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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number: 000-30005
NUMERICAL TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-3232104
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
70 West Plumeria Drive 95134-2134
San Jose, California (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (408) 919-1910
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
Filing requirements or the past 90 days. Yes [X] No [_]
The number of shares outstanding of the registrant's Common Stock, par value
$0.0001 per share, as of May 10, 2000 was 29,667,884
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NUMERICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,863 $ 13,486
Accounts receivable 4,499 1,819
Prepaid and other 342 394
--------- ---------
Total current assets 11,704 15,699
Property and equipment, net 1,932 1,613
Acquired intangibles, net 80,934 -
Other assets 161 293
--------- ---------
$ 94,731 $ 17,605
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 767 $ 613
Accrued expenses 2,831 1,945
Deferred revenue 4,651 2,642
Current portion notes payable 8,750 -
--------- ---------
Total current liabilities 16,999 5,200
--------- ---------
Notes payable, less current portion 26,250 -
--------- ---------
Stockholders' equity:
Convertible preferred stock, $0.0001 par value:
Authorized: 12,253 shares
Issued and outstanding: 11,913 and 8,103 shares in
2000 and 1999, respectively 1 1
Common stock, $0.0001 par value:
Authorized: 30,000 shares
Issued and outstanding: 11,780 and 9,570 shares in
2000 and 1999, respectively 1 1
Additional paid in capital 117,829 50,100
Receivable from stockholders (4,086) (315)
Deferred stock compensation (33,162) (21,220)
Accumulated deficit (29,101) (16,162)
--------- ---------
Total stockholders' equity 51,482 12,405
--------- ---------
$ 94,731 $ 17,605
========= =========
</TABLE>
See the accompanying notes to these condensed consolidated financial statements.
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NUMERICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
2000 1999
-------- --------
<S> <C> <C>
Revenue
Product $ 2,401 $ 1,892
Maintenance 1,055 -
-------- --------
Total revenue 3,456 1,892
-------- --------
Costs and expenses:
Cost of revenue 334 22
Research and development 2,592 743
Sales and marketing 1,798 929
General and administrative 885 187
Depreciation and amortization 5,012 70
Amortization of deferred stock compensation(*) 5,217 434
-------- --------
Total costs and expenses 15,838 2,385
-------- --------
Loss from operations (12,382) (493)
Interest expense (700) -
Interest income 143 26
-------- --------
Net loss $(12,939) $ (467)
======== ========
Net loss per common share, basic and diluted $ (1.71) $ (0.07)
======== ========
Weighted average common shares outstanding,
basic and diluted 7,570 6,572
======== ========
(*)Amortization of deferred stock compensation
Cost of sales $ 195 $ 13
Research and development 2,442 200
Sales and marketing 1,256 157
General and administrative 1,324 64
-------- --------
$ 5,217 $ 434
======== ========
</TABLE>
See the accompanying notes to these condensed consolidated financial statements.
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NUMERICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, except Per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(12,939) $ (467)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation 219 70
Amortization of deferred stock compensation 5,217 434
Amortization of acquired intangibles 4,793 -
Changes in assets and liabilities:
Accounts receivable (1,554) (1,503)
Prepaid and other 147 32
Other assets 132 1
Accounts payable 154 70
Accrued expenses 541 (55)
Deferred revenue 915 (302)
-------- --------
Net cash used in operating activities (2,375) (1,720)
-------- --------
Cash flows used in investing activities:
Purchase of property and equipment (327) (158)
-------- --------
Net cash used in investing activities (327) (158)
-------- --------
Cash flows from financing activities:
Repayment on notes payable (5,000) -
Proceeds from exercise of common stock options 1,092 23
Repurchase of common stock (13) -
-------- --------
Cash provided by (used in) financing activities (3,921) 23
-------- --------
Net decrease in cash (6,623) (1,855)
Cash at beginning of period 13,486 4,973
-------- --------
Cash at end of period $ 6,863 $ 3,118
======== ========
Supplemental disclosure of cash flow information:
Stockholder notes receivable exchanged for common stock 3,771 -
</TABLE>
See the accompanying notes to these condensed consolidated financial statements.
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NUMERICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The unaudited financial statements have been prepared by the Numerical
Technologies, Inc. pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the financial position, operating results and cash flows for
those periods presented. These Financial Statements should be read in
conjunction with the Financial Statements and notes thereto for the years ended
December 31, 1999 and 1998, included in our Form S-1, dated April 7, 2000, as
declared effective by the Securities and Exchange Commission on April 6, 2000.
The results of operations for the interim periods are not necessarily indicative
of the results that may be expected for any other period or for the fiscal year,
which ends December 31, 2000.
NOTE 2 - ACQUISITION
On January 1, 2000, we acquired Transcription Enterprises Ltd.
("Transcription"), a company incorporated in California. Under the terms of the
acquisition, we issued approximately 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 approximately $86.0
million, including acquisition costs of approximately $250,000. The transaction
was accounted for under the purchase method of accounting.
Under the terms of the acquisition agreement, we 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.
Under the terms of the acquisition agreement, the $40 million in promissory
notes is secured by substantially all the assets of Transcription. The notes
bear interest at the rate of 8.0% per annum. $5.0 million was due and paid upon
issuance of the notes, 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 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 notes
otherwise due.
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Had the acquisition of Transcription occurred on January 1, 1999, pro forma
combined revenues would have been $3,840,000 for the three months ended March
31, 1999, after giving effect to reduction of combined revenue related to
deferred revenues on Transcription contracts. Pro forma net loss would have been
$4,738,000 or $(0.70) per share. Pro forma adjustments have been added to record
the amortization of identifiable intangible assets and goodwill and interest
expense related to the acquisition of Transcription as if the transaction
occurred on January 1, 1999.
NOTE 3 - NET LOSS PER SHARE
Net income per share is computed in accordance with Financial Accounting
Standards Board Statement No. 128 (SFAS 128), "Earnings Per Share," which
requires the presentation of basic and diluted net income per share. Basic net
income per share is calculated using the weighted average number of common
shares outstanding during the period. Diluted net income per share is calculated
using the weighted average number of common shares and common stock equivalents,
if dilutive, outstanding during the period. Common stock equivalents includes
common shares issuable upon exercise of common stock, conversion of preferred
stock and warrants. For the periods presented, we had losses and therefore all
common stock equivalents are excluded from the computation of diluted net loss
per share because their effect is antidilutive.
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
For the periods presented, there were no elements of comprehensive income
(loss), except for the net losses.
NOTE 5 - LITIGATION
We are subject to various legal proceedings and claims, either asserted or
unasserted, that arise in the ordinary course of business. In addition, 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. Litigation is inherently uncertain, and an adverse
decision could limit our ability to offer some features of our optical proximity
correction, or OPC, product. Were an unfavorable ruling to occur, there exists
the possibility of a material impact on the net income of the period in which
the ruling occurs. This lawsuit is in early stages of discovery and no trial
date has been set.
NOTE 6 - SUBSEQUENT EVENTS
In April 2000, we sold a total of 6,364,100 shares of common stock at $14.00 per
share through our initial public offering. The net proceeds after underwriters
commission and fees and other costs associated with the offering totaled
approximately $81.3 million. We paid the balance of principal and accrued
interest under the notes payables issued in connection with the acquisition of
Transcription with a portion of the net proceeds. 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. Pending these uses, we have invested the net
proceeds from this offering in short-term, interest-bearing, investment grade
securities.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This Form 10-Q contains certain forward looking statements within the meaning of
Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, and we intend that such
forward-looking statements are subject to the safe harbors created thereby. The
forward-looking statements are based on current expectations that involve a
number of risks and uncertainties. These forward-looking statements are based on
assumptions regarding our business, which involve judgments with respect to,
among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, our business and operations are subject to substantial risks and
uncertainties that could cause actual
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results to differ materially from those reflected in such forward-looking
statements, including those under "Factors Which May Affect Future Results"
below. In light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by us or any other person that our objectives or
plans will be achieved. We do not undertake any obligation to publicly release
the results of any revision to these forward-looking statements.
Overview
We design and develop proprietary technologies and software products that enable
the design and manufacture of semiconductors with subwavelength feature sizes.
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 equipment resellers. 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 integrated circuits, or ICs.
In January 2000, we acquired Transcription Enterprises Ltd. 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 is being amortized on a straight-line basis over two to five
years. We accounted 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.
In March 2000, we entered into our first production license with Motorola.
Pursuant to the Motorola agreement, we granted Motorola a non-exclusive license
to our phase shifting intellectual property for use in one fabrication facility.
Motorola is to pay us approximately $1.3 million in production license fees
under the agreement. In addition, Motorola must pay us additional fees in the
event it desires to use our licensed intellectual property in additional
fabrication facilities or in the event Motorola desires to add a temporary
licensed fabrication facility to meet peak use needs. The agreement has an
initial term of two years, after which it will automatically renew for one year,
for additional production license fees of approximately $1.3 million, unless
Motorola provides written notice to us at least 30 days prior to the end of the
initial term.
In April 2000, we sold a total of 6,364,100 shares of common stock at
$14.00 per share through our initial public offering. The net proceeds, after
underwriters commission and fees and other costs associated with the offering,
totaled approximately $81.3 million. In April 2000, we paid the balance of
principal and accrued interest under the notes payables issued in connection
with the acquisition of Transcription with a portion of the net proceeds. 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. Pending these
uses, we have invested the net proceeds from this offering in short-term,
interest-bearing, investment grade securities.
Results of Operations
Revenue.
Product. Product revenue for the three months ended March 31, 2000
increased 26.9% to $2.4 million from $1.9 million in the comparable three-month
period in 1999. The increase was primarily attributable to increased revenue
from research and development licenses to integrated device manufacturers, or
IDMs.
Maintenance. Maintenance revenue for the three months ended March 31, 2000
was $1.1 million compared to $0 in the comparable three-month period in 1999.
The increase in maintenance revenue was primarily the result of service
contracts associated with the acquisition of Transcription in January 2000.
Costs and Expenses
Cost of revenue. Cost of revenue for the three months ended March 31, 2000
increased 1418.2% to $334,000 from $22,000 in the comparable three-month period
in 1999. The increase was primarily due to increased cost for engineers
associated with maintenance and technical services which resulted from an
increased customer base from our acquisition of Transcription in January 2000.
In addition, cost of revenue increased as a result of royalties paid to third
parties in the three months ended March 31, 2000 as compared to no royalties in
the comparable three-month period in 1999. Cost of revenue increased as a
percent of revenues from 1.2% to 9.7% for the three months ended March 31, 1999
and 2000, respectively. 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.
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Research and development. Research and development expenses for the three
months ended March 31, 2000 increased 248.9% to $2.6 million from $743,000 in
the comparable three-month period in 1999. The increase was primarily due to
increased costs associated with additional personnel in our expanding research
and development efforts, and to a lesser degree as a result of additional
personnel acquired in the Transcription acquisition. Research and development
expenses increased as a percent of revenues from 39.3% to 75.0% for the three
months ended March 31, 1999 and 2000, respectively. 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.
Sales and marketing. Sales and marketing expenses for the three months
ended March 31, 2000 increased 93.5% to $1.8 million from $929,000 in the
comparable three-month period in 1999. The increase was primarily due to
additional sales and marketing personnel, increased sales commissions and higher
tradeshow expenses, and to a lesser degree as a result of additional personnel
acquired in the Transcription acquisition. Sales and marketing expenses
increased as a percent of revenues from 49.1% to 52.0% for the three months
ended March 31, 1999 and 2000 respectively. 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 for the
three months ended March 31, 2000 increased 373.3% to $885,000 from $187,000 in
the comparable three-month period in 1999. The increase was primarily the result
of increased spending in personnel, personnel-related costs and professional
fees and to a lesser degree as a result of additional personnel acquired in the
Transcription acquisition. General and administrative expenses increased as a
percent of revenue from 9.9% to 25.6% for the three months ended March 31, 1999
and 2000, respectively. We expect that general and administrative expenses will
increase in dollar amounts to support increased administrative efforts, but
decline as a percentage of revenue in the long term.
Depreciation and amortization. Depreciation and amortization expenses for the
three months ended March 31, 2000 increased 7060.0% to $5.0 million from $70,000
in the comparable three-month period in 1999. The increase was primarily the
result of amortization of acquired intangibles associated with the acquisition
of Transcription in January 2000.
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 $434,000 and $5.2 million for the three
months ended March 31, 1999 and 2000, respectively. We are amortizing these
amounts over the vesting periods of the individual options, using the multiple
option method.
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 expense. Interest expense for the three months ended March 31, 2000
was $700,000 compared to $0 in the comparable three-month period in 1999.
Interest expense relates to the notes payable associated with the acquisition of
Transcription in January 2000. In April 2000, we paid the remaining principal
and interest due under this note with proceeds from our initial public offering.
Interest income. Interest income for the three months ended March 31, 2000
increased 450.0% to $143,000 from $26,000 in the comparable three-month period
in 1999. The increase was primarily due to higher average cash and short-term
investment balances and to a lesser degree from interest due on notes
receivables from stockholders.
Liquidity and Capital Resources
As of March 31, 2000, we had cash and cash equivalents of $6.9 million,
including restricted cash of $204,000 related to a certificate of deposit
required as collateral for a letter of credit. As of the same date, we had
negative working capital of $5.2 million, including deferred revenue of $4.7
million. Deferred revenue represents the excess of amount billed from licensees
over revenue recognized on license and maintenance contracts.
Net cash used in operating activities was $2.4 million during the three month
period ended March 31, 2000, compared with $1.7 million used in the comparable
period in 1999. Net cash used in the
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three month period ended March 31, 2000 primarily reflects a net loss of $12.9
million, offset by amortization and depreciation expenses of $10.2 million.
Net cash used in investing activities was $327,000 during the three month period
ended March 31, 2000, compared with $158,000 used in the comparable period in
1999. Net cash used in the three month period ended March 31, 2000 consisted of
purchases of computer hardware and software, office furniture and equipment and
leasehold improvements. We expect to invest approximately $2.0 million in fiscal
year 2000 mainly for computer hardware and software, office furniture and
equipment, and business systems upgrades.
Net cash used in financing activities was $3.9 million during the three month
period ended March 31, 2000, compared with $23,000 provided in the comparable
period in 1999. Net cash used in the three month period ended March 31, 2000
consisted of a $5.0 million partial payment of the principal outstanding under
the total $40.0 million dollar notes issued in connection with the acquisition
of Transcription, partly offset by $1.1 million of net proceeds from common
stock option activity.
On January 1, 2000, we acquired Transcription. 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 8.0% per annum, was payable in 16 equal quarterly payments of $2.2
million, plus interest commencing on April 1, 2000. In April 2000, we paid these
notes in full with a portion of the net proceeds from our initial public
offering completed in April 2000.
We are subject to various legal proceedings and claims, either asserted or
unasserted, that arise in the ordinary course of business. In addition, 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. Litigation is inherently uncertain, and an adverse
decision could limit our ability to offer some features of our optical proximity
correction, or OPC, product. Were an unfavorable ruling to occur, there exists
the possibility of a material impact on the net income of the period in which
the ruling occurs. This lawsuit is in early stages of discovery and no trial
date has been set.
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 our initial public offering
completed in April 2000, together with existing cash, will be sufficient to meet
our working capital and capital expenditure 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.
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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin: No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB
101 summarizes certain of the Staff's view in applying generally accepted
accounting principles to revenue recognition in financial statements. We have
until the second quarter of 2000 to comply with the guidelines in SAB 101. The
impact of SAB 101 on our consolidated financial statements has not yet been
determined.
In March 2000, the Financial Accounting Statements Board issued Interpretation
No. 44 (FIN 44) Accounting for Certain Transactions involving Stock Compensation
an interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of a various modifications
to terms of a previously fixed stock or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. Fin 44 is
effective July 1, 2000, but certain conclusions cover specific events that occur
after either December 15, 1998, of january 12, 2000. We believe that the impact
of FIN 44 will not have a material effect on our financial positions or results
of operations.
Factors Which May Affect Future Results
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:
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. 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 and we face a number of risks as
an emerging company in a new market. For example, the key markets within the
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 111 employees as of March 31, 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 $29.1 million as of March 31, 2000. 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.
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
10
<PAGE>
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.
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 semiconductor 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 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.
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<PAGE>
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 seven 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 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.
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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 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 our initial public 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
14
<PAGE>
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 our initial
public 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 our initial public offering. They may choose to
allocate such proceeds in ways that do not yield a favorable return or are not
supported by our stockholders. We have designated only limited specific uses for
the net proceeds from our initial public offering.
Our capital stock ownership is concentrated with insiders and this may limit
your ability to influence corporate matters.
The concentration of ownership of our outstanding capital stock with our
directors and executive officers may limit your ability to influence corporate
matters. Our directors and executive officers, and their affiliates,
beneficially own a significant portion of our outstanding capital stock. 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 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.
The market price of our common stock may be volatile, and you may not be able to
resell your shares at or above the initial public offering price.
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.
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 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.
A large number of shares becoming eligible for sale after our initial public
offering could cause our stock price to decline.
Sales of a substantial number of shares of our common stock after our initial
public 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.
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If we raise additional capital through the issuance of new securities, you will
incur additional dilution.
If we raise additional capital through the issuance of new securities, our
stockholders 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. In addition, any new securities may have rights, preferences or
privileges senior to those securities held by you.
Exercise of registration rights could adversely affect our stock price.
If holders of registration rights exercise those rights, 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. The holders of approximately 17,477,000 shares of our common stock,
which after completion of our initial public offering represents a total of
approximately 58.4% of our outstanding stock, are entitled to rights with
respect to registration under the Securities Act of 1933.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
The Company's exposure to market risk for changes in interest rates relate
primarily to its investment portfolio. The Company does not use derivative
financial instruments for speculative or trading purposes. The Company places
its investments in instruments that meet high credit quality standards, as
specified in the Company's investment policy. The policy also limits the amount
of credit exposure to any one issuer and type of instrument. The Company does
not expect any material loss with respect to its investment portfolio.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
---------------------------------------
1. From January 1, 2000 to March 31, 2000, the registrant issued and sold
an aggregate of 701,137 shares of unregistered common stock to 28 directors,
officers, employees, former employees and consultants at prices ranging from
$0.33 to $2.67 per share, for aggregate cash consideration of approximately
$729,725, of which approximately $238,000 is subject to outstanding promissory
notes payable to the registrant. These shares were sold pursuant to the exercise
of options granted by the board. As to each director, officer, employee, former
employee and consultant of the registrant who was issued such securities, the
registrant relied upon Rule 701 of the Securities Act of 1933. Each such person
purchased securities of the registrant pursuant to a written contract between
such person and the registrant. In addition, the registrant met the conditions
imposed under Rule 701(b).
2. On January 1, 2000, the registrant issued and sold to the shareholders
of Transcription Enterprises Ltd. (1) 3,809,994 shares of unregistered Series E
preferred stock valued at $10.67 per share, and (2) unregistered promissory
notes in the aggregate principal amount of $40,000,000, in exchange for all
outstanding stock of Transcription Enterprises Limited. These securities were
issued pursuant to an agreement and plan of reorganization. The registrant
relied upon Section 3(a)(11) of the Securities Act of 1933 and Rule 147 in
connection with the sale and issuance of these securities.
3. In February 2000, the registrant issued and sold an aggregate of
1,549,999 shares of unregistered common stock to Kevin MacLean, Y.C. (Buno)
Pati, Roger Sturgeon and Yao-Ting Wang at a price per share of $2.67 for
aggregate cash consideration of approximately $4,133,332, of which approximately
$3,533,332 is subject to outstanding promissory notes payable to the registrant.
These shares were sold pursuant to the exercise of stock options granted by the
board of directors. The registrant relied upon Section 4(2) of the Securities
Act of 1933 in connection with the issuance of these securities.
Appropriate legends were affixed to the share certificates issued in the
transactions described above. All recipients had adequate access, through their
relationships with the registrant, to information about the registrant
(D) Use of Proceed from Registered Securities
-----------------------------------------
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In April 2000, we sold a total of 6,364,100 shares of common stock (the total
amount registered) at $14.00 per share through our initial public offering
pursuant to a registration statement on Form S-1 declared effective by the
Securities and Exchange Commission on April 6, 2000 (333-95695). The initial
public offering commenced on April 7, 2000. The managing underwriters were
Credit Suisse First Boston Corporation, Chase H&Q, and SG Cowen. The gross
proceeds to us were $89.1 million. The net proceeds, after underwriters
commission and fees and other costs of an estimated $7.8 million associated with
the offering, totaled approximately $81.3 million. None of the expenses paid by
us were paid, directly or indirectly, to our directors, officers, or 10%
stockholders, or any of our affiliates. In April 2000, we paid the balance of
principal and accrued interest under the notes payable issued in connection with
the acquisition of Transcription with a portion of the net proceeds. 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. Pending these
uses, we have invested the net proceeds from the offering in short-term,
interest-bearing, investment grade securities.
Item 4. Submission of Matters to a Vote of Security Holders
In connection with our initial public offering, we submitted the following
matters to a vote of our stockholders via written consents. Matters voted upon
via written consent and the approximate number of shares cast for, or not voted,
were as follows:
<TABLE>
<CAPTION>
Abstentions and
For Shares Not Voting
--- -----------------
<S> <C> <C>
1. To increase the authorized number of Board
of Directors from seven to eight members. 20,301,945 1,208,691
2. To reincorporate into the state of Delaware. 20,288,812 3,415,960
3. Approve the Pre-offering Certificate of Incorporation
of Numerical-Delaware 20,288,812 3,415,960
4. Approve the Post-offering Certificate of Incorporation
of Numerical-Delaware 20,288,812 3,415,960
5. Adoption of the 2000 Stock Option Plan 20,288,812 3,415,960
6. Adoption of the 2000 Employee Stock Purchase Plan 20,288,812 3,415,960
7. Amendment of the 1997 Stock Option Plan 20,288,812 3,415,960
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
2.1 Agreement and Plan of Reorganization, dated as of December 21, 1999,
between the registrant, Transcription Enterprises Limited, Transcription
Enterprises, Inc., Kevin MacLean and Roger Sturgeon.*
2.2 Agreement and Plan of Merger between the registrant and Numerical
Technologies, Inc., a Delaware corporation.*
3.2 Amended and Restated Certificate of Incorporation of registrant.*
3.3 Bylaws of registrant.*
4.1 Form of registrant's common stock certificate.*
4.2 1999 Second Amended and Restated Shareholders Rights Agreement, dated
January 1, 2000, between the registrant and the parties named therein, as
amended on January 14, 2000.*
10.1 Form of Indemnification Agreement entered into by registrant with each of
its directors and executive officers.*
10.2 2000 Stock Plan and related agreements.*
10.3 1997 Stock Plan and related agreements.*
10.4 2000 Employee Stock Purchase Plan and related agreements.*
10.5 Lease Agreement, dated June 15, 1999, by and between the registrant and
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CarrAmerica Realty Corporation.*
10.6 Lease Agreement, dated May 10, 1990, between Transcription Enterprises,
Inc. and Los Gatos Business Park.*
10.7 Employment Agreement, dated January 1, 2000, by and between
Transcription Enterprises, Inc. and Roger Sturgeon.*
10.8 Employment Agreement, dated January 1, 2000, by and between
Transcription Enterprises, Inc. and Kevin MacLean.*
10.9 Non-Competition Agreement, dated January 1, 2000, by and between
Numerical Technologies, Inc., Transcription Enterprises, Inc.,
Transcription Enterprises Limited and Roger Sturgeon.*
10.10 Non-Competition Agreement, dated January 1, 2000, by and between
Numerical Technologies, Inc., Transcription Enterprises, Inc.,
Transcription Enterprises Limited and Kevin MacLean.*
10.11 Stock Option Agreement--Early Exercise, dated November 2, 1999, by and
between the registrant and William Davidow.*
10.12 Stock Option Agreement--Early Exercise, dated May 26, 1999, by and
between the registrant and Richard Mora.*
10.13 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
between the registrant and Richard Mora.*
10.14 Stock Option Agreement--Early Exercise, dated March 31, 1999, by and
between the registrant and Atul Sharan.*
10.15 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
between the registrant and Atul Sharan.*
10.16 Stock Option Agreement--Early Exercise, dated February 3, 1999, by and
between the registrant and Lars Herlitz.*
10.17 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
between the registrant and Lars Herlitz.*
10.18 Stock Option Agreement--Early Exercise, dated November 17, 1999, by and
between the registrant and John Traub.*
10.19 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
between the registrant and John Traub.*
10.20 Stock Option Agreement--Early Exercise, dated July 15, 1998, between the
registrant and Harvey Jones.*
10.21 License Agreement, dated as of October 1, 1999, between registrant and
Cadence Design Systems, Inc.*+
10.22 OEM Software License Agreement, dated December 31, 1997, between
registrant and Zygo Corporation (fka Technical Instrument Company).*+
10.23 Addendum to OEM Software License Agreement, dated March 25, 1999, between
registrant and Zygo Corporation.*
10.24 Software Production and Distribution Agreement, dated January 9, 1998,
between registrant and KLA-Tencor Corporation.*+
10.25 License Agreement, dated December 23, 1999, between registrant and Seiko
Instruments, Inc.*#
10.26 Development and Distribution Agreement, dated October 1, 1991, between
Transcription Enterprises Limited and KLA Instruments Corporation.*+
10.27 Addendum Number One to Development and Distribution Agreement, dated
December 27, 1999, between Transcription Enterprises Limited and KLA
Instruments Corporation.*+
10.28 Stock Option Agreement--Early Exercise, dated February 1, 2000, by and
between the registrant and Roger Sturgeon.*
10.29 Stock Option Agreement--Early Exercise, dated February 1, 2000, by and
between the registrant and Kevin MacLean.*
10.30 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
between the registrant and Y.C. (Buno) Pati.*
10.31 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
between the registrant and Yao-Ting Wang.*
10.32 Stock Option Agreement--Early Exercise, dated October 23, 1998, by and
between the registrant and Atul Sharan.*
10.33 Amendment No. 1 to Lars Herlitz' Stock Option Agreements dated February
3, 1999 and December 27, 1999, dated as of January 24, 2000, by and
between the registrant and Lars Herlitz.*
10.34 Amendment No. 1 to Atul Sharan's Stock Option Agreements dated October
23, 1998, March 31, 1999 and December 27, 1999, dated as of January 24,
2000, by and between the registrant and Atul Sharan.*
10.35 Amendment No. 1 to John Traub's Stock Option Agreements dated November
17, 1999 and December 27, 1999, dated as of January 24, 2000, by and
between the registrant and John Traub.*
10.36 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
between the registrant and Naren Gupta.*
10.37 PSM Software Development and License Agreement, dated as of March 10,
2000, by and between registrant and Cadence Design Systems, Inc.*+
10.38 License Agreement, dated March 1, 2000, between registrant and Motorola,
Inc.+
18
<PAGE>
27.1 Financial Data Schedule.
* Incorporated by reference to registration statement on form S-1 as declared
effective by the Securities and Exchange Commission on April 6, 2000.
+ Confidential treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
# While portions of this agreement were previously inadvertently filed,
management has deemed that this agreement is not material.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by us during the quarter ending March
31, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NUMERICAL TECHNOLOGIES, INC.
Dated May 12, 2000 By: /s/ Richard Mora
Richard Mora
Chief Financial Officer and
Vice President of Operations
(Principal Accounting Officer and Duly
Authorized Signatory)
19
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27.1 Financial Data Schedule
20
<PAGE>
EXHIBIT 10.38
Confidential
LICENSE AGREEMENT*
This License Agreement ("Agreement"), effective March 1, 2000 (the
"Effective Date"), between MOTOROLA, INC. with offices at 3501 Ed Bluestein
Boulevard, Austin, Texas, 78721 (hereinafter "Motorola") and NUMERICAL
--------
TECHNOLOGIES, INC. with offices at 70 West Plumeria Drive San Jose, CA 95134-
2134 (hereinafter "NTI").
---
WHEREAS, NTI has developed software and patented technology useful in the
design and manufacture of integrated circuits; and
WHEREAS, Motorola desires to license such software and technology.
NOW, THEREFORE, in consideration of the rights and obligations set forth
below Motorola and NTI agree as follows:
1. Definitions.
-----------
1.1 "Affiliate" means an entity controlling or controlled by
---------
Motorola. For purposes of this definition, "control" or any correlative form
thereof, means the ownership of more than fifty-one percent (51%) of the voting
stock of such entity, or if such entity is not a corporation, the ability to
control the day-to-day operations and business of such entity.
1.2 "Confidential Information" means confidential or proprietary
------------------------
information which is disclosed by one party ("disclosing party") to the other
party of this Agreement ("receiving party") in oral, written, graphic, machine-
readable, or sample form, and which is marked as such, if in tangible form, or
is identified as such by the disclosing party, if in intangible form, at or
before the time of disclosure and is summarized in a writing to the receiving
party within 30 days after disclosure, and may include third party information
which the disclosing party is authorized to disclose to receiving party.
Confidential Information also includes this Agreement and all its Exhibits, any
addenda hereto signed by both parties, all Licensed Software listings,
Documentation, information, data, drawings, benchmark tests, specifications,
trade secrets, object code and machine-readable copies of the Licensed Software,
source code relating to the Licensed Software.
1.3 "Contract Manufacturing" means a business relationship under
----------------------
which Motorola produces integrated circuits according to specifications and
designs provided by a third party, which distributes such integrated circuits
under a trademark other than Motorola's.
1.4 "Design Service" means a business relationship under which
--------------
Motorola designs integrated circuits for a third party which distributes such
integrated circuits under a trademark other than Motorola's.
* Certain information in this document has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect to
the omitted portions.
<PAGE>
1.5 "Fix Release" means functional and/or feature improvements made,
-----------
at NTI's discretion, to the Licensed Software, including but not limited to bug
fixes, performance enhancements, improvements, or error corrections that are
generally made available to NTI's other customers. Such Fix Releases are
typically identified by a change in the digit(s) to the right of the tenths
digit [x.x.(x)] (i.e.-1.01, 1.02, 1.03).
1.6 "Licensed Software" means the software products in object code
-----------------
(machine readable) form and related documentation listed in Appendix A and all
written material relating thereto (including but not limited to user manuals,
published external specifications, and test materials) and all Fix Releases and
Updates, and any New Releases provided to Motorola under the terms of this
Agreement, and includes any and all documentation relating to the Licensed
Software including instruction manuals and on-line help files.
1.7 "Licensed Site" means a Motorola facility as further described
-------------
in Appendix A.
1.8 "Major Problem" means a problem which causes a feature failure
-------------
of the Licensed Software that can be avoided by alternate methods.
1.9 "Minor Problem" means a problem which causes only minor
-------------
inconvenience to the computer system user including, but not limited to,
misspelled error messages and documentation errors.
1.10 "New Release" means a substantial improvement in user
-----------
functionality that is marketed by NTI as a new and improved software product, or
a version of the Licensed Software which replaces previous Releases (such new
versions are typically identified by a change in the digit prior to the decimal
point [(x).x.x] (i.e. 4.0, 3.0). A Release is a substantial improvement that
does more than fix program errors in a previous Release. NTI's obligations to
provide New Releases to Motorola are set forth in Section 3.2.
1.11 "NTI's Patent Rights" means U.S. Patent No. 5,858,580 (and any
-------------------
foreign counterparts thereto).
1.12 "Updates" mean any subsequent release(s) of the initial version
-------
of the Licensed Software which includes unique functional and/or feature
improvements made at NTI's discretion to the Licensed Software and that are
generally made available to NTI's other customers. Such Updates are typically
identified by a change in the tenths digit [x.(x).x] (i.e.-1.10, 1.20, 1.30).
2. License Rights to the Licensed Software.
---------------------------------------
2.1 Software License. Subject to the terms and conditions of this
----------------
Agreement, NTI grants to Motorola a time-limited, non-transferable (except as
provided in Section 11.2) nonexclusive license to use and execute the Licensed
Software on a single computer for the purpose of designing integrated circuits
that are produced in a Licensed Site and then distributed under a
-2-
<PAGE>
Motorola owned trademark, unless earlier terminated as provided herein. NTI also
grants to Motorola a non-exclusive license to reproduce the Licensed Software
solely for Motorola's internal back-up and archival purposes. Motorola has no
right to sub-license the rights granted herein. Motorola has no right to use the
rights granted herein for Design Services or Contract Manufacturing.
2.2 Patent License. Subject to the terms and conditions of this
--------------
Agreement, NTI grants to Motorola a time-limited, non-transferable (except as
provided in Section 11.2 and in accordance with Addendum B) non-exclusive,
worldwide right and license under NTI's Patent Rights to exercise its license
rights to the Software under Section 2.1 of this Agreement and to produce at a
Licensed Site integrated circuits that are designed with the Software and then
are distributed under a Motorola owned trademark, unless terminated as provided
herein. Motorola has no right to sub-license the rights granted herein. Motorola
has no right to use the rights granted herein for Design Services or Contract
Manufacturing.
2.3 Copies. Motorola will be entitled to make a reasonable number
------
of machine-readable copies of the Software for backup or archival purposes.
Motorola may not copy the Software, except as permitted by this Agreement.
Motorola shall maintain accurate and up-to-date records of the number and
location of all copies of the Software and inform Numerical Technologies in
writing of such location(s) upon request. All copies of the Software will be
subject to all terms and conditions of this Agreement. Whenever Motorola is
permitted to copy or reproduce all or any part of the Software, all titles,
trademark symbols, copyright symbols and legends, patent markings and other
proprietary markings must be reproduced.
2.4 Restrictions. Motorola agrees that it will not itself, or
------------
through any parent, subsidiary, Affiliate, agent, or other third party: (a)
sell, lease, license or sublicense the Licensed Software; or (b) decompile,
disassemble, or reverse engineer the Licensed Software, in whole or in part; or
(c) write or develop any derivative software or any other software program based
upon the Licensed Software or any Confidential Information disclosed by NTI; or
(d) use the Licensed Software to provide processing services to third parties,
or otherwise use the Licensed Software on a 'service bureau' basis; or (e)
provide, disclose, divulge or make available to, or permit use of the Licensed
Software by any third party without NTI's prior written consent.
2.5 Reservations. This license transfers to Motorola neither title
------------
nor any proprietary rights to the Licensed Software or any copyrights, patents,
or trademarks, embodied therein, except for the rights expressly granted herein.
3. Support, Fix Releases and Updates.
---------------------------------
The subsections of this Section 3 describe the rights and obligations of
the parties for Support, Fix Releases, Updates and New Releases.
-3-
<PAGE>
3.1 Support Services.
----------------
3.1.1 NTI agrees to provide Motorola with ongoing support and
maintenance for the current version of the Licensed Software and any and all
Updates and Fix Releases to the current version. Support and maintenance will be
provided by NTI at no additional cost to Motorola from 8 a.m. to 6 p.m. Pacific
time Monday through Friday.
3.1.2 For a Major Problem, NTI agrees to have trained support
personnel with working knowledge of the Licensed Software available for
telephone consultation with Motorola's support personnel at no additional cost
to Motorola during the times listed in Section 3.1.1 to respond to a Major
Problem within one (1) calendar week such that, through NTI's reasonable
efforts, the Major Problem is either corrected or NTI provides a reasonable way
to resolve the Major Problem within that timeframe.
3.1.3 For a Minor Problem, NTI agrees to have trained support
personnel with working knowledge of the Licensed Software available for
telephone consultation with Motorola's support personnel at no additional cost
to Motorola during the times listed in Section 3.1.1 to respond to a Minor
Problem within thirty (30) calendar days such that, through NTI's reasonable
efforts, the Minor Problem is either corrected or NTI provides a reasonable way
to resolve the Minor Problem within that timeframe.
3.1.4 NTI's obligations under Sections 3.1.2 and 3.1.3 are
conditioned upon Motorola: (i) giving notice to NTI; (ii) using its reasonable
efforts to convey an accurate description of the error or problem, to reasonably
analyze the potential reasons causing the error or problem, and to create,
within reason, an appropriate environment allowing NTI to inquire further about
the nature of the error or problem; and (iii) reasonably classifying an error or
problem reported to NTI as a Major Problem or Minor Problem.
3.2 Fix Releases, Updates and New Releases. NTI shall provide any
--------------------------------------
and all Fix Releases and Updates to Motorola for the then-current version of the
Licensed Software, without additional charge, promptly upon their general
release. New Releases are not provided under Support, or as part of Fix
Releases, and Updates; however, NTI agrees to make such New Releases available
to Motorola at mutually agreeable commercially reasonable terms.
4. Compensation.
------------
4.1 Fees for Licensed Software. In consideration of the rights
--------------------------
granted to Motorola in NTI's Patent Rights and Licensed Software hereunder,
Motorola shall pay the fees set forth in Appendix B hereto (the "License Fees").
------------
Fees for Support, Fix Releases, and Updates are included in this License Fee.
-4-
<PAGE>
4.2 Transfer Fees and Peak Use Fees. Fees relating to the transfer
-------------------------------
of the license to NTI's Rights from one Licensed Site to another Licensed Site
and fees for temporary use of a second Licensed Site during peak times are set
forth in Appendix B hereto.
4.3 Payment. Unless otherwise agreed by the parties, Motorola shall
-------
pay the annual License Fees in quarterly payments as reflected in Appendix B
hereto.
4.4 Taxes. All charges and fees provided for in this Agreement
-----
(including the Maintenance Fees) are exclusive of and do not include any taxes,
duties, or similar charges imposed by any government. Motorola agrees to pay or
reimburse NTI for all federal, state, dominion, provincial, or local sales, use,
personal property, excise or other taxes, fees, or duties arising out of this
Agreement or the transactions contemplated by this Agreement (other than taxes
on the net income of NTI).
4.5 Audit. On NTI's written request, not more frequently than once
-----
per calendar year, Motorola shall provide to NTI a signed certification
verifying Motorola's compliance with the limited license provided hereunder. NTI
may, at NTI's expense and not more than once per calendar year, and upon
reasonable notice, audit Motorola's compliance with this Agreement through use
of an independent public accounting firm reasonably acceptable to Motorola and
subject to reasonable non-disclosure obligations. Any such audit shall be
conducted during business hours and shall not unreasonably interfere with
Motorola's business activities. If such an audit reveals that Motorola has
underpaid fees to NTI, Motorola shall be invoiced for the underpaid fees based
upon NTI's then-current prices in effect at the time of the audit.
5. Confidential Information.
------------------------
5.1 Treatment and Use of Confidential Information. For a period of
---------------------------------------------
two (2) years following the return of confidential information to the disclosing
party pursuant to Section 5, the receiving party agrees to protect Confidential
Information disclosed to it by the disclosing party with at least the same
degree of care as it normally exercises to protect the receiving party's own
information of like importance, but at least use reasonable care, in
safeguarding the disclosing party's Confidential Information against disclosure.
The receiving party shall use the Confidential Information solely in accordance
with the provisions of this Agreement.
5.2 Visits to Other Party's Facilities. The parties acknowledge that
----------------------------------
employee(s) of one party ("visiting party") may visit facilities of the other
party ("hosting party"). Notwithstanding the provisions in of this Agreement
regarding marking and writing requirements for Confidential Information, the
visiting party agrees to treat all information of the hosting party, whether
tangible or intangible, seen or heard by such employee(s) of the visiting party
during such visit as Confidential Information of the hosting party.
5.3 Exclusions to Confidential Information. A party's Confidential
--------------------------------------
Information shall not include information that: (a) is now or becomes available
to the public without breach of
-5-
<PAGE>
this Agreement, (b) is lawfully obtained by a third party, (c) is known to the
receiving party prior to disclosure by the disclosing party and had not been
obtained by the receiving party either directly or indirectly from the
disclosing party with a duty of confidentiality, (d) is developed by the
receiving party independently of any disclosure by the disclosing party, or (e)
is released in writing by the disclosing party.
5.4 Permitted Disclosure. A receiving party may disclose the
--------------------
Confidential Information of the other party (i) in accordance with the prior
written approval of disclosing party, or (ii) after providing prior written
notice to disclosing party and after taking "Reasonable Measures" to obtain
confidential treatment of such Confidential Information where receiving party is
required to disclose such information pursuant to the order or requirement of a
court, administrative agency, or other governmental body. For the purposes of
this Section 5.4 "Reasonable Measures" shall mean designating Confidential
Information for protection under a previously existing protective order, or
providing the disclosing party reasonable assistance in such disclosing party's
efforts to obtain a protective order. Each party agrees that the terms and
conditions of this Agreement shall be treated as Confidential Information and
that no reference to this Agreement or to activities pertaining thereto can be
made in any form of public or commercial advertising without the prior written
consent of the other party, provided, however, that each party may disclose the
terms and conditions of this Agreement to: (1) legal counsel of the parties, (2)
in confidence, to accountants, banks, and financing sources and their advisors;
(3) in confidence, in connection with a merger or acquisition or proposed merger
or acquisition, or the like; or (4) in accordance with applicable law.
5.5 Return of Confidential Information. Upon termination of this
----------------------------------
Agreement as specified in Sections 13 and upon written request, each party
agrees to return Confidential Information of the other party to said other
party, along with copies made, or to certify that all such Confidential
Information has been destroyed, except that each party may retain archival
copies to be used only in a dispute concerning this Agreement.
5.6 Confidential Information from or for third parties. Each party
--------------------------------------------------
will not disclose to the other party any confidential information belonging to
third parties unless it has obtained written authorization to do so. Motorola
may disclose Confidential Information of NTI to its Affiliates provided Motorola
and such Affiliates have executed an agreement having confidentiality provisions
similar to this Agreement before making any such disclosure.
6. Escrow.
------
6.1 Escrow Account. Promptly after the Effective Date of this
--------------
Agreement, NTI agrees to place and maintain current in an escrow account in
California a copy of the source code for the Licensed Software hereunder (the
"Source Code"); provided, however, that NTI shall not be obligated to make
-----------
deposits into the escrow account more frequently than twice per year. NTI shall
promptly notify Motorola of the identity of the escrow agent. Motorola shall
have the right at any time to contact the escrow agent for the purpose of
confirming that the Source Code is in the escrow account and verifying the
instructions to the escrow agent to release the Source Code under the
-6-
<PAGE>
circumstances specified in Section 6.2 below. NTI shall bear all fees, expenses
and other charges to open and maintain such escrow account.
6.2 Release. If (i) NTI (or its successors or assigns) liquidates,
-------
makes general assignment for the benefit of creditors or ceases doing business
as a going concern, or (ii) an involuntary bankruptcy petition is filed against
NTI and is not discharged with in ninety (90) days after NTI receives notice of
the filing of the petition, or (iii) NTI files a voluntary petition for
bankruptcy or (iv) a receiver is appointed for all or a substantial portion of
NTI's assets, or (v) or NTI fails to cure a material default by NTI or its
assigns or successors to perform its support obligations hereunder, within
thirty (30) days written notice specifically setting the basis for such claim of
a material default, then, upon notice thereof by Motorola to NTI and the escrow
agent, which notice is not disputed by NTI within thirty (30) days after NTI's
receipt thereof, the escrow agent shall deliver the Source Code to Motorola. If
NTI disputes Motorola's right to the Source Code, the matter shall be referred
to dispute resolution in accordance with the terms of this Agreement.
6.3 License and Source Code Obligations. Subject to the terms and
-----------------------------------
conditions of this Agreement (including without limitation Sections 6.1 and
6.2), NTI hereby grants to Motorola a nonexclusive right to use and modify such
Source Code solely to correct errors in the Licensed Software. The object code
derived from the Source Code so modified shall be deemed to be Licensed Software
hereunder and subject to the same restrictions on use, reproduction, and
disclosure that are contained in this Agreement with respect to the Licensed
Software. Motorola shall have no right to copy the Source Code for any reason.
Motorola shall not distribute, sell or sublicense the Source Code. The Source
Code shall be deemed the Confidential Information of NTI pursuant to the terms
of this Agreement. In addition, Motorola shall restrict disclosure of the Source
Code to those within its organization who need to use it to correct errors, and
shall keep it in a secure, locked location when not in use. NTI shall retain all
right, title and interest in and to the Source Code and Licensed Software.
7. Status Meetings.
---------------
7.1 Project Managers. Each party shall appoint a project manager to
----------------
act as liaison with the other party. NTI shall make a Project manager available
onsite in Austin, Texas. Project managers shall participate in review meetings
as set forth in Section 7.2. Each party shall retain the sole discretion to
replace Project Managers upon notice to the other party.
7.2 Meetings. Twice each month the project managers or such other
--------
personnel as the parties may agree upon, shall meet (either telephonically or in
person) to discuss the parties' activities under this Agreement. Upon mutual
consent of the parties, the parties will meet more frequently. Unless otherwise
agreed in writing, each party shall pay its own costs in connection with
attending any meetings under this Section 7.2.
-7-
<PAGE>
8. Warranties.
----------
8.1 General Warranty. For ninety days after delivery of the Licensed
----------------
Software, NTI warrants that the Licensed Software will conform to the
specifications provided in the applicable documentation. NTI further warrants
that its obligations hereunder will be performed in a timely and professional
manner by qualified personnel.
8.2 Rights and Powers. Each party warrants that it has the right and
-----------------
power to enter into this Agreement. NTI warrants that it has the right and power
to grant Motorola the rights under this Agreement. NTI also warrants that to its
knowledge as of the Effective Date of this Agreement, the Licensed Software as
provided to Motorola does not infringe the proprietary rights, including patent,
trade secret, and copyright, of any third party.
8.3 YEAR 2000 COMPLIANCE. NTI REPRESENTS AND WARRANTS THAT THE
--------------------
LICENSED SOFTWARE WILL BE COMPLIANT AND WILL CONTINUE TO BE YEAR 2000 COMPLIANT;
PROVIDED HOWEVER THAT THE FOLLOWING CONDITIONS ARE FIRST MET: (1) THAT THE
LICENSED SOFTWARE IS USED IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT AND (2)
IF ALL ASSOCIATED NON-NTI PRODUCTS (SUCH AS HARDWARE, SOFTWARE AND FIRMWARE)
USED IN COMBINATION WITH THE LICENSED SOFTWARE PROPERLY EXCHANGES DATE DATA WITH
THE LICENSED SOFTWARE. YEAR 2000 COMPLIANT SHALL MEAN ALL CALENDAR YEAR
REPRESENTATIONS USED WITHIN NTI LICENSED SOFTWARE WHICH, WHEN OPERATED ON
(INCLUDING, BUT NOT LIMITED TO, ARITHMETIC, COMPARISON AND SORTING OPERATIONS)
BEFORE, DURING AND AFTER THE ACTUAL CALENDAR YEAR 2000 SHALL NOT PRODUCE
SUBSEQUENT OPERATIONS AND/OR GENERATED OUTPUT WHICH YIELD RESULTS IN VARIANCE
WITH THE NORMAL COURSE OF OPERATIONS OF THE NTI LICENSED SOFTWARE OR ERROR
CONDITIONS WHICH ARE THE DIRECT RESULT OF THE USE OF A CALENDAR YEAR
REPRESENTATION.
8.4 RECOMMENDATIONS AND SUGGESTIONS PROVIDED HEREUNDER ARE PROVIDED
ON AN "AS IS" BASIS AND NEITHER PARTY MAKES ANY WARRANTY AS TO THE ACCURACY,
SUFFICIENCY, OR SUITABILITY FOR THE OTHER'S USE OF ANY RECOMMENDATIONS,
SUGGESTIONS, OR ASSISTANCE PROVIDED HEREUNDER FOR USING THE EQUIPMENT OR FOR
MAKING PRODUCTS USING THE SAME. RECOMMENDATIONS AND SUGGESTIONS PROVIDED
HEREUNDER ARE PROVIDED ON AN "AS IS" BASIS AND NEITHER PARTY ASSUMES
RESPONSIBILITY OR LIABILITY FOR LOSS OR DAMAGES, WHETHER DIRECT, INDIRECT,
CONSEQUENTIAL, OR INCIDENTAL, WHICH MIGHT ARISE OUT OF THE OTHER'S USE THEREOF,
WHICH SHALL BE ENTIRELY AT THE USER'S RISK AND PERIL.
8.5 EXCEPT AS SET FORTH IN THIS AGREEMENT, NTI MAKES NO WARRANTIES,
WHETHER EXPRESS, IMPLIED, OR STATUTORY REGARDING OR RELATING TO THE LICENSED
SOFTWARE, OR ANY MATERIALS OR SERVICES
-8-
<PAGE>
FURNISHED OR PROVIDED TO MOTOROLA UNDER THIS AGREEMENT, INCLUDING MAINTENANCE
AND SUPPORT. EXCEPT AS SET FORTH IN THIS AGREEMENT, NTI SPECIFICALLY DISCLAIMS
ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND
NON-INFRINGEMENT WITH RESPECT TO THE SOFTWARE AND DOCUMENTATION.
8.6 MOTOROLA'S SOLE REMEDY FOR A BREACH OF THE WARRANTIES IN THIS
SECTION 8, SHALL BE NTI'S REPAIR OR REPLACEMENT OF THE LICENSED SOFTWARE.
9. Intellectual Property Indemnities.
---------------------------------
9.1 NTI agrees to indemnify and defend at its own expense any and all
actions against Motorola based upon a claim that the Licensed Software infringes
an intellectual property right of a third party, and to pay damages and
reasonable costs paid or incurred by Motorola in any such action, provided that
NTI is notified promptly in writing of the action and at NTI's expense is given
exclusive control of said action and reasonable assistance for defense of same.
9.2 If the Licensed Software becomes, or in NTI's opinion is likely
to become, the subject of a claim of infringement of an intellectual property
right, NTI may at its option and at no expense to Motorola: (i) obtain for
Motorola the right to continue using the Licensed Software in a manner
consistent with this Agreement, (ii) replace it or modify it to make it non-
infringing but functionally equivalent, or if neither (i) or (ii) is reasonably
available to NTI, (iii) terminate the Agreement. If the Licensed Software
becomes the subject of a claim of infringement of an intellectual property
right, Motorola may at its option obtain for itself a right to continue using
the Licensed Software; provided however (1) such right is obtained at no expense
or liability to NTI (including without limitation any obligations that NTI may
have to indemnify Motorola under the terms of this agreement) and (2) without
any admission of infringement or liability on the part of NTI, Motorola or other
user of the Licensed Software.
9.3 NTI shall have no liability for any claim of intellectual
property right if the infringement arises from the use or combination of the
Licensed Software with programs not supplied by NTI, unless such programs are
necessary to use the Licensed Software or from the use of other than a current
unaltered release of the Licensed Software if such infringement would have been
avoided by the use of the current unaltered release of the Licensed Software.
9.4 THE FOREGOING STATES THE ENTIRE LIABILITY OF NTI WITH RESPECT TO
INFRINGEMENT OF ANY PATENT, COPYRIGHT, TRADE SECRET OR OTHER PROPRIETARY RIGHT
OF A THIRD PARTY.
-9-
<PAGE>
10. Term & Termination.
------------------
10.1 Term. This Agreement will take effect on the Effective Date and
----
will remain in force until March 1, 2002 unless earlier terminated in accordance
with this Agreement ("Term One"). This Agreement shall be automatically renewed
for an additional one (1) year term ("Term Two"), unless Motorola provides
written notice to the other at least thirty (30) days prior to the end of Term
One of its intention not to renew the Agreement.
10.2 Termination. Either party may, by written notice to the other,
-----------
terminate this Agreement if any of the following events ("Termination Events")
occur:
(a) Except as provided in Section 6.2 (which provides for
thirty (30) days prior written notice), either party is in material breach of
any material term of this Agreement, which breach is not cured within thirty
(30) days after written notice of such breach by the other party; or
(b) A party (i) terminates or suspends its business, or
(ii) makes an assignment for the benefit of creditors in bankruptcy proceedings,
or (iii) becomes subject to direct control of a trustee, receiver or similar
authority, or (iv) becomes subject to any bankruptcy or insolvency proceeding
under federal or state statutes which is not dismissed within ninety (90) days.
10.3 Survival. Any termination of this Agreement will not affect
--------
Sections 2.4, 2.5, 4, 5, 9, 10.3, 10.4 and 11, which shall survive the
termination or expiration of this Agreement.
10.4 Return of Materials. Within thirty (30) days after the date of
-------------------
termination or discontinuance of this Agreement for any reason whatsoever,
Motorola shall return the Licensed Software and all copies, in whole or in part,
all documentation relating thereto, and any other Confidential Information
provided by NTI in its possession that is in tangible form, to NTI.
11. General.
-------
11.1 Publicity. Unless approved in advance in writing, neither party
---------
shall use the other party's name or endorsement in connection with any publicity
regarding this Agreement, or sales and/or marketing of the Licensed Software
under this Agreement.
11.2 Assignment.
----------
11.2.1 Except as otherwise provided in Section 11.2.2, no
party may assign this Agreement or any of its rights or obligations hereunder
without the prior written consent of the other party, and any such attempted
assignment shall be void. Any attempted assignment, sale, transfer, lease,
conveyance, or license that conflicts with the terms of this paragraph and does
not comply within the provisions of Section 11.2.1 or 11.2.2 shall be void.
-10-
<PAGE>
11.2.2 Either party may assign this Agreement to a successor
in ownership of any of the related assets of the assigning party. The assigning
party shall only assign this Agreement to a successor that has expressly assumed
in writing the performance of all terms and conditions of this Agreement.
11.3 Notices. Unless otherwise provided, any notice to be given
-------
hereunder shall be effective when received. Such notice shall be sent by first
class mail, postage prepaid, and marked for delivery by Certified or Registered
mail, addressed to the parties listed below.
For Motorola For NTI
------------ -------
Director of Networking and Rich Mora
Computing Systems Technology Numerical Technologies, Inc.
Semiconductor Products Sector 70 West Plumeria Drive
3501 Ed Bluestein Boulevard M/D: K20 San Jose, CA 95134-2134
Austin, TX 78721
With a copy to: With a required copy to:
-------------- -----------------------
Sector Intellectual Property Counsel John Roos, Esq.
Austin Intellectual Property Department Wilson Sonsini Goodrich & Rosati
7700 West Parmer Lane 650 Page Mill Road
Austin, TX 78729 Palo Alto, CA 94304-1050
512-996-6849 650-493-9300
11.4 Relationship of the Parties. It is expressly understood and
---------------------------
acknowledged that both parties are independent contractors, and that either
party and its employees or agents will not be construed as an employee, partner,
or joint venture of the other party. Each party does not undertake by this
Agreement or otherwise to perform any obligation of the other party, whether
regulatory or contractual, or to assume any responsibility for the other party's
business or operations. Each party will be solely responsible for any payroll-
related taxes related to its performance of this Agreement.
11.5 Force Majeure. In the event of any failure to comply with, or
-------------
any delay in the performance of, the provisions of this Agreement where such
delay is caused by, or in any manner results from, events beyond the reasonable
control of the affected party, including but not limited to, acts of God, acts
of Government, acts of the public enemy, fires, floods, epidemics, quarantine
restrictions or freight embargoes, the affected party will be excused from
performance hereunder if and to the extent that such failure or delay could not
have been avoided by reasonable precautions. In the event of such failure or
delay, the affected party will give notice to the other party as soon as
practicable and will do everything reasonable to resume performance.
11.6 Waivers. A waiver of any default will not constitute a waiver of
-------
any other or subsequent default. No waiver of any terms, conditions or
provisions of this Agreement will be effective unless it is in writing and
signed by the waiving party.
-11-
<PAGE>
11.7 Dispute Resolution. Motorola and NTI will attempt to settle any
------------------
claim or controversy through consultation and negotiation in good faith and a
spirit of mutual cooperation. If those attempts fail, then the dispute will be
mediated under the rules of the American Arbitration Association, as may be
modified by the parties hereunder or in writing. Any dispute which cannot be
resolved through negotiation or mediation within six months of the date of the
initial demand by either party may then be finally resolved by the courts. The
use of any alternative dispute resolution procedure will not be construed under
the doctrines of laches, waiver or estoppel to affect adversely the rights of
either party. And nothing in this paragraph will prevent either party from
resorting to judicial proceedings if (a) good faith efforts to resolve the
dispute under these procedures have been unsuccessful or (b) injunctive or
equitable relief.
11.8 Governing Law. The laws of the State of Delaware will govern any
-------------
dispute related to this agreement (excluding its choice of law rules).
11.9 Indemnification. Each party will indemnify and hold harmless the
---------------
other party, their directors, officers, employees, and agents from all loss and
liability on account of claims of personal injury, death, or property damage
resulting from any intentional, grossly negligent or negligent act or omission
by that party, its agents, or employees in the course of performing this
Agreement.
11.10 LIMITATION OF LIABILITY. EACH PARTY'S AGGREGATE LIABILITY UNDER
-----------------------
ANY AND ALL PROVISIONS OF THIS AGREEMENT SHALL BE LIMITED TO AN AMOUNT
EQUIVALENT TO THE TOTAL OF ALL FEES ACTUALLY PAID BY MOTOROLA TO NTI UNDER TIES
AGREEMENT.
11.11 Compliance with Applicable Laws. Each party warrants that its
-------------------------------
obligations hereunder will be performed in compliance with all applicable laws,
rules and regulations, and that it will have obtained all permits required to
comply with such laws, rules and regulations.
11.12 Further Assurances. At any time or from time to time on and
------------------
after the Effective Date of this Agreement, at the written request of one party,
the other party shall, in a reasonably prompt manner, (i) deliver such records,
data or other documents consistent with the provisions of this Agreement, (ii)
execute, and deliver or cause to be delivered, all such assignments, consents,
documents or further instruments of transfer or license and take or cause to be
taken all such other actions, as are reasonably necessary or desirable in order
for the requesting party to obtain the full benefits of this Agreement and the
transactions contemplated hereby. Each party shall use reasonable efforts to
make such requests so as not to cause an undue burden on the technical employees
of the other.
11.13 Similar Agreements. Nothing in this Agreement shall be construed
------------------
as preventing either party from entering into similar agreements with other
companies, even if such agreements concern software similar to the Licensed
Software.
-12-
<PAGE>
11.14 Partial Invalidity. If any provision in this Agreement shall be
------------------
found or be held to be invalid or unenforceable in any jurisdiction in which
this Agreement is being performed, then the meaning of said provision shall be
construed, to the extent feasible, so as to render the provision enforceable,
and if no feasible interpretation would save such provision, it shall be severed
from the remainder of this Agreement which shall remain in full force and
effect. In such event, the parties shall negotiate, in good faith, a substitute,
valid and enforceable provision, which most nearly effects the parties' intent
in entering into this Agreement.
11.15 No Implied Rights. Nothing contained in this Agreement shall be
-----------------
construed as conferring by implication, estoppel or otherwise upon either party
hereunder any license or other right except the license and rights expressly
granted hereunder, including without limitation a patent license covering the
use of software other than the Licensed Software. Neither party is granted any
right, by implication or otherwise, to use any of the other party's trademarks,
except as may be authorized in writing.
11.16 Entire Agreement. This Agreement represents the entire agreement
----------------
between the parties with respect to Licensed Software and supersedes all prior
negotiations and agreements, whether oral or written. This Agreement may be
amended only by a written instrument that specifically purports to do so and is
executed by the duly authorized representatives of both parties.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives.
MOTOROLA, INC. NUMERICAL TECHNOLOGIES, INC.
By: /s/ Michael E. Slomke for J. Duckworth By: /s/ Richard Mora
-------------------------------------- -------------------------------
Signature Signature
Name: Michael E. Slomke Name: Richard Mora
---------------------------- -----------------------------
Typed or Printed Typed or Printed
Title: Director, Global [illegible] Teams Title: CFO
---------------------------------- ----------------------------
Date: 3/8/2000 Date: 2/22/2000
--------------------------- ----------------------------
<PAGE>
APPENDIX A
SOFTWARE and SITES
1. "Licensed Software" means the object code version of NTI's phase-
shifting software solution known as "iN-Phase 3.2" (which includes the following
capabilities: (1) automated phase shift mask design for integrated circuits, (2)
automated optical proximity correction associated with phase shifting, (3)
automated silicon-level verification for phase-shifted and OPC layout designs,
(4) process simulation and analysis, and (5) automated OPC and phase shifting
rule generation) and all documentation related thereto, provided by NTI to
Motorola.
On the Effective Date and subject to the terms and conditions of this
agreement (including without limitation, Section 2), Motorola shall have the
license rights to three (3) copies of the Licensed Software. Thereafter, during
the term of this Agreement, in the event that Motorola wishes to obtain rights
to additional copies of the Licensed Software, upon mutual agreeable prices,
such additional Licensed Software provided to Motorola shall be subject to the
terms and conditions (including without limitation, license restrictions) set
forth in this Agreement.
For the purpose of determining the number of Licensed Software that is
being used, the number of Licensed Software shall be measured in the number of
central processing units the Licensed Software is concurrently running on. For
example, in the event the Licensed Software is being used on two Motorola
central processing units at a single Motorola facility concurrently, there are
two copies of the Licensed Software being used. Likewise, in the event the
Licensed Software is run on a central processing unit located at Motorola
facilities in San Jose, CA and then later run on a central processing unit
located at Motorola facilities Austin, TX, but is at no time being run
concurrently at the two sites, such use would constitute a single Licensed
Software copy.
2. Patent License. For the purposes of the Patent License pursuant to
Section 2 of this Agreement, the initial "Licensed Site" shall mean:
Motorola's facility located at 3501 Ed Bluestein Blvd, Austin, TX 78721
Thereafter, in accordance with Appendix B and other terms and
conditions of this Agreement, Motorola may designate additional Licensed Sites
upon payment of applicable fees and written notice to NTI of the address of such
additional Licensed Site. Notwithstanding, Motorola's ARPDL facility and MOS-13
facility with an address of 3501 Ed Bluestein Blvd, Austin, TX 78721 shall
constitute a single Licensed Site for purposes of this Agreement.
<PAGE>
APPENDIX B
FEES
1. License Fees. Subject to the terms of Section 4 below and other terms
------------
and conditions of this Agreement, Motorola shall pay the following amounts, on
the following schedule and be granted the following rights:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Term Term One Term Two
(if contract is renewed)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
License Rights (as limited in (a) Three (3) copies of the (a) Three (3) copies of the
the Agreement) Licensed Software Licensed Software
(b) One (1) Licensed Site. (b) One (1) Licensed Site.
- ------------------------------------------------------------------------------------------------------
Payment The amount of U.S. $ * The amount of U.S. $ *
for Term One. for Term Two.
- ------------------------------------------------------------------------------------------------------
Payment (a) $ * due no later (a) $ * due by March 1,
Schedule than 45 days after the signing 2002; and
of this Agreement by both
parties; and (b) $ * due by June 1,
2002; and
(b) $ * due by July 10, (c) $ * due by September
2000; and 1, 2002; and
(c) $ * due by October (d) $ * due by December 1,
10, 2000; and 2002.
(d) $ * due by January
10, 2001; and
(e) $ * due by April
10, 2001; and
(f) $ * due by July 10,
2001; and
(g) $ * due by October
10, 2001; and
(h) $ * due by January
10, 2002.
- ------------------------------------------------------------------------------------------------------
</TABLE>
For the purposes of this Addendum B, "Term One" means the period of time
--------
from the Effective Date up to the second anniversary of the Effective Date of
the Agreement (March 1, 2002),
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE>
"Term Two" means the period of time from the second anniversary of the Effective
--------
Date up to the third anniversary of the Effective Date.
2. Additional License. If during the term of this Agreement, Motorola
------------------
wishes (in its discretion) to obtain license rights for additional sites or
additional Licensed Software, the parties shall agree upon mutually acceptable
commercially reasonable prices and terms.
3. Transfer Fee. If during the course of this Agreement, Motorola wishes
------------
to transfer its Patent License rights under Section 2.2 from one Licensed Site
to a separate Licensed Site, Motorola may do so provided the following
conditions are first met: (1) Motorola provides prompt written notice to NTI,
and (2) Motorola pays NTI an additional License Fee of U.S. $ * if such
transfer results in the concurrent use of the Licensed Site, and (3) such
concurrent use of the Licensed Sites during the transfer period does not
continue (in the aggregate) for more than ninety (90) days in any calendar year.
In the event that Motorola wishes to use such additional Licensed Site for more
than ninety (90) days during the period of transfer, it must obtain NTI's prior
written approval and may be subject to additional fees.
4. Peak Use Fee. If during the course of this Agreement, Motorola wishes
------------
to temporarily add a Licensed Site to meet peak use needs, Motorola may do so
provided the following conditions are first met: (1) Motorola provides prompt
written notice to NTI, and (2) Motorola pays NTI an additional License Fee of
U.S. $ * for each such licensed Site, and (3) such use of the additional
Licensed Sites does not continue (in the aggregate) for more than ninety (90)
days. In the event that Motorola wishes to use such additional Licensed Site
for more than ninety (90) days in any calendar year, it must seek NTI's prior
written approval and may be subject to additional fees.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
-2-
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<PAGE>
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<TOTAL-LIABILITY-AND-EQUITY> 94,731
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