciation is removed from the accounts and the
resulting gains or losses are included in the statement of operations.
F-7
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Software development costs
Software development costs incurred in the research and development of new
products and enhancements to existing products are charged to expense as
incurred. Software development costs are capitalized after technological
feasibility has been established. The period between achievement of
technological feasibility, which the Company defines as the establishment of a
working model, until the general availability of such software to customers,
has been short, and software development costs qualifying for capitalization
have been insignificant. Accordingly, the Company has not capitalized any
software development costs since its inception.
Income taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
The Company recognizes revenues in accordance with the provisions of
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition", as
amended by SOP 98-4 and 98-9. The Company's revenues are derived from
intellectual property and software licenses and maintenance and technical
services. Revenues are recognized for the various contract elements based upon
vendor-specific objective evidence ("VSOE") of fair value of each element. If
VSOE of fair value does not exist but postcontract customer services ("PCS") is
the only undelivered element, the Company recognized the fee including up-front
payments for licenses, under the arrangement ratably over the contractual PCS
period. To date, the Company has not established VSOE for the service or annual
maintenance elements of the contracts. License revenues, including up-front
fees, are recognized when persuasive evidence of an agreement exists, the
product has been delivered, no significant post-delivery obligations remain,
the license fee is fixed or determinable and collection of the fee is probable.
Revenue for technical services is recognized as the services are performed.
Maintenance services are typically priced based on a percentage of the license
fee and have a one-year term, renewable annually. Services provided to
customers under maintenance agreements include technical product support and
unspecified product upgrades. Deferred revenues include billings in excess of
recognized revenue and payments received in advance of revenue recognition.
Prior to the adoption of SOP 97-2, on January 1, 1998, the Company
recognized revenue for software and intellectual property upon delivery if
remaining obligations were insignificant and collection of the resulting
accounts receivable was probable. Revenue from software maintenance contracts,
including amounts unbundled from license, were deferred and recognized ratably
over the period of the contract. The adoption of SOP 97-2, SOP 98-4 and 98-9
have not had and are not expected to have a material impact on the Company's
results of operations, financial position or cash flows.
F-8
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-based compensation
The Company accounts for its stock based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees" and complies with the disclosure
provisions of Statement of Financial Accounting Standard No. 123 ("SFAS
No. 123"). Deferred compensation recognized under APB No. 25 is amortized over
the vesting period on an accelerated basis using the model presented in
Financial Accounting Standards Board Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN
No. 28"). Accordingly, the percentages of the deferred compensation amortized
in the first, second, third and fourth years following the option grant date
are approximately 52%, 27%, 15% and 6%, respectively, for options with a
four-year vesting period.
Net loss per share
The basic net loss per share is computed by dividing the net loss
attributable to common stockholders for the period by the weighted average
number of the common shares outstanding during the period. The diluted net loss
per share is the same as the basic net loss per share for the periods presented
because common equivalent shares, composed of common shares subject to
repurchase and common shares issuable upon the exercise of stock options and
warrants and upon conversion of convertible preferred shares, are considered
when their effect would be dilutive. In 1997, 1998 and 1999, 4,337,000,
7,580,000 and 11,976,000, respectively, antidilutive securities including
options, warrants and convertible preferred stock were excluded from the net
loss per share computation.
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 1999 is
computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of convertible
preferred shares into common shares effective upon the closing of the Company's
initial public offering on an as-if-converted basis. Pro forma diluted net loss
per share is computed using the pro forma weighted average number of common and
common equivalent shares outstanding. Common equivalent shares, composed of
common shares subject to repurchase and common shares issuable upon the
exercise of stock options and warrants, are not included in pro forma diluted
net loss per share as such shares are antidilutive. Antidilutive securities
totaling 3,873,000 including options and warrants were excluded from the pro
forma net loss per share computation.
Pro forma December 31, 1999 balance sheet (unaudited)
Upon consummation of the offering, all shares of convertible preferred stock
outstanding will convert into an aggregate of 8,103,000 shares of common stock.
The effect of this conversion has been reflected in the accompanying unaudited
pro forma consolidated balance sheet as of December 31, 1999.
Comprehensive income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"), FAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. There was no difference between the
Company's net loss and its total comprehensive loss for each of the periods
presented.
Recent accounting pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, or SFAS 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 establishes new standards of
F-9
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 will be effective for fiscal years beginning after June 15,
2000. The Company does not currently hold derivative instruments or engage in
hedging activities.
NOTE 2--BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
<S> <C> <C>
Property and equipment:
Computer equipment......................................... $ 393 $1,362
Furniture and equipment.................................... 133 490
Computer software.......................................... 63 234
------ ------
589 2,086
Less accumulated depreciation.............................. (133) (473)
------ ------
$ 456 $1,613
====== ======
Accrued expenses:
Payroll and related expenses............................... $1,259 $1,204
Other accrued expenses..................................... 82 741
------ ------
$1,341 $1,945
====== ======
</TABLE>
NOTE 3--COMMITMENTS
Operating leases
The Company leases its facility under a noncancelable operating lease which
expires in May 2004. The Company has the option to renew the lease for three
years. The lease requires a security deposit of $272,000 in the form of cash
and a letter of credit. The letter of credit is secured by a $204,000
certificate of deposit, which was considered restricted cash at December 31,
1999. The terms of the lease provide for rental payments on a graduated scale.
The Company recognized rent expense on a straight-line basis over the period,
and has accrued for rent expense incurred but not paid. The Company is
responsible for maintenance, insurance and taxes.
Minimum lease payments as of December 31, 1999 for noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
Lease
Year Payments
---- --------
<S> <C>
2000.............................................................. $ 723
2001.............................................................. 748
2002.............................................................. 770
2003.............................................................. 793
2004.............................................................. 478
------
$3,512
======
</TABLE>
Rent expense was $60,000, $229,000 and $474,000 for 1997, 1998 and 1999,
respectively.
F-10
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 4--CAPITAL STOCK
Convertible preferred stock
At December 31, 1999, the amounts, terms and liquidation values of Series A,
Series B, Series C, Series D and Series E convertible preferred stock are as
follows:
<TABLE>
<CAPTION>
Common
Shares
Reserved
Issued and for Liquidation
Series Amount Designated Outstanding Conversion Value
------ -------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
A.................. $ 538 2,250 2,250 2,250 $ 540
B.................. 693 1,050 1,050 1,050 700
C.................. 7,636 2,595 2,445 2,445 7,971
D.................. 13,425 2,548 2,358 2,358 13,880
E.................. -- 3,810 -- -- --
-------- ------ ----- ----- -------
$ 22,292 12,253 8,103 8,103 $23,091
======== ====== ===== ===== =======
</TABLE>
Each share of preferred stock is convertible into common stock on a one-for-
one basis subject to adjustment for certain changes in capitalization and
certain dilutive issuances. Conversion of preferred stock into common stock is
at the option of the holder, and is automatic upon the earlier of (1) for
Series A, Series B, Series C and Series D preferred stock the election of
holders of at least a majority of the outstanding shares of Series A, Series B,
Series C and Series D preferred stock voting as a class, and for Series E
preferred stock the election of holders of at least a majority of the
outstanding shares of Series E preferred stock voting as a class, or (2) the
closing of a public offering of the Company's common stock at a price per share
of not less than $10.67 and an aggregate offering price of not less than
$15,000,000. The holders of shares of preferred stock are entitled to the
number of votes equal to the number of shares of common stock into which the
preferred shares are convertible.
The holders of preferred stock may receive noncumulative dividends of $0.02,
$0.07, $0.33, $0.47 and $0.85, per share per annum for Series A, Series B,
Series C, Series D and Series E preferred stock, respectively, when and as
declared by the Board of Directors. No cash dividends may be paid to holders of
common stock during any year until dividends of $0.02, $0.07, $0.33, $0.47 and
$0.85 per share for Series A, Series B, Series C, Series D and Series E
preferred stock, respectively, have been paid in that year. No dividends have
been declared to date. The holders of preferred stock have certain registration
rights.
The holders of Series E preferred have preference of the holders of common
stock and all other series of preferred stock in liquidation to the extent of
$10.67 per share plus all declared but unpaid dividends. The holders of Series
D preferred stock have preference over the holders of common stock and Series
A, Series B and Series C preferred stock in liquidation to the extent of $5.89
per share plus all declared but unpaid dividends. The holders of Series C
preferred stock have preference over the holders of common stock and Series A
and Series B preferred stock in liquidation to the extent of $3.26 per share
plus all declared but unpaid dividends. Thereafter, Series A and Series B have
preference over common stock in liquidation to the extent of $0.24 and $0.67
per share, respectively, plus all declared but unpaid dividends. The holders of
common stock are then entitled to share ratably in the remaining assets, based
on the number of shares of common stock held by each stockholder.
Stock Option Plans
1997 Stock Option Plan
Under the Company's 1997 Stock Option Plan (the "1997 Plan"), 6,197,000
shares of the Company's common stock are reserved for issuance to employees,
directors and consultants. Options granted under the
F-11
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
1997 Plan may be incentive stock options or non-statutory stock options. Stock
purchase rights may also be granted under the 1997 Plan. Incentive stock
options may only be granted to employees. The 1997 Plan, which is administered
by the board of directors, provides generally that the option price shall not
be less than the fair market value of the shares on the date of grant and that
no portion may be exercised beyond ten years from that date. Under the 1997
Plan, stock options vest over a period that is limited to five years, but are
typically granted with a four year vesting period. Each option outstanding
under the 1997 Plan may be exercised in whole or in part at any time.
Exercised but unvested shares are subject to repurchase by the Company at the
initial exercise price. At December 31, 1999, 2,188,000 shares were subject to
repurchase.
Activity under this plan is as follows:
<TABLE>
<CAPTION>
Outstanding Shares
------------------- Weighted
Shares Number Average
Available of Price Per Exercise
for Grant Shares Share Price
--------- ------ ----------- --------
<S> <C> <C> <C> <C>
Options reserved upon adoption of the
plan.................................. 1,107
Options granted........................ (905) 905 $ 0.03-0.07 $0.03
Options exercised...................... (848) $ 0.03 $0.03
------ ------
Balances, December 31, 1997............ 202 57 $ 0.07 $0.07
Options reserved upon amendment of the
plan.................................. 1,591
Options granted........................ (1,236) 1,236 $0.03-$0.17 $0.17
Options exercised...................... (825) $0.03-$0.17 $0.33
Shares repurchased..................... 35
Options cancelled...................... 47 (47) $ 0.33 $0.08
------ ------
Balances, December 31, 1998............ 639 421 $ 0.33 $0.33
Options reserved upon amendment of the
plan.................................. 3,498
Options granted........................ (3,019) 3,019 $0.33-$1.00 $0.81
Options exercised...................... (2,001) $0.03-$1.00 $0.67
Shares repurchased..................... 158
Options cancelled...................... 31 (31) $ 0.33
------ ------
Balances, December 31, 1999............ 1,307 1,408 $ 0.88 $0.88
====== ======
</TABLE>
The weighted average grant date fair value of options granted during 1997,
1998 and 1999 was $0.08, $3.45, and $11.85, respectively.
The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Options Upon Exercise
Options Outstanding Subject to Repurchase
------------------------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.33-
$1.00 1,408 9.73 $0.88 1,303 $0.88
</TABLE>
Deferred Stock Compensation
During 1999 and 1998, the Company issued stock options under the 1997 Plan
at exercise prices deemed by the Board of Directors at the date of grant to be
the fair value. In anticipation of the Company's initial
F-12
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
public offering, the Company has subsequently determined that, for financial
statement purposes, the estimated value of its common stock was in excess of
the exercise prices. Accordingly the Company has recorded deferred compensation
for the difference between the purchase price of stock issued to employees
under stock options and the fair market value of the Company's stock at the
date of grant. This deferred compensation is amortized to expense over the
period during which the Company's right to repurchase the stock lapses or
options become exercisable, generally four years. At December 31, 1999, the
Company had recorded deferred compensation related to these options in the
total amount of $26.0 million of which $862,000 and $3,990,000 had been
amortized to expense during 1998 and 1999, respectively. Future compensation
expense from options granted through December 31, 1999 is estimated to be $11.2
million, $5.9 million, $3.0 million and $1.1 million for 2000, 2001, 2002 and
2003, respectively.
Pro forma stock-based compensation
Had compensation expense for the 1997 Plan been determined based on the fair
value at the grant date for options granted in 1999, 1998 and 1997 consistent
with the provisions of SFAS No. 123, the Company's net loss and net loss per
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December
31,
------------------------
1997 1998 1999
------ ------- -------
(in thousands, except
per share data)
<S> <C> <C> <C>
Net loss
As reported...................................... $ (584) $(6,551) $(8,828)
====== ======= =======
Pro forma........................................ $ (585) $(6,558) $(8,946)
====== ======= =======
Net loss per common share, basic and diluted
As reported...................................... $(0.08) $ (0.89) $ (1.26)
====== ======= =======
Pro forma........................................ $(0.08) $ (0.89) $ (1.27)
====== ======= =======
</TABLE>
The increases in the pro forma amounts above reflect the incremental fair
value over the intrinsic value recognized as part of deferred stock
compensation.
The fair value of each option grant is calculated on the date of grant using
the minimum value method under the Black-Scholes pricing model with a
volatility factor of effectively zero as described by SFAS No. 123, an expected
divident yield of 0%, and with the following assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate........................ 5.3%-6.3% 5.3%-5.6% 4.8%-6.1%
Expected life (years).......................... 5 5 5
</TABLE>
Warrants
In June 1997, the Company issued immediately exercisable warrants to
purchase 195,000 shares of the Company's Series B preferred Stock at an
exercise price of $0.67 per share. These warrants were issued to a customer of
the Company in connection with the issuance of Series B preferred stock and
entering into a licensing and services contract (see Note 6). The Company
determined the fair value of such warrants to be approximately $53,000 using
the Black-Scholes model and the following assumptions: no future dividends,
volatility of 60%, a weighted average risk-free interest rate of 5.88% and a
term of 2 years. The warrants expired in June 1999.
F-13
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1998, in connection with the issuance of Series C preferred stock,
the Company issued immediately exercisable warrants to purchase 150,000 shares
of the Company's Series C preferred stock at an exercise price of $3.26 per
share. The Company determined the fair value of such warrants to be
approximately $289,000 using the Black-Scholes model and the following
assumptions: no future dividends, volatility factor of 60%, a weighted average
risk-free interest rate of 4.73% and a term of 5 years. The warrants will
expire upon the earlier of June 2003 or the closing of a public offering of the
Company's common stock at a price per share of not less than $6.40 and an
aggregate offering price of not less than $15,000,000. At December 31, 1999,
150,000 shares of Series C preferred stock are reserved for the exercise of the
warrants. The Company expects these warrants will be exercised upon the initial
public offering and will recognize a charge of approximately $778,000 related
to the beneficial conversion feature of these warrants.
Notes receivable from Stockholders
During 1999, an officer of the Company exercised stock options in exchange
for notes receivable totaling $315,000, which are secured by the underlying
shares of common stock. The notes accrue interest at rates ranging from 4.9% to
5.7% per annum, and are payable, with principal, in 2001.
NOTE 5--INCOME TAXES
The components of the net deferred tax asset comprise:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998 1999
(in thousands) ----- ------- -------
<S> <C> <C> <C>
Net operating loss carryforward..................... $240 $ 1,323 $ 2,675
Research and development credit carryforward........ 50 222 382
Accrued liabilities................................. 65 450 1,444
Valuation allowance................................. (355) (1,995) (4,501)
----- ------- -------
$ -- $ -- $ --
===== ======= =======
</TABLE>
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Annually, management evaluates the recoverability of the deferred tax assets
and the level of the valuation allowance. At such time as it is determined that
it is more likely than not that deferred tax assets are realizable the
valuation allowance will be reduced.
The Company had the following carryforwards and credits at December 31,
1999:
<TABLE>
<CAPTION>
Expiration
Date Amount
(in thousands) ---------- ------
<S> <C> <C>
Net operating loss carryforwards
Federal................................................. 2010-2019 $6,904
State................................................... 2002-2004 5,611
Research and development credits
Federal................................................. Indefinite $ 217
State................................................... Indefinite 165
</TABLE>
For federal and state tax purposes, a portion of the Company's net operating
loss and tax credit carryforwards may be subject to certain limitations on
annual utilization due to an "Ownership Change," as defined by federal and
state tax law.
F-14
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 6--RELATED PARTY TRANSACTIONS
During 1997, the Company received $120,000 from a Series B preferred
stockholder under a licensing and service contract negotiated concurrently with
the purchase of Series B preferred stock and warrants to purchase Series B
preferred stock. As the fair value of these warrants was determined to be
approximately $53,000, such amount was allocated to the warrants. The warrants
expired unexercised in June 1999.
During 1998, the chairman loaned the Company $250,000 for a period of 2
months at an annual interest rate of 8%. The loan was repaid in 1998.
NOTE 7--EMPLOYEE BENEFIT PLAN
The Company sponsors the Numerical Technologies, Inc. 401(k) Retirement Plan
(the "401(k) Plan"). The 401(k) Plan provides for tax deferred automatic salary
deductions. Under the terms of the 401(k) Plan, employees over the age of 21
are eligible to participate after completing three months of employment. The
Company is permitted to make contributions to the 401(k) Plan as determined by
the Board of Directors. No Company contributions were made to the 401(k) Plan
in 1999, 1998 or 1997.
NOTE 8--OPERATING SEGMENTS
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement requires enterprises to
report information about operating segments in annual financial statements and
selected information about reportable segments in interim financial reports. It
also establishes standards for related disclosures about products, geographic
areas and major customers. The method for determining what information to
report is based upon the "management" approach, which requires the Company to
report certain financial information related to continuing operations that is
provided to the Company's chief operating decision-maker for the purpose of
evaluating financial performance and resource allocation. The Company's chief
operating decision-maker reviews revenue by both geography and customer. The
Company is not organized into business units nor does it capture expenses or
allocate resources based on segmentation of its business. Therefore, the
Company believes that it operates in a single segment.
The following is a summary of the Company's revenue attributed to the
geographic regions in which the technology and services are delivered:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ------
<S> <C> <C> <C>
United States............................................... $380 $626 $4,300
Japan....................................................... -- 105 516
Taiwan...................................................... -- -- 558
Korea....................................................... -- -- 117
Germany..................................................... 215 5 1
Other....................................................... 25 -- --
---- ---- ------
Total....................................................... $620 $736 $5,492
==== ==== ======
</TABLE>
The Company has no long-lived assets outside the United States in any of the
years presented.
F-15
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 9--SUBSEQUENT EVENTS
Acquisition of Transcription
On January 1, 2000, Numerical Technologies, Inc. (" Numerical" or the "
Company") acquired Transcription Enterprises Ltd. ("Transcription"), a company
incorporated in California. Under the terms of the acquisition, the Company
issued 3,810,000 shares of Series E Convertible Preferred Stock and $40.0
million in notes payable for all of the outstanding stock of Transcription. The
total purchase price was $86.0 million, including acquisition costs of
$250,000. The transaction will be accounted for as a purchase.
Under the terms of the agreement, Numerical acquired specified accounts
receivable of Transcription, consisting of 45% of accounts receivable for
license fees, plus all fees associated with maintenance, support and other
services rendered by Transcription on such accounts. The allocation of the
purchase price is as follows: (in thousands):
<TABLE>
<S> <C>
Net tangible assets................................................. $ 243
In process research and development................................. 300
Developed technology................................................ 7,400
Customer base....................................................... 14,300
Covenants not to compete............................................ 2,700
Work force.......................................................... 1,500
Trade name.......................................................... 200
Goodwill............................................................ 59,327
-------
$85,970
=======
</TABLE>
The estimated purchase price was allocated to the identifiable assets
acquired and the liabilities assumed based upon the fair market value on the
acquisition date. The net tangible assets consist primarily of accounts
receivable, property and equipment, and other liabilities. Because the in-
process technology had not reached the stage of technological feasibility at
the acquisition date and had no alternative future use, the amount was
immediately charged to operations. The amounts allocated to developed
technology and customer base and trade name are amortized over the estimated
useful life of five years. The amounts allocated to covenants not to compete
and work force are being amortized over the estimated useful lives of two and
four years, respectively. The excess amount of the purchase price over the fair
market value of the identifiable assets acquired is accounted for as goodwill
and is being amortized over its estimated useful life of five years. The
valuation for the intangible assets has been determined using management's
assumptions and the report from an independent appraiser.
The following unaudited pro forma consolidated financial information
reflects the results of operations for the years ended December 31, 1999, as if
the acquisition had occurred on January 1, 1999, and after giving effect to
purchase accounting adjustments. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what operating
results would have been had the acquisition actually taken place on January 1,
1999, and may not be indicative of future operating results.
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
---------------------
(unaudited)
(in thousands, except
per share data)
<S> <C>
Revenues............................................... $ 19,159
Loss from operations................................... (17,912)
Net loss............................................... (20,684)
Basic and diluted net loss per share................... $ (2.95)
</TABLE>
F-16
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Under the terms of the acquisition agreement, the $40 million note is
secured by substantially all the assets of Transcription. The note bears
interest at the rate of 8% per annum. $5 million was due and paid upon issuance
of the note, with the remaining principal amount due and payable in 16 equal
quarterly installments of $2.2 million, commencing on April 1, 2000 and
thereafter on each of calendar quarter with the final installment being due on
January 1, 2004. All interest accrued to each payment is due and payable on
such payment date. The major stockholders of Transcription have the right to
setoff certain indemnification claims against the interest and principal of the
note otherwise due.
2000 Stock Option Plan
On January 24, 2000, the Company approved the 2000 Stock Option/Stock
Issuance Plan (the "2000 Plan"), under which all remaining shares available for
grant under the Company's 1997 Stock Option Plan and 3,000,000 additional
shares of the Company's common stock has been authorized for issuance. The 2000
Plan is intended to serve as a successor to the 1997 Stock Option Plan and has
term similar to those of the 1997 Plan. Under the 2000 Plan, the term of the
options is generally ten years with a vesting requirement of 25% after one year
of service and monthly, thereafter, fully vesting upon completion of the fourth
year of service. Pursuant to the 2000 Plan, the board of directors has the
discretion to grant options to non-employee directors. The director option
component will not become effective until the date of this offering. Each
nonemployee director who first becomes a board member after the date of this
offering may be granted options for up to 30,000 shares. In addition, each non-
employee director may be granted options for up to 7,500 shares annually.
2000 Employee Stock Purchase Plan
On January 24, 2000, the Company approved the Company's 2000 Employee Stock
Purchase Plan (the "ESPP") and authorized 300,000 shares to be issued under the
ESPP. Under the ESPP, employees are granted the right to purchase shares of
common stock at a price per share that is 85% of the lesser of: the fair market
value of the shares at (i) the beginning of a rolling twenty-four-month
offering period, or (ii) the end of each semi-annual purchase period. The ESPP
will become effective on the effective date of this offering.
Stock-based compensation
On February 1, 2000, the Company granted under the 1997 and 2000 Plans
approximately 2,029,000 options to purchase the Company's common stock. In
connection with these stock option grants, the Company recognized deferred
compensation of approximately $16,990,000, which is being amortized over
vesting periods for the related options of generally four years.
F-17
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
OVERVIEW
On January 1, 2000, Numerical Technologies, Inc. (" Numerical" or the "
Company") acquired Transcription Enterprises Ltd. ("Transcription"), a company
incorporated in California. Under the terms of the acquisition, the Company
issued 3,810,000 shares of Series E Convertible Preferred Stock and $40.0
million in notes payable for all of the outstanding stock of Transcription. The
total purchase price was $86.0 million, including acquisition costs of
$250,000.
Under the terms of the agreement, Numerical acquired specified accounts
receivable of Transcription, consisting of 45% of accounts receivable for
license fees, plus all fees associated with maintenance, support and other
services rendered by Transcription on such accounts. The transaction will be
accounted for as a purchase.
The allocation of the purchase price is as follows (in thousands):
<TABLE>
<S> <C>
Net tangible assets................................................. $ 243
In process research and development................................. 300
Developed technology................................................ 7,400
Customer base....................................................... 14,300
Covenants not to compete............................................ 2,700
Work force.......................................................... 1,500
Trade name.......................................................... 200
Goodwill............................................................ 59,327
-------
$85,970
=======
</TABLE>
The estimated purchase price was allocated to the identifiable assets
acquired and the liabilities assumed based upon the fair market value on the
acquisition date.The net tangible assets consist primarily of accounts
receivable, property and equipment and other liabilities. Because the in-
process technology has not reached the stage of technological feasibility at
the acquisition date and had no alternative future use, the amount was
immediately charged to operations. The amounts allocated to developed
technology, customer base and trade name are amortized over the estimated
useful life of five years. The amounts allocated to covenants not to compete
and work force are being amortized over the estimated useful lives of two and
four years, respectively. The excess amount of the purchase price over the fair
market value of the identifiable assets acquired is accounted for as goodwill
and is being amortized over its estimated useful life of five years. The
valuation for the intangible assets has been determined using management's
assumptions and the preliminary report from an independent appraiser.
The accompanying unaudited pro forma combined balance sheet gives effect to
the acquisition of Transcription as if such transaction had occurred on
December 31, 1999, by consolidating the balance sheet of Transcription at
December 31, 1999 with the balance sheet of Numerical at December 31, 1999.
The accompanying unaudited pro forma combined statement of operations gives
effect to the acquisition of Transcription as if it had occurred on January 1,
1999, by consolidating the results of operations of Transcription for the year
ended December 31, 1999 with the results of operations of Numerical for the
year ended December 31, 1999.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the transaction had
been consummated at the dates indicated, nor is it necessarily indicative of
future operating results or the financial position of the combined companies.
F-18
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
Numerical Transcription Pro forma
------------ ------------- ----------------------
December 31, December 31,
1999 1999 Adjustments Combined
------------ ------------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $ 13,486 $ 132 $ (250)(a) $ 8,236
(132)(b)
(5,000)(c)
Accounts receivable...... 1,819 2,424 (1,298)(b) 2,945
Prepaid and other........ 394 31 (31)(b) 394
-------- ------ ------- --------
Total current assets... 15,699 2,587 (6,711) 11,575
Property and equipment,
net....................... 1,613 211 -- 1,824
Intangible assets.......... -- -- 85,427 (a) 85,427
Other assets............... 293 42 (42)(b) 293
-------- ------ ------- --------
$ 17,605 $2,840 $78,674 $ 99,119
======== ====== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......... $ 613 $ 75 $ (75)(b) $ 613
Accrued expenses......... 1,945 72 (72)(b) 1,945
Deferred revenue......... 2,642 3,410 (2,316)(a) 3,736
Current portion notes
payable................. -- -- 8,750 (a) 8,750
-------- ------ ------- --------
Total current
liabilities........... 5,200 3,557 6,287 15,044
Long term notes payable.... -- -- 31,250 (a) 26,250
(5,000) (c)
-------- ------ ------- --------
Total liabilities.......... 5,200 3,557 (32,537) 41,294
-------- ------ ------- --------
Stockholders' equity:
Preferred Stock.......... 1 -- (1)(h) --
Common Stock............. 1 43 (43)(b) 2
1 (h)
Additional paid-in
capital................. 50,100 -- 45,720 (a) 95,820
Receivable from
stockholders............ (315) -- -- (315)
Deferred stock
compensation............ (21,220) -- (21,220)
Accumulated deficit...... (16,162) (760) 760 (b) (16,462)
(300)(d)
-------- ------ ------- --------
Total stockholders'
equity................ 12,405 (717) 46,137 57,825
-------- ------ ------- --------
$ 17,605 $2,840 $78,674 $ 99,119
======== ====== ======= ========
</TABLE>
F-19
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Numerical Transcription Pro forma
--------- ------------- ----------------------
For the Year Ended
December 31, 1999 Adjustment Combined
------------------------ ---------- --------
<S> <C> <C> <C> <C>
Revenue..................... $ 5,492 $13,667 $ -- $ 19,159
-------- ------- -------- --------
Costs and expenses:
Cost of revenue........... 307 1,050 1,480 (f) 2,837
Research and development.. 4,816 1,580 863 (f) 7,259
Sales and marketing....... 4,277 857 3,669 (f) 8,803
General and
administrative........... 1,303 920 94 (f) 2,317
Amortization of deferred
stock compensation....... 3,990 -- -- 3,990
Amortization of goodwill.. -- -- 11,865 (f) 11,865
-------- ------- -------- --------
Total costs and
expenses............... 14,693 4,407 17,971 37,071
-------- ------- -------- --------
Income (loss) from
operations................. (9,201) 9,260 (17,971) (17,912)
Interest income (expense),
net........................ 373 55 (3,200)(e) (2,772)
-------- ------- -------- --------
Income (loss) before
provision for income
taxes...................... (8,828) 9,315 (21,171) (20,684)
Provision for income taxes.. -- 120 (120)(g) --
-------- ------- -------- --------
Net income (loss)........... $(8,828) $ 9,195 $(21,051) $(20,684)
======== ======= ======== ========
Net loss per common share,
basic and diluted, for pro
forma financial
statements................. $ (1.26) $ (2.95)(h)
======== ========
Weighted average common
shares, basic and diluted,
for pro forma financial
statements................. 7,019 7,019 (h)
======== ========
Net loss per common share,
basic and diluted pro forma
assuming conversion of all
outstanding preferred stock
and warrants:
Basic and diluted......... $(1.17)
========
Weighted average shares... 10,676 (h) 17,695
======== ========
</TABLE>
F-20
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(unaudited)
The following adjustments were reflected in the unaudited pro forma
combined condensed balance sheet.
(a) To record the acquisition of Transcription assuming the issuance of
3,810,000 shares of Numerical's Series E valued at $45.7 million and the
issuance of notes of $40 million in debt.
Under purchase accounting, the total purchase price will be allocated to
the acquired assets and liabilities of Transcription based on the relative
fair values as described in the overview. The amounts and components of the
purchase price, along with the allocation of the purchase price to assets
purchased are as follows (in thousands):
<TABLE>
<S> <C>
Series E Preferred Stock............................................ $45,720
Notes Payable....................................................... 40,000
Estimated transaction costs......................................... 250
-------
Gross Purchase Price.............................................. 85,970
In process research and development charge.......................... (300)
-------
Net Purchase price................................................ $85,670
=======
Assets Acquired:
Accounts Receivable............................................... $ 1,126
Deferred Revenue.................................................. (1,094)
Net fixed Assets.................................................. 211
-------
Fair value of net tangible assets acquired...................... 243
Developed Technology.............................................. 7,400
Customer Base..................................................... 14,300
Non-compete agreement............................................. 2,700
Workforce......................................................... 1,500
Trademark......................................................... 200
Goodwill.......................................................... 59,327
-------
Net assets acquired............................................. $85,670
=======
</TABLE>
(b) To reflect the elimination of certain assets and liabilities of
Transcription that were not purchased or assumed by Numerical.
(c) To record principal payment of $5.0 million upon issuance of the notes
payable. The balance of the notes payable of $35 million is expected to be
paid upon the consummation of the IPO.
(d) To record a charge for in-process research and development.
The following adjustments have been reflected in the unaudited pro forma
combined condensed statement of operations:
(e) To record interest expense on notes payable at the stated interest rate of
8.0% per annum on the principal of $40 million, assuming no initial or
quarterly principal payments.
F-21
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION--(Continued)
(Unaudited)
(f) To record the amortization of identifiable intangible assets and goodwill
related to the acquisition of Transcription as if the transaction occurred
on January 1, 1999 as follows:
<TABLE>
<CAPTION>
Estimated
Useful Annual
Value Life Amortization
------- --------- ------------
<S> <C> <C> <C>
Developed Technology.......................... $ 7,400 5 years $ 1,480
Customer Base................................. 14,300 5 years 2,860
Non-compete agreement......................... 2,700 2 years 1,350
Workforce..................................... 1,500 4 years 375
Tradename..................................... 200 5 years 40
Goodwill...................................... 59,327 5 years 11,866
-------
$17,971
=======
</TABLE>
(g) To reflect the pro forma combined net loss position resulting in no tax
provision on a combined basis.
(h) To reflect the shares of Series E convertible preferred stock issued in
conjunction with the acquisition of Transcription on an "as if converted"
basis. Antidilutive securities totaling 3,723,000, including options and
warrants were excluded from the pro forma net loss per share.
<TABLE>
<CAPTION>
Pro Forma
-------------------
As-If
Combined Converted
-------- ---------
<S> <C> <C>
Combined Pro Forma Net Loss............................... $(20,684) $(20,684)
======== ========
Weighted Average Common Shares, basic and diluted......... 7,019 7,019
As if conversion of Series A, B, C and D preferred stock.. -- 6,866
As if conversion of Series E preferred stock.............. -- 3,810
-------- --------
7,019 17,695
======== ========
Pro forma net loss per share, basic and diluted........... $ (2.95) $ (1.17)
======== ========
</TABLE>
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of
Transcription Enterprises Limited
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Transcription
Enterprises Limited at December 31, 1998 and 1999, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States. 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 of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 21, 2000
F-23
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash
equivalents.............. $1,497 $ 132
Accounts receivable....... 2,147 2,424
Prepaid and other......... 90 31
------ ------
Total current assets.... 3,734 2,587
Property and equipment,
net........................ 197 211
Other assets................ 3 42
------ ------
$3,934 $2,840
====== ======
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable.......... $ 23 $ 75
Accrued expenses.......... 273 72
Deferred revenue.......... 2,584 3,410
------ ------
Total current
liabilities............ 2,880 3,557
------ ------
Shareholders' equity:
Common stock, no par value:
Authorized: 10,000 shares;
Issued and outstanding:
798 shares............... 43 43
Retained earnings
(deficit)................ 1,011 (760)
------ ------
Total shareholders'
equity (deficit)....... 1,054 (717)
------ ------
$3,934 $2,840
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------
1998 1999
--------- ---------
<S> <C> <C>
Revenue:
License.................................................. $ 7,162 $ 5,708
Service.................................................. 7,396 7,959
--------- ---------
Total revenue.......................................... 14,558 13,667
--------- ---------
Costs and expenses:
Cost of revenue.......................................... 789 1,050
Research and development................................. 1,704 1,580
Sales and marketing...................................... 779 857
General and administrative............................... 885 920
--------- ---------
Total costs and expenses............................... 4,157 4,407
--------- ---------
Income from operations..................................... 10,401 9,260
Interest income............................................ 78 55
--------- ---------
Income before provision for income taxes................... 10,479 9,315
Provision for income taxes................................. 118 120
--------- ---------
Net income................................................. $ 10,361 $ 9,195
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Common Stock Retained
------------- Earnings
Shares Amount (Deficit) Total
------ ------ --------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1997.................. 798 $43 $ 1,376 $ 1,419
Net income................................ -- -- 10,361 10,361
Distributions to shareholders............. -- -- (10,726) (10,726)
--- --- -------- --------
Balance, December 31, 1998.................. 798 43 1,011 1,054
Net income................................ -- -- 9,195 9,195
Distributions to shareholders............. -- -- (10,966) (10,966)
--- --- -------- --------
Balance, December 31, 1999.................. 798 $43 $ (760) $ (717)
=== === ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Years
Ended
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 10,361 $ 9,195
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation............................................ 91 129
Changes in assets and liabilities:
Accounts receivable................................... 72 (277)
Prepaid and other..................................... (38) 59
Other assets.......................................... (1) (39)
Accounts payable...................................... 8 52
Accrued expenses...................................... (40) (201)
Deferred revenue...................................... 511 826
-------- --------
Net cash provided by operating activities........... 10,964 9,744
-------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (152) (143)
-------- --------
Net cash used in investing activities............... (152) (143)
-------- --------
Cash flows from financing activities:
Distrubutions to shareholders............................. (10,726) (10,966)
-------- --------
Net cash used in financing activities............... (10,726) (10,966)
-------- --------
Net increase (decrease) in cash and cash equivalents...... 86 (1,365)
Cash and cash equivalents at beginning of year............ 1,411 1,497
-------- --------
Cash and cash equivalents at end of year.................. $ 1,497 $ 132
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Transcription Enterprises Limited (the "Company") was incorporated in
California in May 1986 as an S Corporation to develop and market integrated
software products and services that provide semiconductor manufacturers with an
interactive graphics system for fracturing and verifying photomask pattern
data.
Certain risks and concentrations
At December 31, 1998 and 1999, substantially all of the Company's cash and
cash equivalents were invested with four major financial institutions.
The Company markets and sells its products and services to end users and
original equipment manufacturers primarily in North America, Europe and Japan.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The
Company had accounts receivable from one customer representing 10% and one
customer representing 27% of accounts receivable at December 31, 1998 and 1999,
respectively.
In 1998 and 1999, the Company had one customer who accounted for 12%, and
15% of sales, respectively.
The Company operates in one industry segment. The following is a summary of
the Company's revenue by geographic operations. Revenues are attributed to the
countries in which the products and services are delivered:
<TABLE>
<CAPTION>
U.S. Japan Pac Rim Europe Other Total
------ ------ ------- ------ ----- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
1998.............................. $6,846 $2,814 $2,383 $2,131 $384 $14,558
1999.............................. 6,400 3,101 1,654 2,005 507 13,667
</TABLE>
The Company had no material long-lived assets outside of the United States.
Financial instruments
The carrying amount of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate fair value due to their short maturities.
Cash and cash equivalents
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase and money market funds to be cash
equivalents.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated on a straight-line basis over their
estimated useful lives of 3 years.
F-28
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Research and development costs
Costs related to research, design and development of products are charged to
research and development expenses as incurred. Software development costs are
capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release to
customers. The Company has not capitalized any software development costs to
date, as such costs have not been significant.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
The Company recognizes revenues in accordance with the provisions of
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition", as
amended by SOP 98-4 and 98-9. The Company's revenues are derived from licenses
of its software and technology and from services the Company provides to its
customers. Revenues are recognized for the various contract elements based upon
vendor-specific objective evidence ("VSOE") of fair value of each element. If
VSOE of fair value exists only for undelivered elements, the Company recognizes
fees assigned to the delivered element(s) as the difference between the total
arrangement fee and the VSOE of the undelivered element.
License revenues are recognized when persuasive evidence of an agreement
exists, the software and technology has been delivered, no significant post-
delivery obligations remain, the license fee is fixed or determinable and
collection of the fee is probable.
Services revenues consist of maintenance fees. Maintenance agreements are
typically priced based on a percentage of the product license fee and have a
one-year term, renewable annually. Services provided to customers under
maintenance agreements include technical product support and unspecified
product upgrades. Deferred revenues from advanced payments for maintenance
agreements are recognized ratably over the term of the contract, which is
typically one year.
Comprehensive income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. There was no difference between the
Company's net income and its total comprehensive income for 1998 and 1999.
Recent accounting pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, or SFAS 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the statement of financial position,
and that the corresponding gains or losses be reported either in the statement
of operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. SFAS 133 will be effective for fiscal
years beginning after June 15, 2000. The Company does not currently hold
derivative instruments or engage in hedging activities.
F-29
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 2--BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
(in
thousands)
<S> <C> <C>
Property and equipment:
Computer equipment......................................... $ 753 $ 895
Furniture and equipment.................................... 14 15
------ ------
767 910
Less accumulated depreciation.............................. (570) (699)
------ ------
$ 197 $ 211
====== ======
Accrued expenses:
Payroll and related expenses............................... $ 248 $ 65
Other accrued expenses..................................... 25 7
------ ------
$ 273 $ 72
====== ======
</TABLE>
NOTE 3--COMMITMENTS
Operating leases
The Company leases its facility under a noncancelable operating lease, which
expires in January 2001. The Company has the option to renew the lease for five
years. The Company is responsible for maintenance, insurance and taxes.
Minimum lease payments as of December 31, 1999 for noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
Year Lease Payments
---- --------------
<S> <C>
2000.......................................................... $73
2001.......................................................... 6
---
$79
===
</TABLE>
Rent expense was $70,000 and $67,000 for 1999 and 1998, respectively.
NOTE 4--INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company is not subject
to federal corporate income taxation. Rather, the Company's shareholders
include their respective portions of taxable income in their individual income
tax returns. Therefore, no provision or liability for federal income taxes has
been included in these financial statements.
The state of California generally conforms to the federal provisions
recognizing S corporations as pass-through entities. However, California
imposes a 1.5% tax at the entity level. The income tax provisions for 1998 and
1999 consist of current state tax expense.
F-30
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 5--PROFIT SHARING PLAN
For the years ended December 31, 1998 and 1999, the company had a
discretionary profit sharing plan under which ten percent of the Company's
profits were redistributed to the employees, a portion of which is invested in
a retirement fund (up to a maximum allowable by the IRS) and the balance is
paid to the employee. The plan was terminated upon the effective date of the
merger described in Note 6.
NOTE 6--SUBSEQUENT EVENT
On January 1, 2000, the Company was acquired by and became a wholly-owned
subsidiary of Numerical Technologies, Inc. (the Parent). Under the terms of the
acquisition Agreement, each share of the common stock of the Company was
converted to 4.778 shares of Series E Preferred Stock and $50.1575 in principal
amount of a Promissory Note. The maximum consideration to be paid by the
Company pursuant to the Merger is 3,810,000 shares of Series E preferred stock
plus $40.0 million in aggregate principal amount of Notes. The Promissory Notes
are secured by the assets of the Company.
F-31
<PAGE>
[LOGO OF NUMERICAL APPEARS HERE]
