<PAGE>
As filed with the Securities and Exchange Commission on March 3, 2000
Registration No. 333-95695
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT No. 2
TO
Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
NUMERICAL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
California 7371 94-3232104
(prior to
reincorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification Number)
Delaware
(after
reincorporation)
(State or other
jurisdiction of
incorporation or
organization)
</TABLE>
70 West Plumeria Drive, San Jose, CA 95134, (408) 919-1910
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
Yagyensh C. Pati
President and Chief Executive Officer
70 West Plumeria Drive, San Jose, CA 95134, (408) 919-1910
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
<TABLE>
<S> <C>
Kathleen B. Bloch Stephen J. Schrader
Julie A. Bell Justin L. Bastian
Anthony Kikuta Stephanie J. Millet
Lynn Hashimoto Amie Peters
Wilson Sonsini Goodrich &
Rosati Morrison & Foerster, LLP
Professional Corporation 755 Page Mill Road, Palo Alto, CA 94304-1018
650 Page Mill Road, Palo
Alto, CA 94304 (650) 813-5600
(650) 493-9300
</TABLE>
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered Offering Price Registration Fee(1)
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.0001 par value............. $82,732,000 $21,841
- --------------------------------------------------------------------------------
</TABLE>
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(1) $18,480 was previously paid.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 3, 2000
5,534,000 Shares
[NUMERICAL LOGO]
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$11.00 and $13.00 per share. We have applied to list our common stock on The
Nasdaq Stock Market National Market under the symbol "NMTC."
The underwriters have an option to purchase a maximum of 830,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 7.
<TABLE>
<CAPTION>
Underwriting
Discounts and Proceeds to
Price to Public Commissions Numerical
--------------- ------------- -------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Chase H&Q
SG Cowen
The date of this prospectus is , 2000.
<PAGE>
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 4
Risk Factors......................... 7
Special Note Regarding Fowarding
Looking Statements.................. 16
Use of Proceeds...................... 17
Dividend Policy...................... 17
Capitalization....................... 18
Dilution............................. 19
Selected Financial Data.............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business............................. 26
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management..........................38
Related Party Transactions..........47
Principal Stockholders..............53
Description of Capital Stock........55
Shares Eligible for Future Sale.....58
Underwriting........................60
Notice to Canadian Residents........62
Legal Matters.......................63
Experts.............................63
Where You Can Find More
Information........................63
Index to Financial Statements......F-1.
</TABLE>
----------------
You should only rely on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only where it is legal
to sell these securities. The information in this document may only be accurate
on the date on this document.
Dealer Prospectus Delivery Obligation
Until , 2000, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to unsold
allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus.
Numerical Technologies
We are a leading commercial provider of proprietary technologies and
software products that enable the design and manufacture of faster, smaller and
more power efficient electronic products that are powered by semiconductors
with subwavelength feature sizes of 0.18 micron and below. A semiconductor's
"feature size" relates to the size of the integrated circuit, or IC, components
on the semiconductor and is measured in microns, or millionths of a meter. In
semiconductors with "subwavelength" feature sizes, the wavelength of light used
to create the IC features on the semiconductor is larger than the feature sizes
needed to be created. Our subwavelength solution has exceeded the predictions
of industry roadmaps by producing semiconductors with feature sizes of 0.09
micron and below using existing semiconductor equipment. We believe our
patented technologies and software products are critical to key markets of the
semiconductor industry as they strive to design and manufacture subwavelength
semiconductors.
Our industry partners and customers have demonstrated the success of our
proprietary technologies and software products. Motorola used our proprietary
technologies in its 0.18 micron fabrication facilities to produce 0.10 micron
microprocessor features. One of our industry partners announced that it had
developed the world's fastest one volt digital signal processor, or DSP, by
reducing feature sizes from 0.25 micron to 0.12 micron using our proprietary
technologies. DSPs manipulate large volumes of video or sound in products such
as cell phones or video cameras. MIT Lincoln Laboratory, a research laboratory,
used our proprietary technologies to achieve the first successful creation of
0.05 micron features. We have industry partner and customer relationships with
leading companies in all key segments of the semiconductor industry, including
vendors of tools used to design semiconductors, such as Cadence Design Systems;
manufacturers of photomasks, or templates used in creating ICs, such as Dupont
Photomask and Photronics; manufacturers of sophisticated equipment used to
manufacture semiconductors, such as Applied Materials and KLA-Tencor; and
semiconductor manufacturers, or foundries, such as TSMC and UMC. Through our
industry partner relationships, our industry partners resell, market, either
jointly with us or unilaterally, and promote our technologies and products to
their own customers. Our customers are the actual users of our technologies and
products.
Our Market and the Subwavelength Challenge
The Semiconductor Industry Association estimates that the worldwide market
for semiconductors will grow from $144 billion in 1999 to $233 billion in 2002,
or 61.8%. This growth is being driven by the proliferation of semiconductors in
a broad range of electronic products, including personal computers, mobile
phones, Internet appliances, video game consoles, and high-speed networking and
communications products that serve as the backbone of the Internet. To
capitalize on this growing market, electronics manufacturers must continuously
introduce higher-performance products that are cheaper and more portable. These
advanced products must incorporate semiconductors that are faster and smaller,
consume less power and can be manufactured at a lower cost. As a result, the
growth in manufacturing of semiconductors with feature sizes of less than 0.25
micron is expected to be significantly greater than the growth for
semiconductors with larger feature sizes.
The ability to produce advanced ICs depends on developing technologies that
enable the design and manufacture of devices with increasingly smaller feature
sizes. Advances in semiconductor design and manufacturing processes have driven
reductions in feature sizes from 3.0 micron in 1980 to 0.18 micron in
4
<PAGE>
today's advanced fabrication facilities. This progression has required large
research and development investments in sophisticated semiconductor design
tools, photomask manufacturing and semiconductor equipment. In addition, each
incremental reduction in feature size has required significant capital
expenditures. The purchase and installation of new equipment and the
construction of new fabrication facilities can require billions of dollars and
several years before becoming operational.
At 0.18 micron and smaller, traditional technology approaches are no longer
adequate. The wavelength of light used in production semiconductor equipment to
manufacture these features is significantly larger than the features
themselves. This is like trying to paint a one-inch wide line with a four-inch
wide paint brush. This growing disparity between feature sizes and the
wavelength of light is referred to as the "subwavelength gap." We do not expect
alternative manufacturing processes that can bridge the subwavelength gap to be
commercially viable for many years. We believe advances in manufacturing
equipment technology alone can no longer enable the progression to smaller
feature sizes.
Our Solution
We have developed patented phase shifting and proprietary optical proximity
correction and process modeling technologies that are integral to our
subwavelength solution. Phase-shifting technologies manipulate light wave
patterns to create high-resolution images of IC features. Optical proximity
correction technologies, or OPC, are used to reduce distortions in IC features.
Process modeling technologies allow semiconductor designers and manufacturers
to accurately translate IC designs to photomasks and then to the semiconductor
on which the IC features are created. These technologies enable the progression
to subwavelength feature sizes.
Our comprehensive subwavelength solution allows our industry partners and
customers to produce smaller, faster and more power efficient semiconductors
with existing semiconductor equipment. This saves them the time and cost
necessary to establish a more advanced fabrication facility. As a result, our
industry partners and customers can earn revenues more quickly and increase
their return on invested capital.
We license our proprietary technology and software products to semiconductor
designers, design tool vendors, photomask manufacturers, semiconductor
equipment manufacturers and foundries. By providing a subwavelength solution
that is used by companies in every key stage of the semiconductor design and
manufacturing process, our technologies and products integrate the entire
subwavelength "design-to-silicon flow." We believe that we can capitalize on
the pressing need for proven subwavelength solutions by leveraging our
technology leadership and our relationships with leading companies within the
semiconductor industry to drive the adoption of our solution as the industry
standard.
Our company incorporated in California in October 1995 and will
reincorporate in Delaware prior to the closing of this offering. Our principal
executive office is located at 70 West Plumeria Drive, San Jose, CA 95134. Our
telephone number is (408) 919-1910, and our Internet address is
www.numeritech.com. Information contained on our Internet site does not
constitute part of this prospectus.
Unless otherwise indicated, information in this prospectus assumes the
following:
. a three-for-two forward stock split of preferred stock and common stock,
which is subject to stockholder approval, prior to the closing of this
offering;
. the automatic conversion of all outstanding shares of preferred stock
into shares of common stock immediately prior to the completion of this
offering;
. our reincorporation in Delaware prior to the closing of this offering;
and
. no exercise of the underwriters' over-allotment option.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by us.................. 5,534,000 shares
Common stock to be outstanding after the
offering................................... 29,074,505 shares
Use of proceeds............................. For the repayment of outstanding promissory
notes issued pursuant to our acquisition of
Transcription Enterprise Limited and for
general corporate purposes.
Proposed Nasdaq National Market Symbol...... NMTC
</TABLE>
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Statement of Operations Data:
Revenue.............................................. $ 620 $ 736 $ 5,492
Total costs and expenses............................. 1,239 7,469 14,693
Loss from operations................................. (619) (6,733) (9,201)
Net loss............................................. (584) (6,551) (8,828)
Pro forma net loss per common share, basic and
diluted (unaudited)................................. $ (0.62)
Pro forma weighted average common shares, basic and
diluted (unaudited)................................. 14,156
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................ $13,486 $ 8,236 $ 33,063
Working capital.................................. 10,499 (3,469) 21,358
Total assets..................................... 17,605 99,119 123,947
Notes payable, including short-term portion...... -- 35,000 --
Total stockholders' equity....................... 12,405 57,825 117,653
</TABLE>
- --------
See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
The pro forma balance sheet data reflects our acquisition of Transcription
Enterprises Limited effected in January 2000 and the conversion of
approximately 11,913,000 shares of preferred stock into shares of common stock.
The pro forma as adjusted amounts give effect to the sale of 5,534,000 shares
of common stock in this offering at an assumed initial public offering price of
$12.00 per share after deducting estimated underwriting discounts and
commissions and estimated offering expenses and the application of the net
proceeds from this offering. See Note 9 of Notes to Financial Statements.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
If our proprietary technologies and software products are not adopted by the
key markets within the semiconductor industry, especially by semiconductor
manufacturers, 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 our proprietary
technologies and software products are not adopted by these markets, the full
benefit of our subwavelength solution may not be realized and our product sales
could decline. Our technologies and products are designed so that each key
market within the semiconductor industry can work efficiently with the other
markets. For example, if our technologies and products are not adopted by
designers, it will be more difficult for them to design semiconductors which
can be understood and processed efficiently by mask manufacturers that have
adopted our technologies and products. In addition, we believe semiconductor
manufacturers need to adopt our proprietary technologies and software products
first in order to drive the 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 who
have adopted them, the efficiency of the entire manufacturing process is
greatly diminished if they do not. Our proprietary technologies and software
products could become less valuable and more difficult to license if they are
not established as the industry standard in each key market of the
semiconductor industry. Factors that may limit adoption of our subwavelength
solution within the markets include:
. our current and potential industry partners and customers may fail to
adopt our technologies and products;
. semiconductor designers may not need subwavelength processes if there is
a slowdown in semiconductor manufacturing or a decrease in the demand for
smaller semiconductor feature sizes; and
. alternative methods to produce subwavelength features with existing
capital equipment may be developed due to a rapidly evolving market and
the likely emergence of new technologies.
In order for potential industry partners and customers to adopt, and expend
their own resources to implement, our technologies and products, we must expend
significant marketing resources, with no guarantee of success.
Our proprietary technologies and software products involve a new approach to
the subwavelength gap problem. As a result, we must employ intensive and
sophisticated marketing and sales efforts to educate prospective industry
partners and customers about the benefits of our technologies and products,
with no guarantee of success. Our sales and marketing expenses increased from
$1.4 million in 1998 to $4.3 million in 1999. In addition, even if our industry
partners and customers adopt our proprietary technologies and software
products, they must devote the resources necessary to fully integrate our
technologies and products into their operations. This is especially true for
our industry partners so that they can begin to resell and market our solution
to their customers. If they do not make these expenditures, establishing our
technologies and products as the industry standard to the subwavelength gap
problem will be difficult.
Our limited operating history and dependence on new technologies make it
difficult to evaluate our future prospects.
We only have a limited operating history on which you can base your
evaluation of our business. We face a number of risks as an emerging company in
a new market. For example, the key markets within the
7
<PAGE>
semiconductor industry may fail to adopt our proprietary technologies and
software products, or we may not be able to establish distribution channels.
Our company was founded in October 1995. In February 1997, we shipped our
initial software product, IC Workbench. We have only recently begun to expand
our operations significantly. For example, we grew from 47 employees as of
January 1, 1999 to 105 employees as of January 1, 2000.
We have a history of losses, we expect to incur losses in the future and we may
be unable to achieve profitability.
We may not achieve profitability if our revenue increases more slowly than
we expect or not at all. In addition, our operating expenses are largely fixed,
and any shortfall in anticipated revenue in any given period could cause our
operating results to decrease. We have not been profitable in any quarter, and
we had an accumulated deficit of approximately $16.2 million as of December 31,
1999. We expect to continue to incur significant operating expenses in
connection with increased funding for research and development and expansion of
our sales and marketing efforts. In addition, we expect to incur additional
noncash charges relating to amortization of intangibles and deferred stock
compensation. As a result, we will need to generate significant revenue to
achieve and maintain profitability. If we do achieve profitability, we may be
unable to sustain or increase profitability on a quarterly or annual basis. Any
of the factors discussed above could cause our stock price to decline.
We recently acquired Transcription Enterprises Limited and if we are not
successful in integrating Transcription's products and operations with ours,
our revenue and operating results could decline.
Our recent acquisition of Transcription Enterprises Limited will only be
successful if we are able to integrate its operations with ours, which could
substantially divert management's attention from the day-to-day operations of
the combined company. If we encounter any difficulties in the transition
process, the revenue and operating results of the combined company could
decline. We must successfully integrate Transcription's products with ours. We
must also coordinate our research and development and sales and marketing
efforts to realize the technological benefits of this combination.
We may find it difficult to integrate personnel with disparate business
backgrounds and combine two different corporate cultures. In addition, during
the process of combining our company with Transcription, the activities of
either or both of the companies' businesses could be interrupted or could lose
momentum. 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, orders may be delayed or cancelled,
our revenue may significantly decrease and our ability to implement our
combined business strategy may be limited.
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.
8
<PAGE>
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
they must be adopted before changes in the semiconductor industry, such as the
introduction by our current and potential competitors of more advanced products
or the emergence of alternative technologies, render the innovations obsolete,
which could cause us to lose our competitive position. These innovations are
inherently complex, require long development cycles and a substantial
investment before we can determine their commercial viability. Moreover,
designers, mask manufacturers and equipment manufacturers must each respond to
the demand of the market to design and manufacture masks and equipment for
increasingly smaller and complex semiconductors. Our innovations must be viable
and meet the needs of these key markets within the semicondutor industry before
the consumer market demands even smaller semiconductors, rendering the
innovations obsolete. We may not have the financial resources necessary to fund
any future innovations. In addition, any revenue that we receive from
enhancements or new generations of our proprietary technologies and software
products may be less than the costs of development.
Fluctuations in our quarterly operating results may cause our stock price to
decline.
It is likely that our future quarterly operating results may fluctuate from
time to time and may not meet the expectations of securities analysts and
investors in some future period. As a result, the price of our common stock
could decline. We have historically experienced fluctuating quarterly operating
results. We may experience significant fluctuations in future quarterly
operating results that may be caused by many factors, including:
. 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.
9
<PAGE>
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.
A limited number of industry partners represent a high percentage of our total
revenue. As a result, if these partners terminate or decrease the extent of
their relationships with us, our revenue could significantly decrease.
To date, we have derived a large percentage of our total revenue from a
relatively small number of our industry partners. The loss of, or reduction in,
expected revenue from a significant partner could significantly decrease our
revenue and results of operations, or limit our ability to execute our
strategy. In addition, we generate revenue under our contracts with several of
our significant industry partners, such as KLA-Tencor and Zygo, only when the
partner resells our proprietary technologies and software products to their
customers. If these partners reduce their efforts to promote or sell our
products, our revenue could decrease. Our revenue could also be significantly
decreased if:
. a major partner significantly delays or cancels its development projects
with us;
. we materially breach our agreement with an industry partner, which could
lead to termination of the agreement; or
. we delay or cancel new product announcements and releases.
Downturns in general economic conditions or in the semiconductor industry in
particular could cause an even greater decrease in our revenue. In 1999,
revenue from KLA-Tencor accounted for 23.0% of our total revenue, revenue from
Zygo accounted for 17.0% of our total revenue and revenue from Cadence
accounted for 16.0% of our total revenue. No other industry partner accounted
for more than 10.0% of our total revenue in 1999. We anticipate that a
significant portion of our revenue will continue to be derived from a limited
number of industry partners for the forseeable future.
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.
10
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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 would be required to develop new proprietary
technologies and software products to address these new customer demands. As a
result, our management's attention would be diverted. 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 be
required 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 has placed
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 so, our partners or customers
could be dissatisfied, which could also 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, our ability to implement our business
strategy would be disrupted. Competition for qualified engineers is intense,
especially in the Silicon Valley where we are located.
Our chief executive officer and chief technology officer, as well as the co-
founders of Transcription, are critical to our business and they may not remain
with us in the future.
Our future success will depend to a significant extent on the continued
services of Y. C. (Buno) Pati, our President and Chief Executive Officer, Yao-
Ting Wang, our Chief Technology Officer, Roger Sturgeon, one of our directors
and a senior executive of Transcription and Kevin MacLean, Vice President and
General Manager of Transcription. If we lose the services of any of these key
executives, our product development processes could be slowed. We might also
incur increased operating expenses and be required to divert other senior
management time in searching for their replacements. If we lose their services,
our reputation could be injured if our industry partners and customers become
concerned about our future operations. 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.
11
<PAGE>
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, incur substantial unexpected
operating costs and be required to 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 granted two patents and have 13 patent applications currently pending in
the U.S. and in selected foreign countries. Patents may not be issued on our
pending applications, and our existing and future patents may not be
sufficiently broad to protect our proprietary technologies. Furthermore, if we
fail to adequately protect our trademark rights, our brand identity ability to
compete effectively would be impaired. If we do not successfully protect our
trademark rights, we may be forced 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, our reputation could be injured
and our ability to license or sell our proprietary technologies or software
products could be limited.
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 our
ability to license or sell our software products. For example, we may be
invited to take a patent license from a company. 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.
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, the business of our licensees could be
severely disrupted or shut down as the result of the litigation, which in turn
could hurt our relations with our customer 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, the market
acceptance and sales of our software products could be significantly decreased,
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 that will not be discovered until after customer
12
<PAGE>
implementation. If our software products contain errors or defects, we may be
required 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 this offering, will be sufficient to meet our presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months. However, we may need to raise additional funds in order to:
. support more rapid expansion;
. develop new or enhanced products;
. respond to competitive pressures; or
. acquire complementary businesses or technologies.
These factors will impact our future capital requirements and the adequacy
of our available funds. We may be required to raise additional funds through
public or private financings, strategic relationships or other arrangements.
We may be unable to consummate other potential acquisitions or investments or
successfully integrate them with our business, which may slow our ability to
expand the range of our proprietary technologies and software products.
To expand the range of our proprietary technologies and software products,
we may acquire or make investments in additional complementary businesses,
technologies or products if appropriate opportunities arise. We may be unable
to identify suitable acquisition or investment candidates at reasonable prices
or on reasonable terms, or consummate future acquisitions or investments, each
of which could slow our growth
13
<PAGE>
strategy. If we do acquire additional companies or make other types of
acquisitions, we could have difficulty integrating the acquired products,
personnel or technologies. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses.
Management will have broad discretion as to the use of proceeds from this
offering and, as a result, the proceeds may not be used to the satisfaction of
our stockholders.
Our board of directors and management will have broad discretion in
allocating the net proceeds of this offering. They may choose to allocate such
proceeds in ways that do not yield a favorable return or are not supported by
our stockholders. We have designated only limited specific uses for the net
proceeds from this offering. Please see "Use of Proceeds."
Our capital stock ownership will likely be concentrated with insiders upon the
completion of this offering, which will limit your ability to influence
corporate matters.
The concentration of ownership of our outstanding capital stock with our
directors and executive officers after this offering may limit your ability to
influence corporate matters. Prior to the completion of this offering, our
directors and executive officers, and their affiliates, beneficially own 67.0%
of our outstanding capital stock, and we expect them to remain significant
stockholders upon the completion of this offering. As a result, these
stockholders, if acting together, will have the ability to control all matters
submitted to our stockholders for approval, including the election and removal
of directors and the approval of any corporate transactions.
We have anti-takeover defenses that could delay or prevent an acquisition of
our company.
Provisions of our certificate of incorporation and bylaws in effect after
completion of this offering and Delaware law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. Please see "Description of Capital Stock."
The initial public offering price is determined by negotiations between the
underwriters and us, but the market price may be less or may be volatile, and
you may not be able to resell your shares at or above the initial public
offering price.
This initial public offering price may vary from the market price of our
common stock after the offering. The market price of our common stock may
fluctuate significantly in response to factors, some of which are beyond our
control, including:
. actual or anticipated fluctuations in our operating results;
. changes in market valuations of other technology companies;
. conditions or trends in the semiconductor industry;
. announcements by us or our competitors of significant technical
innovations, contracts, acquisitions or partnerships;
. additions or departures of key personnel;
. any deviations in net revenue or in losses from levels expected by
securities analysts;
. volume fluctuations, which are particularly common among highly volatile
securities of technology related companies; and
. sales of substantial amounts of our common stock or other securities in
the open market.
General political or economic conditions, such as recession or interest rate
or currency rate fluctuations in the United States or abroad, also could cause
the market price of our common stock to decline. Please see "Underwriting."
14
<PAGE>
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.
An active public market for our common stock may not develop.
An active public market for our common stock may not develop or be sustained
after this offering. The initial public offering price for the shares has been
determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market.
A large number of shares becoming eligible for sale after this offering could
cause our stock price to decline.
Sales of a substantial number of shares of our common stock after this
offering could cause our stock price to fall. Our current stockholders hold a
substantial number of shares, which they will be able to sell in the public
market in the near future. Please see "Shares Eligible for Future Sale."
You will incur immediate and substantial dilution in the book value of the
stock you purchase.
The initial public offering price is substantially higher than the book
value per share of our outstanding common stock immediately after the offering.
This is referred to as dilution. Accordingly, if you purchase common stock in
the offering, you will incur immediate dilution of approximately $10.81, at an
initial public offering price of $12.00 per share, in the book value per share
of our common stock from the price you pay for our common stock. Please see
"Dilution."
If we raise additional capital through the issuance of new securities at a
price lower than the initial public offering price, you will incur additional
dilution.
If we raise additional capital through the issuance of new securities at a
lower price than the initial public offering price of $ per share, you will
be subject to additional dilution. If we are unable to access the public
markets in the future, or if our performance or prospects decreases, we may
need to consummate a private placement or public offering of our capital stock
at a lower price than the initial public offering price. In addition, any new
securities may have rights, preferences or privileges senior to those
securities held by you.
Exercise of registration rights after this offering could adversely affect our
stock price.
If holders of registration rights exercise those rights after this offering,
a large number of securities could be registered and sold in the public market,
which could result in a decline in the price of our common stock. If we were to
include in a company-initiated registration shares held by these holders
pursuant to the exercise of their registration rights, our ability to raise
needed capital could suffer. After this offering, the holders of 17,476,825
shares of our common stock, which will represent a total of approximately 60.1%
of our outstanding stock after completion of this offering, will be entitled to
rights with respect to registration under the Securities Act of 1933.
15
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements in "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and elsewhere. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks
outlined under "Risk Factors," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results.
16
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of 5,534,000 shares of common stock in this
offering at an estimated initial public offering price of $12.00 per share,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses, will be approximately $59.8 million. If the underwriters'
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $69.0 million.
In connection of our acquisition of Transcription Enterprises Limited, we
issued promissory notes in the aggregate principal amount of $40 million, $35
million of which is outstanding. Interest on the notes accrues at 8.0% per
annum. These notes are payable in 16 equal quarterly payments of $2.2 million,
plus interest, commencing on April 1, 2000. We expect to pay the balance of
principal and accrued interest under the notes with a portion of the net
proceeds from this offering. The remaining proceeds will be used for working
capital and general corporate purposes. We may use a portion of the net
proceeds to acquire businesses, products and technologies that are
complementary to our business. However, we have no present plans or
committments and are not engaged in any negotiations with respect to any
transactions of this type. Pending these uses, our net proceeds from this
offering will be invested in short-term, interest-bearing, investment grade
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities. We currently anticipate that we will retain all of our future
earnings for use in the expansion and operation of our business and do not
anticipate paying any cash dividends for the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth our total capitalization as of December 31,
1999:
. on an actual basis after giving effect to the three-for-two forward stock
split of our preferred stock and common stock;
. on a pro forma basis to reflect our acquisition of Transcription
Enterprises Limited effected in January 2000 and the automatic conversion
of all outstanding shares of preferred stock into common stock upon the
closing of this offering; and
. on a pro forma as adjusted basis to reflect the sale of the 5,534,000
shares of common stock at an assumed initial public offering price of
$12.00 per share in this offering, after deducting estimated underwriting
discounts and commissions and estimated offering expenses to be paid by
us and the repayment of the remaining $35.0 million of notes issued in
connection with the acquisition of Transcription Enterprises Limited.
You should read this information together with the consolidated financial
statements and the notes to these statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------ ------------ --------------
(in thousands, except per share data)
<S> <C> <C> <C>
Notes payable, including current
portion............................ $ -- $ 35,000 $ --
------------ ------------ ------------
Stockholders' equity:
Convertible preferred stock,
$0.0001 par value: 12,253 shares
authorized, 8,103 issued and
outstanding, actual; no shares
issued or outstanding, pro forma
and pro forma as adjusted........ 1 -- --
Common stock, $0.0001 par value:
30,000 shares authorized, actual,
pro forma and pro forma as
adjusted; 9,570 shares issued and
outstanding, actual; 17,673
shares issued and outstanding,
pro forma; 27,017 shares issued
and outstanding, pro forma as
adjusted......................... 1 2 3
Additional paid in capital......... 50,100 95,820 155,648
Receivable from stockholders....... (315) (315) (315)
Deferred stock compensation........ (21,220) (21,220) (21,220)
Accumulated deficit................ (16,162) (16,462) (16,462)
------------ ------------ ------------
Total stockholders' equity ....... 12,405 57,825 117,654
------------ ------------ ------------
Total capitalization............ $ 12,405 $ 92,826 $ 123,948
============ ============ ============
</TABLE>
18
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999, after giving
effect to our acquisition of Transcription Enterprises Limited effected in
January 2000 and the conversion of our outstanding preferred stock into common
stock, was $(27.6) million or $(1.29) per share of common stock. Pro forma net
tangible book value per share represents total tangible assets less total
liabilities, divided by the number of outstanding shares of common stock.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of our common stock in this
offering and the net tangible book value per share of our common stock
immediately afterwards. After giving effect to our sale of the 5,534,000 shares
of common stock offered by this prospectus and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our net tangible book value at December 31, 1999 would have been
$32.2 million or $1.19 per share. This represents an immediate increase in net
tangible book value to existing stockholders of $2.48 per share and an
immediate dilution to new public investors of $10.81 per share. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share as of December
31, 1999................................................. $(1.29)
Increase per share attributable to new public investors... 2.48
------ ---
Pro forma net tangible book value per share after offering.. 1.19
------ ---
Dilution per share to new public investors.................. $10.81
======
</TABLE>
The following table sets forth on a pro forma basis as of December 31, 1999,
after giving effect to the conversion of our preferred stock and the
acquisition of Transcription Enterprises Limited, and assuming a three-for-two
forward stock split of all the outstanding common stock, the differences
between the number of shares of common stock purchased from us, the total price
paid, and the average price per share paid by the existing stockholders and new
public investors, deducting estimated underwriting discounts and commissions
and offering expenses to be paid by us, using an assumed initial public
offering price of $12.00 per share:
<TABLE>
<CAPTION>
Total Cash
Shares Purchased Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 21,483,450 79.5% $24,488,000 29.0% $ 1.14
New public investors....... 5,534,000 20.5 59,828,000 71.0 10.81
---------- ---- ----------- ----
Total.................... 27,017,450 100% $84,316,000 100%
========== ==== =========== ====
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors increase to 6,364,000, or 22.9%, of the total
shares of common stock outstanding after this offering.
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<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data are qualified by reference to, and
should be read in conjunction with, Management's Discussion and Analysis of
Financial Condition and Results of Operations and the financial statements and
notes thereto and other information contained in this prospectus. The selected
balance sheet data as of December 31, 1998 and 1999 and selected statements of
operations data for the years ended December 31, 1997, 1998 and 1999 have been
derived from our audited financial statements and the notes thereto included
elsewhere in this prospectus. The selected balance sheet data as of December
31, 1996 and 1997 and the selected statement of operations data for the year
ended December 31, 1996 were derived from financial statements not included in
this prospectus.
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1996 1997 1998 1999
------ ------ ------- -------
(in thousands, except per
share data)
<S> <C> <C> <C> <C>
Statement of Operations Data
Revenue..................................... $ 51 $ 620 $ 736 $ 5,492
------ ------ ------- -------
Costs and expenses:
Cost of revenue........................... 9 57 127 307
Research and development.................. 202 993 2,721 4,816
Sales and marketing....................... 2 58 1,404 4,277
General and administrative................ 43 131 2,355 1,303
Amortization of deferred stock
compensation............................. -- -- 862 3,990
------ ------ ------- -------
Total costs and expenses................ 256 1,239 7,469 14,693
------ ------ ------- -------
Loss from operations........................ (205) (619) (6,733) (9,201)
Interest income, net........................ 6 35 182 373
------ ------ ------- -------
Net loss.................................... $ (199) $ (584) $(6,551) $(8,828)
====== ====== ======= =======
Net loss per common share, basic and
diluted.................................... $(0.04) $(0.08) $ (0.89) $ (1.21)
====== ====== ======= =======
Weighted-average common shares, basic and
diluted.................................... 4,722 7,397 7,373 7,290
====== ====== ======= =======
Pro forma net loss per common share, basic
and diluted (unaudited).................... $ (0.62)
=======
Pro forma weighted-average common share,
basic and diluted (unaudited).............. 14,156
=======
<CAPTION>
As of December 31,
--------------------------------
1996 1997 1998 1999
------ ------ ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents................... $ 615 $ 656 $ 4,973 $13,486
Working capital............................. 340 377 2,319 10,499
Total assets................................ 650 1,081 6,611 17,605
Total stockholders' equity.................. 338 474 2,815 12,405
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our actual results could differ materially from those discussed in the
forward-looking statements contained in this section. The following discussion
and analysis of our financial condition and results of operations should be
read in conjunction with "Selected Financial Data" and our financial statements
and notes thereto appearing elsewhere in this prospectus.
Overview
We design and develop proprietary technologies and software products that
enable the design and manufacture of semiconductors with subwavelength feature
sizes. From our incorporation in October 1995 through February 1997, our
activities were primarily focused on conducting research and development and
establishing markets and distribution channels for our proprietary technologies
and software products. In February 1997, we shipped our first software product,
IC Workbench.
In January 2000, we acquired Transcription Enterprises Limited for
approximately $45.7 million in Series E preferred stock and $40.0 million in
notes payable, resulting in goodwill and other intangible assets of $85.4
million which will be amortized on a straight-line basis over two to five
years. Had the acquisition taken place on January 1, 1999, we would have had
combined revenues of $16.8 million in 1999 after giving effect to reduction of
pro forma combined revenues related to deferred revenues on Transcription
contracts. The acquisition will be accounted for under the purchase method of
accounting and, as a result, our historical results of operations do not
include the results of operations of Transcription. As such, we do not believe
the discussion and analysis of our historical financial condition and results
of operations set forth below are indicative, nor should they be relied upon as
an indicator, of our future performance.
We derive revenue from intellectual property and software licenses,
maintenance and related technical services. To date, a significant portion of
our revenue has been derived from research and development licenses to
integrated device manufacturers, or IDMs, and foundries of our phase shifting
technologies and software and OPC software licenses, as well as licenses of
photomask verification software to semiconductor resellers. An IDM is a
traditional semiconductor company that designs and manufactures its own ICs.
Our research and development licenses limit the use of our proprietary
technologies for pre-production purposes.
We expect to enter into production licenses with semiconductor manufacturers
as they adopt our proprietary technologies for production. Production licenses
grant licensees the right to use our phase shifting intellectual property and
software to design and manufacture subwavelength ICs. We entered into our first
production license with Texas Instruments in December 1999. We expect
production licenses to account for a significant portion of our revenue in the
future and that fees for production licenses will be time-based, and structured
on a per fabrication facility or per device basis.
We license our intellectual property and software products through our
direct sales force and to resellers. To date, our direct sales force has
primarily focused on selling research and development licenses to semiconductor
manufacturers. We anticipate an increase in direct sales efforts related to
converting these manufacturers to production licensees. Our reseller licensees
are primarily leading semiconductor equipment manufacturers, such as Applied
Materials, KLA-Tencor and Zygo, that integrate our software products with their
equipment. In the fourth quarter of 1999, we entered into a reseller agreement
with Cadence that provides Cadence with unlimited distribution rights for a
fixed fee that is payable quarterly over approximately three years. In return,
Cadence agreed to integrate portions of our OPC software products with its
physical design and verification tools. Our agreement with Cadence expires on
December 31, 2002, but may be extended by Cadence for an additional two-year
period.
Revenue from existing research and development licenses is recognized
ratably over a related service period. Maintenance revenue is typically priced
based on a percentage of the license fee and is recognized
21
<PAGE>
ratably over the term of the agreement, typically 12 months. Revenue from
technical services is typically recognized as the services are performed. For
licenses to resellers and licenses of our manufacturing data preparation
software, where the license fee is fixed or determinable and the collection of
the fee is probable, revenue is recognized upon delivery if no significant post
delivery obligations remain. We record billed amounts due from customers in
excess of recognized revenue as deferred revenue. The timing and amounts billed
to customers can vary significantly depending on specific contract terms and
can therefore have a significant impact on the amount of deferred revenue in
any given period.
We have adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." This statement requires enterprises to report
information about operating segments in annual financial statements and
selected information about reportable segments in interim financial reports. It
also establishes standards for related disclosures about products, geographic
areas and major customers. The method for determining what information to
report is based upon the "management" approach. This method requires us to
report certain financial information related to continuing operations that is
provided to our chief operating decision-maker for the purpose of evaluating
financial performance and resource allocation. Our chief operating decision-
maker reviews revenue by both geography and customer. We allocate resources and
generate revenue based on requirements of our customers in the semiconductor
industry. We are not organized into business units nor do we capture expenses
or allocated resources based on segmentation of our business. Thus, we operate
in a single segment.
Since inception, we have incurred substantial costs to develop our
proprietary technologies and software products, to recruit and train personnel
for our engineering, sales and marketing and technical support departments, and
to establish an administrative organization. As a result, we have incurred net
losses in each year since inception and had an accumulated deficit of $16.2
million as of December 31, 1999. We anticipate that our operating expenses will
increase substantially in future years as we increase sales and marketing
operations, increase research and development, broaden technical support
services and expand international operations. In addition, we expect to incur
additional non-cash operating expenses relating to amortization of deferred
stock compensation and goodwill associated with our acquisition of
Transcription Enterprises Limited. Accordingly, we expect to incur additional
losses for the foreseeable future. In addition, our limited operating history
makes it difficult for us to predict future operating results and, accordingly,
there can be no assurance that we will achieve or sustain revenue growth or
profitability.
Results of Operations
Years 1998 and 1999
Revenue. Revenue increased from $736,000 in 1998 to $5.5 million in 1999.
The increase in 1999 was primarily due to increased research and development
licenses to foundries and IDMs and increased reseller sales.
Costs and Expenses
Cost of revenue. Cost of revenue includes primarily salary and related costs
for engineers associated with maintenance and technical services. Cost of
revenue increased from $127,000 in 1998 to $307,000 in 1999. This increase was
due primarily to an increase in the time spent on service and integration
efforts by our engineering personnel. Cost of revenue decreased as a percentage
of sales from 17.0% of revenue in 1998 to 6.0% of revenue in 1999. We
anticipate that cost of revenue will increase in dollar amount as we support
our expanding number of industry partners and customers and assist our research
and development licensees to transition into production. We expect, however,
that cost of revenue will continue to decrease as a percentage of revenue in
the long term.
Research and development. Research and development expenses consist
primarily of personnel and related costs. Research and development expenses
increased from $2.1 million in 1998, exclusive of a $600,000 bonus paid to one
of our founders and executive officers, to $4.8 million in 1999. The increase
in dollar
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amounts reflects our expanding research and development efforts in
subwavelength technologies and products. Research and development expenses
decreased as a percentage of revenue from 285.3% of revenue in 1998, exclusive
of the $600,000 bonus, to 87.3% of revenue in 1999. A significant portion of
the increase was due to the addition of personnel and personnel-related costs
for enhancement of existing applications and development of new products. We
anticipate that we will continue to commit substantial resources to research
and development in the future. We expect that research and development expenses
will increase in dollar amounts to support increased research and development
efforts, but decline as a percentage of revenue in the long term.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries and related costs for sales and marketing personnel, sales
commissions, tradeshows and other marketing activities. Sales and marketing
expenses increased from $1.4 million in 1998 to $4.3 million in 1999. This
increase was primarily due to the hiring of additional sales and marketing
personnel, increased sales commissions and higher tradeshow expenses. Sales and
marketing expenses decreased as percentage of revenue from 190.2% of revenue in
1998 to 77.8% of revenue in 1999. We expect that sales and marketing expenses
will increase in dollar amounts to support increased sales efforts, but decline
as a percentage of revenue in the long term.
General and administrative. General and administrative expenses consist
primarily of salaries and related costs for operations and finance employees
and legal and accounting services. General and administrative expenses
increased, exclusive of the $1.4 million bonus to a founder and officer in
1998, from $1.0 million in 1998 to $1.3 million in 1999. Exclusive of the
bonus, general and administrative expenses increased in 1999 primarily as a
result of increased spending in personnel and personnel-related costs. General
and administrative expenses decreased as a percentage of revenue from 129.8% of
revenue in 1998, exclusive of the $1.4 million bonus, to 23.6% of revenue in
1999. We expect that general and administrative will increase in dollar amounts
to support increased administrative efforts, but decline as a percentage of
revenue in the long term.
On February 1, 2000, we granted stock options to purchase an aggregate of
2,007,000 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.
Amortization of deferred stock compensation. Amortization of deferred stock
compensation represents the amount of amortization related to the difference
between the exercise price of options granted and the estimated fair market
value of the underlying common stock on the date of the grant. We recognized
stock-based compensation of $2.8 million in 1998 and $23.3 million in 1999
related to the grant of stock options. We are amortizing these amounts over the
vesting periods of the individual options, using the multiple option method.
Amortization of deferred stock-based compensation totaled $862,000 and $4.0
million for 1998 and 1999, respectively. Outstanding options will continue to
vest over the next four years. Future compensation expense from options granted
through December 31, 1999 is estimated to be $11.2 million for 2000, $5.9
million for 2001, $3.0 million for 2002 and $1.1 million for 2003.
Interest income. Interest income increased from $182,000 in 1998 to $373,000
in 1999 primarily due to higher average cash and short-term investment
balances.
Years 1997 and 1998
Revenue. Revenue increased from $620,000 in 1997 to $736,000 in 1998. This
increase was primarily attributable to increased reseller sales, as well as
maintenance and support on an increased number of customers.
Costs and Expenses
Cost of Revenue. Cost of revenue increased from $57,000 in 1997 to $127,000
in 1998. This increase was due primarily to increased service and integration
efforts by our engineering personnel.
Research and development. Research and development expenses increased from
$1.0 million in 1997 to $2.7 million in 1998. This increase was due to the
addition of personnel and higher personnel-related costs to enhance and expand
our product offerings and a $600,000 bonus paid to a founder and officer.
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Sales and marketing. Sales and marketing expenses increased from $58,000 in
1997 to $1.4 million in 1998. This increase was primarily due to the addition
of personnel and higher personnel-related costs resulting from the continued
growth of our sales and marketing organizations, as well as costs associated
with the sales and marketing of our products.
General and administrative. General and administrative expenses increased
from $131,000 in 1997 to $2.4 million in 1998. General and administrative
expenses increased in 1998 partly as a result of increased spending in legal,
accounting and human resources professional services. General and
administrative expenses also included a bonus of $1.4 million to one of our
founders and executive officers in 1998.
Interest income. Interest income increased from $35,000 in 1997 to $182,000
in 1998 primarily due to higher average cash and short-term investment
balances.
Net Operating Losses and Tax Credit Carryforwards
As of December 31, 1999, we had federal net operating losses and research
and development credit carryforwards of approximately $6.9 million and
$217,000, respectively. The net operating loss and research and development
credit carryforwards will expire at various dates, beginning in 2010, if not
utilized. Under the provisions of the Internal Revenue Code of 1986, as
amended, substantial changes in our ownership may limit the amount of net
operating loss carryforwards that can be utilized annually in the future to
offset taxable income. A valuation allowance has been established to fully
reserve the potential benefits of these carryforwards in our financial
statements to reflect the uncertainty of future taxable income required to
utilize available tax loss carryforwards and other deferred tax assets.
Liquidity and Capital Resources
Since inception, we have funded our operations primarily through the private
sale of our equity securities in aggregate net proceeds of approximately $24.5
million. As of December 31, 1999 we had $10.5 million in working capital and
$13.5 million in cash and cash equivalents. We anticipate using available cash
to fund growth in operations, invest in capital equipment, acquire businesses,
and license technologies or software products related to our line of business.
Net cash used in operating activities was $3.3 million in 1998, compared to
$4.4 million in 1999. Net cash used in operating activities in 1999 primarily
reflects a net loss of $8.8 million, partly offset by amortization of deferred
stock compensation costs of $4.0 million.
Net cash provided by financing activities was approximately $719,000 in
1997, $8.0 million in 1998 and $14.4 million in 1999. Net cash provided by
financing activities includes proceeds from the issuance of preferred and
common stock and stock warrants.
Capital expenditures were approximately $82,000 in 1997, $455,000 in 1998
and $1.5 million in 1999. Our capital expenditures consisted of purchases of
computer hardware and software, office furniture and equipment and leasehold
improvements. Purchases of computer equipment represent the largest component
of our capital expenditures. We expect to invest approximately $2.0 million in
2000 mainly for computer equipment, facilities and business systems upgrades.
On January 1, 2000, we acquired Transcription Enterprises Limited. In
connection with the acquisition, we issued $40.0 million in promissory notes.
Shortly after issuance of the notes, we repaid $5.0 million of the principal,
leaving a balance of $35.0 million outstanding under the notes. The remaining
principal amount, plus interest at 8% per annum, is payable in 16 equal
quarterly payments of $2.2 million, plus interest commencing on April 1, 2000.
We expect to repay these notes in full with the net proceeds of this offering.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business
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strategy. As a result, we anticipate that such operating expenses, as well as
planned capital expenditures, will constitute a material use of our cash
resources. In addition, we may utilize cash resources to fund acquisitions of,
or investments in, complementary businesses, technologies or product lines. We
believe that the net proceeds from the sale of the common stock in this
offering, together with funds generated from operations, will be sufficient to
meet our working capital requirements for at least the next 12 months.
Thereafter, we may find it necessary to obtain additional equity or debt
financing. In the event additional financing is required, we may not be able to
raise it on acceptable terms or at all.
Recent Accounting Pronouncements
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities", which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, collectively referred to as derivatives, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. This statement does not apply to us as we currently do not
have any derivative instruments or hedging activities.
Disclosures About Market Risk
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates,
particularly since the majority of our investments are in short-term debt
securities issued by corporations. We place our investments with high quality
issuers and limit the amount of credit exposure to any one issuer. Due to the
nature of our short-term investments, we believe that we are not subject to any
material market risk exposure.
Year 2000 Compliance
As of March 2, 2000, we had not experienced, nor do we expect to experience,
any Year 2000-related disruption in the operation of our systems. To our
knowledge, none of our material suppliers or vendors experienced any material
Year 2000 problems or had any difficulty resolving the so-called "century leap
year" algorithm. Although most Year 2000 problems should have become evident on
January 1, 2000 or February 29, 2000, additional Year 2000-related problems may
become evident in the future.
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BUSINESS
Overview
We are a leading commercial provider of proprietary technologies and
software products that enable the design and manufacture of subwavelength
semiconductors using existing design tools and semiconductor equipment. We have
accelerated the semiconductor technology roadmap by at least two years,
enabling the production of semiconductors with feature sizes of 0.09 micron.
Our comprehensive solution addresses each key stage of the design-to-silicon
flow, including physical design of semiconductors; verification that the design
is optimal; manufacturing data preparation, manufacturing and inspection of
photomasks, or templates; and the manipulation of light waves to create images
of IC patterns, or photolithography. By offering a subwavelength solution that
is used in every key stage of the semiconductor design and manufacturing
process, we help to integrate the entire design-to-silicon flow for
subwavelength ICs.
Our patented phase shifting, proprietary OPC and process modeling
technologies form the foundation of our subwavelength solution. By enabling our
industry partners and customers to produce smaller, faster and more power
efficient semiconductors with existing semiconductor equipment, our
subwavelength solution allows our industry partners and customers' to introduce
new high performance semiconductors more quickly, while significantly
increasing their return on invested capital. Motorola and one of our industry
partners have already demonstrated success with our proprietary technologies,
and MIT Lincoln Laboratory, a research laboratory, has demonstrated the future
potential of our proprietary technologies by creating 0.05 micron features. We
believe our technology leadership and our relationships with leading companies
within the semiconductor industry are driving the adoption of our comprehensive
subwavelength solution as the industry standard. Our industry partners and
customers include Applied Materials, KLA-Tencor, DuPont Photomask,
Phototronics, Cadence, TSMC and UMC.
Industry Background
Businesses and individuals increasingly rely on electronic products and
systems powered by semiconductors. These products and systems include desktop
and portable personal computers, mobile phones, Internet appliances, video game
consoles, and high-speed networking and communications products that serve as
the backbone of the Internet. The semiconductor industry could not enhance
these electronic products or continue to introduce new, more sophisticated
products without these advances. Growing recognition of the benefits of
advances in electronics, including enhanced productivity and communications
capability, is driving demand for higher performance, lower cost, smaller and
more power efficient products with greater functionality. To meet this demand,
manufacturers of electronic products and systems require an increasing supply
of faster, cheaper and more power efficient semiconductors. The Semiconductor
Industry Association estimates that the worldwide market for semiconductors
will grow from $144 billion in 1999 to $233 billion in 2002, or 61.8%.
Delivering these advanced semiconductors will require rapid advances in IC
design and manufacturing technologies.
The Historical March to Smaller Feature Sizes and Systems-on-a-Chip
The ability to produce advanced ICs depends on developing technology that
enables the design and manufacture of semiconductors with smaller feature
sizes. A semiconductor's "feature size" relates to the size of circuit
components in the device and is measured in microns, or millionths of a meter.
Advanced semiconductors today have feature sizes of 0.18 to 0.25 micron. To
illustrate how small these features are, when placed side by side, one thousand
0.10 micron transistors can fit within the width of a single human hair.
Smaller feature sizes significantly increase performance while decreasing the
size, cost and power consumption of semiconductors. Smaller feature sizes also
allow multiple components, such as microprocessors, memory, analog components
and digital signal processors, to be integrated into a single semiconductor.
The resulting complex semiconductor, commonly referred to as system-on-a-chip,
offers significant performance, cost, power and reliability benefits over
systems that require multiple semiconductors to perform the same tasks.
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Advances in semiconductor design and manufacturing technologies have enabled
reductions in feature sizes from 3.0 micron in 1980 to 0.18 micron in today's
advanced production fabrication facilities. These advances have led to
significant improvements in electronic systems and products. For example,
today's cellular phones compared to those of a few years ago have a battery
life of days instead of hours, weigh ounces instead of pounds and can be
produced at a fraction of the price. In addition, today's cellular phones have
many times the computing power of the most advanced personal computer in 1980.
To date, the semiconductor industry has relied upon advances in
semiconductor equipment to produce smaller feature sizes on semiconductors.
However, to fully realize the benefits of smaller feature sizes, significant
advances have also been required in each of the following stages of the
semiconductor design-to-silicon flow:
. Semiconductor Design Tools. A variety of complex software programs used
to design, simulate and verify semiconductor designs.
. Photomasks. Transparent templates used to transfer images of electronic
circuits onto silicon wafers.
. Semiconductor Equipment. Sophisticated equipment used to manufacture
semiconductors.
. Semiconductor Manufacturing. Complex processes required to create
semiconductors on silicon.
Historically, leading semiconductor companies designed, manufactured and
tested their semiconductors in their own facilities using internally developed
tools. The growing complexity of the design and manufacturing processes and the
escalating cost of manufacturing facilities resulted in a disaggregation of the
semiconductor industry into companies separately focusing on each individual
stage of the design-to-silicon flow. This disaggregation is fueling the rapid
growth of "fabless" semiconductor companies, which do not own or operate their
own semiconductor fabrication facilities, design tool vendors, semiconductor
equipment manufacturers and third-party semiconductor manufacturers, or
foundries. Each of these industry markets is facing significant challenges as
feature sizes continue to decrease.
The Subwavelength Challenge
Semiconductor manufacturing equipment transmits light at a specific
wavelength through a photomask to create images of IC patterns on a
semiconductor. This process is referred to as photolithography or optical
lithography. At feature sizes below 0.25 micron, the semiconductor industry
reached a critical technology transition. At and above 0.25 micron, the
wavelength of light used is smaller than the IC features. However, at 0.18
micron and below, the wavelength of light used in production semiconductor
manufacturing equipment is significantly larger than the IC features, resulting
in image quality that degrades rapidly. This is like trying to paint a one-inch
line with a four-inch paint brush. This growing disparity between feature sizes
and wavelength of light is referred to as the "subwavelength gap." As a result,
semiconductors with feature sizes of 0.18 micron and smaller cannot be
manufactured with acceptable yield levels using traditional technologies.
Furthermore, as the demand for reduced feature sizes continues to outpace the
reduction in wavelengths used by available equipment, this subwavelength gap
will widen.
[Graph depicting wavelengths used in optical lithography equipment and feature
sizes with the horizontal axis representing a time line and the vertical axis
representing the dimension of the feature]
In its 1999 International Technology Roadmap, the Semiconductor Industry
Association predicted that microprocessors with 0.10 micron feature sizes would
be introduced for semiconductors by the end of 2001 and 0.10 micron DRAM by the
end of 2005. Advances in manufacturing equipment technology alone can no longer
enable the progression to smaller feature sizes and we do not expect
alternative non-optical manufacturing processes to be commercially viable for
many years. As a result, the semiconductor industry must develop and integrate
new subwavelength solutions into all aspects of the design-to-silicon flow.
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Our Solution
We are a leading commercial provider of proprietary technologies and
software products that enable the design and manufacture of subwavelength
semiconductors using existing design tools and semiconductor equipment. We have
accelerated the semiconductor technology roadmap by at least two years,
enabling the production of semiconductors with feature sizes of 0.09 micron.
Our comprehensive solution addresses each key stage of the design-to-silicon
flow, including physical design, design verification, manufacturing data
preparation, photomask manufacturing inspection and photolithography. By
offering a subwavelength solution that is used in every stage of the
semiconductor design and manufacturing process, we integrate the entire design-
to-silicon flow for subwavelength ICs.
[Pictorial representation of the subwavelength relationship between photomask
manufacturing and semiconductor fabrication]
Our patented phase shifting and proprietary OPC and process modeling
technologies serve as the foundation for our subwavelength solution. Our
subwavelength solution leverages our expertise in semiconductor and photomask
manufacturing processes, semiconductor equipment, IC design, software
development and subwavelength technologies.
Our proprietary technologies and software products are designed to offer the
following key benefits:
Proven Path to Smaller, Faster, Cheaper and Power Efficient Devices. Our
industry partners and customers have demonstrated the success of our
proprietary technologies and software products. For example, Motorola used our
phase shifting technology and software to enable its 0.18 micron wafer
fabrication facilities to produce 0.10 micron features. Similarly, in November
1999, one of our industry partners announced that it had developed the world's
fastest digital signal processor operating at one volt. To create this high-
performance digital signal processor, the partner reduced the feature sizes
from 0.25 micron to 0.12 micron using our phase shifting technology software.
Further, in February 2000, MIT Lincoln Laboratory, a research laboratory,
demonstrated the future potential of our technologies and products by
successfully creating 0.05 micron features. MIT used our phase shifting
technology software and 0.25 micron semiconductor manufacturing equipment.
Accelerate Time to Market. In today's economy, semiconductor manufacturers
can achieve a significant market advantage by being the first to introduce more
advanced semiconductors. Introducing next generation semiconductors has
historically required the semiconductor industry to install new equipment or to
construct new manufacturing facilities, which may take up to three years to
complete. Our phase shifting technology and software products enable companies
to use existing equipment to produce smaller, faster and more power efficient
semiconductors, thereby enabling new products to be introduced more rapidly.
Increase Return on Capital Equipment Investment. Our proprietary
technologies and software products are designed to enable existing
semiconductor manufacturing equipment to produce subwavelength ICs. Using our
technologies and products, semiconductor manufacturers will not be required to
spend billions of dollars to produce ICs with smaller and smaller feature
sizes. As a result, these semiconductor manufacturers can significantly
increase their return on invested capital. Furthermore, we believe that the use
of our proprietary technologies and software products results in higher
manufacturing yields.
Integrate the Key Stages of the Design-to-Silicon Flow. Our proprietary
technologies and software products are designed on a common platform and
architecture and are implemented in key stages of the design-to-silicon flow.
Our software products utilize a common process modeling and simulation
technique that allows the results generated by each of these stages to be
understood and processed by the tools and equipment used in subsequent stages.
For example, the separate tools and equipment used to design, verify and
manufacture semiconductors can be made to coordinate with each other to ensure
an accurate design-to-silicon flow. This coordination is particularly critical
in the semiconductor industry, which has disaggregated into different companies
that specialize in separate key stages of the design-to-silicon flow. We
believe this is necessary to the successful production of subwavelength
semiconductors.
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Our Strategy
Our objective is to establish our proprietary technologies and software
products as the industry standard for the design and manufacture of
subwavelength semiconductors. Key elements of our strategy include:
Drive Continued Adoption of Our Subwavelengh Solution. We seek to
proliferate our proprietary technologies and software products as the solution
to the subwavelength gap problem. As part of this strategy, we intend to
continue to expand our relationships with leading integrated device
manufacturers, or IDMs, such as Lucent and Motorola, and leading foundries such
as TSMC and UMC. Due to the increasing proportion of semiconductors
manufactured at foundries, we intend to increasingly focus our efforts on
establishing our patented phase shifting technologies as the standard at TSMC,
UMC and other foundries to further drive the adoption of our subwavelength
solution by each of the other participants in the design-to-silicon flow.
Expand Relationships with Our Industry Partners. We intend to strengthen and
expand our industry partner relationships with the leading companies within
each stage of the design-to-silicon flow. To date, we have developed
relationships with semiconductor design tool vendors such as Cadence, photomask
manufacturers such as Dupont Photomask and Photronics, and semiconductor
equipment manufacturers such as Applied Materials and KLA-Tencor. We believe
that these broad-based industry relationships will help to proliferate our
proprietary technologies and software products as the industry standard.
Leverage Our Comprehensive Platform. We intend to leverage the common
platform of our proprietary technologies and software products to aggressively
market our products to each key market in the semiconductor industry. This
common platform enables data and information regarding subwavelength designs to
be shared by participants in each key stage of the design-to-silicon flow.
Because our proprietary technologies and software products ensure the accurate
and consistent communication of subwavelength design and process data, each
participant in the design-to-silicon flow benefits from their use.
Leverage Our Dominant Market Position in Manufacturing Data Preparation
Products. The vast majority of semiconductor, photomask and semiconductor
equipment manufacturers and foundries use our manufacturing data preparation
software as the essential link between the design and production stages of the
design-to-silicon flow. We intend to build on this dominant market position in
manufacturing data preparation to market our subwavelength proprietary
technologies and software products to these customers.
Extend Technology Leadership Position. We believe we were among the first to
recognize that the subwavelength gap would represent a significant challenge to
continued advances in semiconductor technology. To capitalize on this business
opportunity, we have engaged in significant research and development activities
over the past four years, pioneering proprietary and manufacturable phase
shifting technologies that we believe are the key to bridging the subwavelength
gap. We have assembled a strong team of subwavelength experts, more than half
of which have graduate technical degrees, and we intend to continue expanding
our research and development efforts to further enhance our proprietary
technologies.
Maintain Time-Based Software and Intellectual Property Licensing Models. Our
business model allows us to build on the sales and marketing efforts of our
industry partners, which resell, market and promote our technologies and
products. We seek to generate the majority of our future revenue through time-
based license fees, intellectual property licensing agreements and other
innovative, ongoing agreements with IDMs, foundries and reseller licensees.
Technology
As feature sizes have decreased to dimensions smaller than the wavelength of
light used in optical lithography equipment, phase shifting and OPC
technologies have become critical to the continued growth of the semiconductor
industry. Widespread deployment of subwavelength technologies requires an
efficient and integrated IC design and manufacturing process to be created and
new technologies to be introduced into
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several stages of the design-to-silicon flow. Our proprietary technologies and
software products allow IC designers, as well as manufacturers of photomasks,
semiconductor equipment and semiconductor devices, to successfully deploy phase
shifting and OPC technologies. We believe we are the only company exclusively
focused on delivering a comprehensive solution that enables the design and
manufacture of subwavelength ICs.
Phase Shifting
The foundation of our subwavelength process technologies lies in our phase
shifting technology, which manipulates light waves to produce high-resolution
images of subwavelength IC features. Our phase shifting technology sequences
positive and negative light wave patterns to prevent interfering waves from
causing the image on silicon to blur or disappear entirely. This enables IC
features to be created that are less than half the size of those that can be
produced using conventional optical lithography techniques. Our phase shifting
technology also dramatically reduces sensitivity to variations in the
manufacturing process such as focus deviations and lens imperfections,
significantly improving manufacturing yields. We have developed the industry's
first production-worthy, commercial phase shifting technology by combining the
multidisciplinary expertise of our scientists and engineers and investing
significantly in joint research and development activities with leading
photomask and semiconductor manufacturers.
[Graphic rendition of scanning electron micrograph of semiconductor features
produced using a non-phase shifted process as compared to semiconductor
features produced using a phase shifted process]
Optical Proximity Correction
Our OPC technologies embed corrective features in the IC design and
photomask to reduce image distortions caused by interfering light waves. We
have developed these technologies in close collaboration with photomask and
semiconductor manufacturers to improve photomask manufacturability without
sacrificing performance. Our OPC technologies focus on correcting distortions
in semiconductor features that would most affect the semiconductor's
performance. OPC makes it possible to obtain an IC pattern that more closely
resembles the original desired design. However, as feature sizes continue to
decrease, OPC is no longer sufficient to ensure acceptable manufacturing
yields. At these smaller feature sizes, semiconductor manufacturers will employ
both OPC and phase shifting process technologies.
[Graphic rendition of an image formed on silicon with OPC as compared to an
image formed on a semiconductor without OPC for a given target design]
Process Modeling and Simulation
Historically, the designed layout of a semiconductor, its representation on
the photomask and the corresponding features on the semiconductor were
essentially identical. At subwavelength feature sizes, this relationship no
longer exists. As a result of distortions created during the manufacturing
process and the application of phase shifting and OPC, the design of a
semiconductor, its representation on the photomask and the pattern transferred
to the semiconductor all look different. We have developed proprietary process
modeling and simulation technologies that recharacterize the relationship
between device design, photomask pattern and semiconductor features. This
recharacterized relationship allows designers and manufacturers to accurately
translate designs and photomasks to final semiconductors. Our process models
can be calibrated to accurately characterize the specific processes of
semiconductor manufacturers and then used in our software products throughout
the design-to-silicon flow. A common process model can be used throughout the
design-to-silicon flow to facilitate consistency in the communication of
process and design data.
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Implementation Technologies
We have developed several technologies necessary to implement the mainstream
design and manufacturing use of phase shifting and OPC technologies. These
include:
. design automation algorithms for phase shifting and OPC;
. hierarchical design data management technologies;
. subwavelength design verification technologies;
. photomask defect analysis technologies;
. high-performance process simulation algorithms and process model
calibration technologies; and
. algorithms for manufacturing data preparation.
Products
We offer technology products, software products and services that together
provide a comprehensive subwavelength design-to-silicon solution.
Technology Products
Phase Shift Technology. Our phase shifting technology licenses allow the
licensee to produce subwavelength semiconductor devices using our proprietary
technology. We offer limited use research and development licenses that allow
the licensee to use our proprietary technology for pre-production purposes. We
also offer production licenses of our phase shifting technology that are time
based, or are licensed per fabrication facility or per device produced.
Subwavelength Process Development. We offer a comprehensive implementation
package that includes a development plan, calibration and test photomasks and
on-site customer assistance to develop advanced subwavelength manufacturing
processes using our phase shifting and OPC technologies and software products.
Our engineers and scientists work on-site at our customers' fabrication
facilities to develop these processes and generate design rules, calibrated
models and associated design-to-silicon flows.
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Software Products
We offer a comprehensive suite of complex, tightly integrated software
products that can be used across all of the key markets within the
semiconductor industry. Our software products are used independently or
integrated with IC design tools, and photomask and semiconductor manufacturing
equipment. Our products address the needs of subwavelength design and
manufacture in four key sectors of the design-to-silicon flow:
<TABLE>
<CAPTION>
Sector Products Applications
<S> <C> <C>
Physical Design and iNPhase . Ensure compatability of semiconductor
Post-
Layout Data Processing TROPiC designs with subwavelength processes
iMagic . Create phase shifted and OPC device
SiVL design layout
. Verify silicon performance of designs
- ---------------------------------------------------------------------------------------
Manufacturing Data CATS . Process design data required to
Preparation and iNMask fabricate and inspect photomasks
Photomask Manufacturing iNMask-MRC . Verify input data, manufacturing data
processing and photomask layout
. Convert photomask design data to
formats required by specific photomask
manufacturing equipment
. Verify photomask and wafer
manufacturability
- ---------------------------------------------------------------------------------------
Photomask Inspection Virtual Stepper . Characterize located photomask defects
and Measurement iNSpect . Transcribe and transfer design data to
photomask and wafer inspection and
measurement equipment
- ---------------------------------------------------------------------------------------
IC Fabrication and IC Workbench . Optimize fabrication process
Process parameters
Development ModelCal . Generate calibrated process models and
RuleGen design rules for phase shift and OPC
CheckIt processes and our products
. Verify silicon performance of designs
</TABLE>
Each of these products is described below.
Physical Design and Post-Layout Data Processing Products
iNPhase. Our iNPhase product automates and integrates the design,
verification and OPC functions of our phase shifting technology. iNPhase also
verifies that the semiconductor design is free of "phase conflicts," or design
configurations that could result in manufacturing failures.
TROPiC. This integrated product automatically corrects designs for process-
induced distortions of subwavelength features. TROPiC implements our OPC
technologies that control photomask complexity to lower photomask cost without
sacrificing semiconductor performance.
iMagic. Our process simulation software product uses process models that are
calibrated to individual semiconductor manufacturers' processes. iMagic is used
by designers to simulate the final IC features that correspond to their
designs.
SiVL. Our silicon-versus-layout product utilizes our proprietary process
simulation technologies to verify that conventional, phase shifting and OPC
designs produce printed IC patterns within specified tolerances. By
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accurately predicting "silicon level" failures, SiVL reduces or eliminates the
need to repeat the design and manufacturing process. SiVL integrates with tools
used to verify that the IC patterns are within specified tolerances.
Manufacturing Data Preparation and Photomask Manufacturing Products
CATS. This family of products includes products that automatically create
different photomask layers by sizing and combining design layers. Our CATS
products allow users to view the input and output data of the manufacturing
data preparation process and verify photomask design accuracy using a
combination of graphical algorithmic and query analyses.
iNMask. Our iNMask formatting product automatically transcribes photomask
layout data into input data formats optimized for specific photomask
manufacturing equipment. iNMask supports leading photomask equipment
manufacturers, including Etec, Hitachi and Leica.
iNMask-MRC. This product verifies that the photomask data files produce
manufacturable photomasks and wafers. The data is checked for variations from
manufacturing requirements, including minimum widths, spacing and layer to
layer errors.
Photomask Inspection and Metrology Products
Virtual Stepper. This product allows photomask manufacturers to accurately
assess the impact of photomask defects on the silicon wafer. Photomask
manufacturers using Virtual Stepper can quickly determine photomask quality,
improving their productivity and yield. The Virtual Stepper takes direct input
from defect inspection and review equipment manufactured by leading equipment
companies including Applied Materials, KLA-Tencor and Zygo.
iNSpect. Our iNSpect product automatically transcribes photomask layout data
into input data formats optimized for specific photomask and wafer inspection
equipment. iNSpect also identifies measurement locations for photomask and
wafer measurement equipment. This product supports leading equipment
manufacturers, including Applied Materials, KLA-Tencor, Leica and Zygo.
Semiconductor Fabrication and Process Development
IC Workbench. IC Workbench is an interactive process simulation, analysis
and optimization tool. This product includes a powerful graphical user
interface, design data viewer and editor with real-time simulation feedback.
This allows users to rapidly evaluate the impact of design and process
parameters on the final silicon results while optimizing subwavelength
processes.
ModelCal. This product enables users to automatically calibrate process
models using empirical measurement data from specific semiconductor
manufacturers' processes. ModelCal implements our proprietary model calibration
technology to produce extremely accurate process models using our calibration
photomask designs for both phase shifting and OPC applications.
RuleGen. This product automatically generates design rules and parameters
for phase shifting and OPC processes using our calibrated process models. The
output of RuleGen is fully compatible with the input requirements of InPhase
and TROPiC.
CheckIt. This product performs accurate, exhaustive, silicon-level
verification for phase shifting and OPC designs prior to IC production. CheckIt
accurately predicts potential failures in the manufacture of semi-conductors
and marginal locations on phase shifting and OPC designs.
33
<PAGE>
Services
Design Services. We assist our industry partners and customers with
semiconductor designs that use our phase shifting and OPC technologies. Our
design services include creating phase shifted designs, applying OPC technology
to designs and verifying the final design layout. Our design services help
industry partners and customers rapidly adopt our technologies.
Technology Integration Services. We offer technology integration services to
allow our industry partners to integrate our software products with their
products for marketing to their customers. We develop software interfaces to
semiconductor design tools and equipment to enable the necessary data
communication to integrate the operation of the combined products.
Customers and Industry Partners
We license our proprietary technologies and software products to companies
in key markets within the semiconductor industry. Our customers include
licensees of our phase shifting technology and software, manufacturing data
preparation software and silicon verification and photomask verification
software. Our industry partners integrate our technologies and software into
their products and act as resellers. The following customers and/or industry
partners accounted for license, maintenance and technical service revenues of
more than $100,000 in 1999:
<TABLE>
<S> <C>
IDMs and Foundries Design Tool Vendors
CNet Cadence Design Systems
Conexant
Fujitsu Semiconductor Equipment
IBM Manufacturers
LG International Applied Materials
Lucent KLA-Tencor
Matsushita Ultrabeam
Motorola Zygo
National Semiconductor
NEC Mask Manufacturers
OKI Align Rite
Samsung Compugraphics
Siemens Dai Nippon Printing
ST Microelectronics DuPont Photomask
Texas Instruments Hoya
Tokyo University Photronics
Toshiba Precision Semiconductor
TSMC Mask Corporation
UMC Taiwan Mask Corporation
VLSI Technology Toppan
World Semiconductor
Manufacturing Company
</TABLE>
All of the companies listed above are our customers. In addition, Lucent,
Motorola, Toshiba, TSMC, UMC, Cadence, Applied Materials, KLA-Tencor, Zygo,
DuPont Photomask, Photronics and Taiwan Mask Corporation are our industry
partners.
34
<PAGE>
Sales and Marketing
We rely on our direct sales force and on our industry partner relationships
to penetrate each key market of the semiconductor industry. Domestically, our
direct sales force operates primarily out of our headquarters in California. We
also employ sales personnel in Minnesota and Texas. In addition, we maintain
sales personnel and support staff who work closely with resellers and partners
in Korea, Japan, The Netherlands and Taiwan. We intend to continue to expand
our sales and support personnel both domestically and internationally. As of
January 1, 2000, we had 28 employees involved in sales and marketing.
Our marketing personnel focus on developing our relationships with industry
partners. Our industry partners include leading semiconductor equipment
manufacturers, such as Applied Materials and KLA-Tencor, and design tool
companies, such as Cadence. We also have entered into joint-marketing
relationships with leading photomask manufacturers, such Dupont Photomask and
Photronics. Our direct sales efforts have focused primarily on licensing to
foundries and IDMs. To date, we have concentrated our sales and marketing
efforts on selling research and development licenses. We expect to extend these
efforts to generate production licenses as semiconductor manufacturers move
into production of subwavelength ICs. We have already entered into a production
license with a leading IDM. We believe that our broad-based sales and marketing
efforts will facilitate the adoption of our subwavelength technologies as the
industry standard.
Research and Development
Our future success will depend to a large extent on our ability to rapidly
develop and introduce new proprietary technologies and software products and
enhancements to our existing products. We have made and expect to continue to
make substantial investments in research and development. The complexity of
phase shifting and OPC technologies require expertise in physical IC design and
layout, photomask manufacturing, optical lithography, numerical algorithms and
software development. We believe that the multidisciplinary expertise of our
team of scientists and engineers will continue to advance our market and
technological leadership.
As of January 1, 2000, our engineering group consisted of 51 employees, 67%
of which have advanced degrees, including 35% who have Ph.D.s. These employees
are focused on the following objectives:
Product Development. Our product development group is organized in teams
around the different products we offer. A separate team within this group
develops our common core technology and ensures that each product fits into
this common architecture.
Advanced Research. Our advanced research group works independently from our
product development group to assess and develop new technologies that meet the
evolving needs of subwavelength design and manufacturing.
Product Engineering. Our product engineering group is primarily focused on
product release, platform support, quality assurance and product documentation.
Competition
The semiconductor industry is highly competitive and characterized by
rapidly changing design and process technologies. The market for phase shifting
and OPC solutions is rapidly evolving and we expect competition to continue to
increase. We face direct competition from other providers of phase shifting,
OPC and manufacturing data preparation solutions, including Avant! and Mentor
Graphics. We also compete with companies that have developed or have the
ability to develop their own proprietary phase shifting and OPC enabling
solutions, such as IBM. Many of these companies are larger than we are, have
greater financial or other resources than we do and therefore can withstand
adverse market or economic conditions more readily than we can. We may also
face competition from alternatives to current photolithography systems. In
addition, commercially viable manufacturing processes that provide alternatives
to our subwavelength solution may be developed in the future by existing or
potential competitors. We believe that the principal competitive factors in
35
<PAGE>
our market include technology viability, product availability, performance,
reliability, functionality, cost and customer service. We believe we compete
favorably with respect to each of these factors.
Intellectual Property
Our future success and competitive position depend upon our continued
ability to develop and protect proprietary technologies. We rely significantly
on a combination of patents, copyrights, trademarks and trade secrets to
protect our proprietary technologies and prevent competitors from using our
technologies in their products. We have been granted two patents and have 13
patent applications currently pending in the U.S. and in selected foreign
countries. In the future, we may seek additional patent protection when we feel
it is necessary.
Our existing or future patents may be invalidated, circumvented, challenged
or licensed to others. The rights granted thereunder may not provide
competitive advantages to us. In addition, our future patent applications may
not be issued with the scope of the claims sought by us, if at all.
Furthermore, others may develop technologies that are similar or superior to
our proprietary technologies, duplicate our proprietary technologies or design
around the patents owned or licensed by us. In addition, effective patent and
trademark protection may be unavailable or limited in foreign countries where
we may need this protection. We cannot be sure that steps taken by us to
protect our proprietary technologies will prevent misappropriation of our
technologies.
In addition, we generally enter into confidentiality agreements with our
employees, industry partners and customers, as well as generally control access
to and distribution of our documentation and other proprietary information.
Despite this protection, unauthorized parties may copy aspects of our current
or future software products or obtain and use information that we regard as
proprietary.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions. There are also numerous
patents in the semiconductor industry and new patents are being issued at a
rapid rate. This often results in significant and often protracted and
expensive litigation. There is no intellectual property litigation currently
pending against us. However, we may from time to time be notified of third
party intellectual property infringement claims. If it is necessary or
desirable, we may seek licenses under these third party patents or intellectual
property rights. However, we cannot be sure that licenses will be offered or
that the terms of any offered licenses will be acceptable to us.
The failure to obtain a license from a third party for proprietary
technologies used by us could cause us to incur substantial liabilities and to
suspend the sale of our software products or our use of processes requiring the
technologies. Litigation could result in significant expenses to us, harm sales
of the challenged technologies or software product and divert the efforts of
our technical and management personnel, whether or not the litigation is
determined in our favor. In the event of an adverse result in any litigation,
we could be required to pay substantial damages, cease sale of infringing
products, expend significant resources to develop or acquire non-infringing
technology and discontinue the use of processes requiring the infringing
technology or obtain licenses to the infringing technology. We may not be
successful in the development or acquisition, or the necessary licenses may not
be available under reasonable terms, and any development, acquisition or
license could require expenditures by us of substantial time and other
resources. Any of these developments would harm our business.
Employees
As of January 1, 2000, we employed 98 individuals in the United States, of
which 96 were located in the Silicon Valley. As of January 1, 2000, we also
employed seven individuals abroad to provide technical support to customers in
Asia and Europe, two of which were located in Korea, two in Taiwan, one in
Japan and two in The Netherlands. None of our employees is represented by a
labor union or is subject to a collective bargaining agreement. We believe that
our relationship with our employees is good.
36
<PAGE>
Facilities
Our executive offices and principal operations are currently located in
approximately 39,300 square feet of office space in San Jose, California under
a lease that expires in May 2004. We also lease approximately 2,400 square feet
of office space in Los Gatos, California under a lease that expires in January
2001. We believe that our existing facilities are adequate for our current
needs.
Legal Proceedings
We are not currently party to any material legal proceedings.
37
<PAGE>
MANAGEMENT
The following table sets forth information regarding our executive officers
and directors as of January 24, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
William H. Davidow(b)..... 64 Chairman of the Board
Y. C. (Buno) Pati......... 35 President, Chief Executive Officer and
Director
Yao-Ting Wang............. 36 Chief Technology Officer and Director
Richard Mora.............. 53 Chief Financial Officer and Vice President,
Operations
Atul Sharan............... 40 Vice President, Marketing and Business
Development
Lars Herlitz.............. 35 Vice President, Engineering
John Traub................ 53 Vice President, Worldwide Sales
Kevin MacLean............. 37 Vice President and General Manager,
Transcription
Roger Sturgeon............ 55 Director and Fellow
Thomas Kailath(b)......... 64 Director
Narendra K. Gupta(a)...... 51 Director
Abbas El Gamal(a)......... 49 Director
Harvey Jones(a)(b)........ 47 Director
</TABLE>
- --------
(a) Member of the Audit Committee
(b) Member of the Compensation Committee
William H. Davidow has served as our Chairman of the Board since January
2000 and as a director of our company since June 1998. Mr. Davidow has served
as a partner at Mohr, Davidow Ventures since May 1985 and has been a high-
technology industry executive and a venture investor for over 20 years. From
August 1973 to January 1985, Mr. Davidow was at Intel Corporation where he was
Senior Vice President of marketing and sales, Vice President of the
microcomputer division and Vice President of the microcomputer systems
division. Mr. Davidow received a Ph.D. in electrical engineering from Stanford
University, an M.S. in electrical engineering from the California Institute of
Technology, an M.S. in electrical engineering from Dartmouth College and a B.S.
in electrical engineering from Dartmouth. Mr. Davidow is chairman of the board
at both Rambus Corporation and Viant Corporation. Mr. Davidow also serves on
the boards of several other start-up companies.
Dr. Y. C. (Buno) Pati has served as our President and Chief Executive
Officer and a director since he co-founded our company in October 1995. From
October 1995 to December 1996, Dr. Pati served as an assistant professor of
electrical engineering and computer science at Harvard University. From October
1992 to October 1995, Dr. Pati conducted research efforts in computational and
system sciences applied to integrated circuit manufacturing at Stanford
University. Dr. Pati has published numerous articles in signal processing,
communications, fast lithography simulations and automated phase shifting
photomask design. Dr. Pati received a B.S., an M.S. and a Ph.D. in electrical
engineering from the University of Maryland at College Park.
Dr. Yao-Ting Wang has served as our Chief Technology Officer and a director
since he co-founded our company in October 1995. Dr. Wang's doctoral
dissertation research was on automated design of phase shifting photomasks
using fast algorithms and signal processing techniques. Dr. Wang is active in
the areas of fast lithography simulations and automated advanced photomask
designs, with specific interests in communications, signal processing and
lithographic techniques. Dr. Wang received a B.S. degree from National Taiwan
University and a Ph.D. in Electrical Engineering from Stanford University.
Richard Mora has served as our Chief Financial Officer and Vice President,
Operations since May 1999. From August 1994 to April 1999, Mr. Mora was Chief
Financial Officer and Vice President of Finance at Mattson Technologies, Inc.,
a semiconductor equipment manufacturer. During 1994, Mr. Mora was also Vice
38
<PAGE>
President and General Manager of the High Temp Products Division at Mattson.
From September 1988 to August 1994, Mr. Mora served as Chief Financial Officer
and Vice President of Finance at Actel Corporation, a semiconductor
manufacturer. From June 1985 to August 1988, Mr. Mora was Chief Financial
Officer and Vice President of Finance at HHB Systems. Mr. Mora received a B.S.
in Accounting from Santa Clara University and is a Certified Public Accountant.
Atul Sharan has served as our Vice President, Marketing and Business
Development since October 1998. From April 1997 to October 1998, Mr. Sharan was
director of strategic business development at Ambit Design Systems where he
helped establish and manage key partner relationships with LSI Logic and
Cadence. From May 1991 to March 1997, Mr. Sharan held senior sales and
marketing management positions at Compass Design Automation. While at Compass
as General Manager-Compass India Operations, Mr. Sharan helped establish a
software development center in India. From December 1984 to May 1991, Mr.
Sharan worked in semiconductor manufacturing operations at VLSI Technology and
Integrated Device Technology. While at IDT, Mr. Sharan helped initiate the
company's first overseas test and assembly plant in Penang, Malaysia.
Mr. Sharan received an M.B.A. from the University of California at Berkeley, an
M.S. in engineering from the University of Houston, Texas and a B.Tech. Degree
in engineering from the Indian Institute of Technology in Kanpur, India.
Lars Herlitz has served as our Vice President, Engineering since December
1998. From March 1994 to November 1998, Mr. Herlitz served in various positions
at Escalade Corporation, an engineering design automation company focused on
system-on-chip design. Mr. Herlitz culminated his career at Escalade as Vice
President of Engineering from 1997 to 1998. From December 1987 to March 1994,
Mr. Herlitz served in various positions at Cadence, including as Director of
Engineering from 1993 to 1994. Mr. Herlitz received an M.S. in electrical
engineering and computer science from the University of Linkoping in Sweden.
John Traub has served as our Vice President, Worldwide Sales since September
1999. From December 1998 to September 1999, Mr. Traub served as Vice President
of Worldwide Sales at Ultratech Stepper, Inc. From June 1997 to December 1998,
he was President and Chief Executive Officer of Cyberspace Inc., a technology
consulting company which he founded. From June 1989 to June 1997, Mr. Traub
held various positions at Systems Chemistry, Inc., a manufacturer of ultra-high
parity chemical systems, including Vice President of Worldwide Sales, Chairman,
President and Chief Executive Officer. From April 1982 to June 1989, he was
founder and Managing Director and Vice President of Business Development of
Align-Rite Ltd. in Wales, where he successfully expanded the U.S. company's
business into the European market.
Kevin MacLean has served as our Vice President and General Manager,
Transcription since January 2000. In June 1986, Mr. MacLean co-founded
Transcription Enterprises Limited, where he served as Vice President until we
acquired the company in January 2000. Mr. MacLean received a B.S. in mechanical
engineering from Cornell University.
Roger Sturgeon has served as a director of our company and a Fellow since
January 2000. In June 1986, he co-founded Transcription Enterprises Limited,
where he served as President until we acquired the company in January 2000. Mr.
Sturgeon received an M.S. in electrical engineering and computer science from
the University of California at Berkeley and a B.S. in engineering sciences
from the University of California at Berkeley.
Dr. Thomas Kailath has served as a director of our company since October
1995 and was Chairman of the Board from October 1995 to January 2000. Dr.
Kailath has served as the Hitachi American Professor of Engineering at Stanford
University since 1987. From January 1981 to June 1987, Dr. Kailath was
Associate Department Chairman of the Department of Electrical Engineering at
Stanford University and served as Director of the Information Systems
Laboratory from January 1971 to January 1981. In February 1980, Dr. Kailath co-
founded Integrated Systems Inc., a leading developer of embedded software, and
has served as a director of Integrated Systems since its inception.
39
<PAGE>
Dr. Kailath received an Sc.D. in Electrical Engineering from the Massachusetts
Institute of Technology, an S.M. in Electrical Engineering from MIT and a B.E.
in telecommunications from the University of Poona, India. Dr. Kailath is a
member of the National Academy of Engineering and the American Academy of Arts
and Sciences. Dr. Kailath serves on the board of Excess Bandwidth Corporation.
Dr. Narendra K. Gupta has served as director of our company since April
1997. Dr. Gupta co-founded Integrated Systems in 1980 and has served as its
Chairman since November 1992. He was the President and Chief Executive Officer
of Integrated Systems from its inception until May 1994. Dr. Gupta received a
Ph.D. in engineering from Stanford and an M.S. in engineering from the
California Institute of Technology. Dr. Gupta also received a B. Tech. Degree
in mechanical engineering from the Indian Institute of Technology. Dr. Gupta
was elected a Fellow of the Institute for Electrical and Electronics in 1991.
Dr. Abbas El Gamal has served as a director of our company since April 1997.
Dr. El Gamal has been on the faculty of the Electrical Engineering department
at Stanford University since September 1981. In December 1990, Dr. El Gamal co-
founded Silicon Architects, which was acquired by Synopsis in 1995 and served
as its Chief Technical Officer until May 1995. In July 1986, Dr. El Gamal co-
founded Actel Corporation and served as its Chief Scientist until November
1990. From July 1984 to July 1986, Dr. El Gamal served as a director of LSI
Logic's Research Lab, where he developed silicon compilation technology, DSP
and image processing ASICs. Dr. El Gamal's research interests include CMOS
image sensors and digital cameras, image processing, photomask programmable
gate arrays and information theory. He has authored or co-authored over 100
papers and 20 patents in these areas. Dr. El Gamal received a Ph.D. in
electrical engineering from Stanford, an M.S. in Statistics from Stanford and a
B.S. in Electrical Engineering from Cairo University, Egypt. Dr. El Gamal is a
Fellow of The Institute of Electrical and Electronics Engineers and serves on
the boards of Lightspeed Semiconductor and PiXIM, Inc.
Harvey Jones has served as a director of our company since June 1998. From
December 1987 to February 1998, Mr. Jones was employed by Synopsys, an
electronic design automation software company. Mr. Jones served as President
and Chief Executive Officer of Synopsys from December 1987 to January 1995, and
as its Executive Chairman of the Board from January 1995 to February 1998. From
April 1981 to November 1987, Mr. Jones served in various positions at Daisy
Systems, a computer-aided engineering company he co-founded, most recently as
President and Chief Executive Officer. From August 1974 to March 1981, Mr.
Jones served in various positions at Calma, a computer-aided design company,
most recently as Vice President of Marketing. In addition to his operational
roles, Mr. Jones has been an investor and active board member of such ventures
as Remedy Corporation, an enterprise software company, and NVIDIA Corporation,
a 3-D graphics processor company. Mr. Jones received an M.S. degree from MIT's
Sloan School of Management and a B.S. in mathematics and computer sciences from
Georgetown University.
Classified Board
Immediately following the offering, our board of directors will consist of
eight directors divided into three classes with each class serving for a term
of three years as follows:
<TABLE>
<CAPTION>
Class Expiration Member
----- ---------- ------
<S> <C> <C>
Class I............. 2001 El Gamal, Jones and Wang
Class II............ 2002 Kailath and Sturgeon
Class III........... 2003 Davidow, Gupta and Pati
</TABLE>
At each annual meeting of stockholders, directors will be elected by the
holders of common stock to succeed those directors whose terms are expiring. In
addition, our bylaws provide that the authorized number of directors may be
changed only by resolution of the board of directors. Any additional
directorships resulting
40
<PAGE>
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the total number of directors. This classification of the board of directors
may have the effect of delaying or preventing changes in control of our
company.
Board Committees
The board of directors has a compensation committee and an audit committee.
The compensation committee, currently comprised of Mr. Davidow, Mr. Jones and
Mr. Kailath, administers the 1997 stock plan, the 2000 stock plan, the 2000
employee stock purchase plan and all matters concerning executive compensation
and employee agreements. The audit committee, currently comprised of Mr. El
Gamal, Mr. Gupta and Mr. Jones, performs the following functions:
. monitors our system of internal controls;
. corporate financial reporting and internal and external audits;
. provides the board of directors with the results of its examinations and
recommendations;
. outlines to the board of directors the improvements made or to be made in
internal accounting controls;
. nominates independent auditors; and
. provides the board of directors with other information and materials
necessary to make the board of directors aware of significant financial
matters.
Each of the audit committee and compensation committee was established in
January 2000.
Director Compensation
We do not currently pay compensation to directors for serving in that
capacity, nor do we reimburse directors for expenses incurred in attending
board meetings. In November 1999, Mr. Davidow received an option to purchase an
aggregate of 150,000 shares of common stock at an exercise price per share of
$1.00. On February 1, 2000, Mr. Sturgeon received an option to purchase an
aggregate of 225,000 shares of common stock at an exercise price per share of
$2.67. Please see "Related Party Transactions--Restricted Stock Purchase
Agreements." On February 1, 2000, each of Mr. Davidow, Mr. El Gamal, Mr. Gupta,
Mr. Jones and Mr. Kailath received an option to purchase 7,500 shares of common
stock at an exercise price per share of $2.67 in consideration for their prior
services on the board of directors. The board has the discretion to grant
options to non-employee directors under the 2000 stock plan. See "Employee
Benefit Plans--2000 Stock Plan."
Compensation Committee Interlocks and Insider Participation
The compensation committee is currently comprised of Mr. Davidow, Mr. Jones
and Mr. Kailath. None of these committee members has at any time been an
officer or employee of our company. No interlocking relationship exists between
our board of directors or compensation committee and the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
Limitation on Liability and Indemnification Matters
Our amended and restated certificate of incorporation limits the personal
liability of directors for breach of fiduciary duty to the maximum extent
permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable to us or our stockholders for
monetary damages for breach of their fiduciary duties as directors, except for:
. any breach of the director's duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases, redemptions
or other distributions; or
. any transaction from which the director derived an improper personal
benefit.
41
<PAGE>
Our bylaws require that we indemnify our directors and officers to the
extent permitted by Delaware law. We may, in our discretion, indemnify other
employees and agents to the extent permitted by Delaware law. We believe that
indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any of our officers, directors, employees or
other agents for any liability incurred in that capacity or arising out of that
status, regardless of whether indemnification is permitted under Delaware law.
We have also entered into agreements to indemnify our directors and
officers. These agreements indemnify our directors and officers for some
expenses, including attorneys' fees, judgments, fines and settlement amounts
incurred by them in any action or proceeding, including any action by or in the
right of our company, arising out of their services as one of our directors or
officers, any of our subsidiaries or any other company or enterprise to which
the person provides services at our request. In addition, we have obtained
directors' and officers' insurance providing indemnification for some of our
directors, officers and employees for certain liabilities. We believe that
these provisions, agreements and insurance are necessary to attract and retain
qualified directors and officers.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. Moreover, a stockholder's investment in us may be adversely
affected to the extent we pay the costs of settlement or damage awards against
our directors and officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification.
Executive Compensation
The following table sets forth information concerning the compensation that
we paid during the fiscal year ended December 31, 1999 to our Chief Executive
Officer and our three other most highly compensated officers who earned more
than $100,000 during that fiscal year. All option grants were made under our
1997 stock plan. The amounts listed under "All Other Compensation" represent
the dollar value of term life insurance premiums paid by us on behalf of the
named executive officer during the fiscal year ended December 31, 1999. There
is no cash surrender value under the life insurance policy.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation Long Term Compensation
---------------- ----------------------------
Securities
Salary Bonus Underlying All Other
Name and Principal Position ($) ($) Options (#) Compensation ($)
- --------------------------- -------- ------- ----------- ----------------
<S> <C> <C> <C> <C>
Buno Pati........................ $104,000 $ -- -- $ 91
President and Chief Executive
Officer
Richard Mora..................... 80,095 25,962 412,500 78
Chief Financial Officer and Vice
President, Operations
Atul Sharan...................... 130,000 52,000 277,500 101
Vice President, Marketing and
Business Development
Lars Herlitz..................... 130,000 37,250 255,000 101
Vice President, Engineering
</TABLE>
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<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth information with respect to stock options
granted to our Chief Executive Officer and our three most highly compensated
executive officers during the fiscal year ended December 31, 1999. We have
never granted any stock appreciation rights. All option grants were made under
our 1997 stock plan. The exercise price per share was equal to the fair market
value of the common stock on the date of grant as determined by the board of
directors. Percentage of total options is based on an aggregate of
3,019,050 shares of common stock granted under the 1997 stock plan in the year
ended December 31, 1999. The potential realizable value is calculated based on
the term of the ten-year option and assumed rates of stock appreciation of 5%
and 10%, compounded annually. These assumed rates comply with the rules of the
Securities and Exchange Commission and do not represent our estimate of future
stock price. Actual gains, if any, on stock option exercises will be dependent
on the future performance of our common stock.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
------------------------------------------------ Value at Assumed
Number Annual Rates of Stock
of Securities % of Price Appreciation
Underlying Total Options Exercise for Option Term ($)
Options Granted in Price Per Expiration ----------------------
Name Granted (#) 1999 (%) Share ($) Date 5% 10%
- ---- ------------- ------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Buno Pati............... -- -- -- -- -- --
Richard Mora............ 195,000 6.5 0.50 05/26/09 61,317 155,390
Richard Mora............ 217,500 7.2 1.00 12/27/09 136,785 346,639
Atul Sharan............. 90,000 3.0 0.33 03/31/09 18,865 47,807
Atul Sharan............. 187,500 6.2 1.00 12/27/09 117,918 298,827
Lars Herlitz............ 172,500 5.7 0.33 02/03/09 36,158 91,631
Lars Herlitz............ 82,500 2.7 1.00 12/27/09 51,884 131,484
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth our Chief Executive Officer and our three
other most highly compensated executive officers information concerning shares
acquired upon exercise of stock options in fiscal year ended December 31, 1999
and exercisable and unexercisable options held as of December 31, 1999. All
options were granted under our 1997 stock plan. The value realized is based on
the assumed initial public offering price of $12.00, minus the per share
exercise price, multiplied by the number of shares issued upon exercise of the
option.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at December 31, In-the-Money Options at
Shares 1999 (#) December 31, 1999 ($)
Acquired on Value ------------------------- -------------------------
Name Exercise (#)(a) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Buno Pati............... -- -- -- -- -- --
Richard Mora............ 412,500 4,635,000 -- -- -- --
Atul Sharan............. 73,500 857,500 339,000 -- 101,000 --
Lars Herlitz............ 198,282 2,296,102 56,718 -- -- --
</TABLE>
- --------
(a) The shares acquired by each of Mr. Mora, Mr. Sharan and Mr. Herlitz were
acquired pursuant to restricted stock purchase agreements. We have the
right to repurchase any unvested shares at their cost in the event of any
of such employees termination of employment. As of December 31, 1999,
approximately 412,500 shares held by Mr. Mora, 17,250 shares held by Mr.
Sharan and 155,157 shares held by Mr. Herlitz were unvested and subject to
our repurchase.
43
<PAGE>
Employment Agreements
Mr. Sturgeon.
On January 1, 2000, Mr. Sturgeon entered into an employment agreement with
Transcription. Pursuant to the employment agreement, Mr. Sturgeon is to serve
as Fellow for a term of two years. Mr. Sturgeon is entitled to a base salary of
$205,000 per year and a bonus for the year 2000 of up to approximately $50,000,
based upon the achievement of mutually agreed upon performance objectives.
Simultaneously with the execution of his employment agreement, Mr. Sturgeon
entered into a non-competition agreement with us and Transcription. Pursuant to
the non-competition agreement, Mr. Sturgeon agreed not to compete against or
solicit the employees of either us or Transcription for, generally, a period of
two years after his termination of employment.
Mr. MacLean.
On January 1, 2000, Mr. MacLean entered into an employment agreement with
Transcription. Pursuant to the employment agreement, Mr. MacLean is to serve as
Vice President and General Manager of Transcription for a term of two years.
Mr. MacLean is entitled to a base salary of $200,000 per year and a bonus for
the year 2000 of up to approximately $100,000, based upon the achievement of
mutually agreed upon revenue quotas. Simultaneously with the execution of his
employment agreement, Mr. MacLean entered into a non-competition agreement with
us and Transcription substantially similar to the non-competition agreement
executed by Mr. Sturgeon described above.
Generally.
We require each of our employees to enter into confidentiality agreements
prohibiting the employee from disclosing any of our confidential or proprietary
information. In addition, the agreements generally provide that upon
termination, the employee will not solicit our employees for a period of twelve
months. At the time of commencement of employment, our employees also generally
sign offer letters specifying certain basic terms and conditions of employment.
Other than as described above, in general, our employees are not subject to
written employment agreements.
Employee Benefit Plans
2000 Stock Plan.
Our 2000 stock plan provides for the granting to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code
and for the granting to employees, directors, and consultants of nonstatutory
stock options and stock purchase rights. As of February 15, 2000, 3,000,000
shares were authorized under the plan, no shares were subject to outstanding
options and approximatley 1,450,001 shares remain available for future grant.
The 2000 stock plan provides for annual increases on the first day of each
fiscal year beginning 2001 equal to the lesser of:
. 3,000,000 shares;
. 5% of our outstanding shares as of such date; or
. a lesser amount determined by the board of directors.
The 2000 stock plan may be administered by the board of directors or a
committee of the board. The board has the power to determine the terms of the
options granted, including the exercise price, the number of shares subject to
each option, the exercisability of the option grant and the form of
consideration payable upon such exercise. The board also has the authority to
amend, suspend or terminate the 2000 stock plan, provided that no such action
may affect any share of common stock previously issued and sold or any option
previously granted under the plan. The 2000 stock plan terminates in 2010.
44
<PAGE>
The 2000 stock plan provides that in the event we merge with or into another
corporation, or we sell substantially all of our assets, each option may be
assumed or substituted by the successor corporation. If the outstanding options
are not assumed or substituted by the successor corporation, each outstanding
option will fully vest and become exercisable, and the optionee will have 15
days to exercise the option, after which such time the option will terminate.
Non-Employee Director Stock Program. Pursuant to the 2000 stock plan, the
board has the discretion to grant options to non-employee directors. The
director option component of the 2000 stock plan will not become effective
until the date of this offering. Each non-employee director who first becomes a
board member after the date of this offering may be granted options for up to
30,000 shares. In addition, each non-employee director may be granted options
for up to 7,500 shares annually.
The exercise price of all options granted to non-employee directors under
the 2000 stock plan is required to be 100% of the fair market value per share
of the common stock, determined with reference to the closing price of the
common stock as reported on the Nasdaq National Market on the date of grant.
In the event of a change of control, each option granted pursuant to the
non-employee director stock program will become fully-vested and exercisable.
1997 Stock Plan. Our 1997 stock plan provides for the granting to employees
of incentive stock options within the meaning of Section 422 of the Internal
Revenue Code and for the granting to employees and consultants of nonstatutory
stock options. The terms of the 1997 stock plan are substantially similar to
those of the 2000 stock plan. As of February 15, 2000, 6,196,500 shares were
authorized under the plan, 1,324,405 shares were subject to outstanding options
and approximately 853,781 shares remain available for future grant. Upon the
completion of this offering, the 1997 stock plan will terminate, no further
option grants will be made under the 1997 stock plan, and any shares reserved
but not yet issued under the 1997 stock plan will be available for future grant
under the 2000 stock plan.
The stock option agreements under the 1997 stock plan provide for the full
acceleration of vesting of options and stock purchase rights if such options or
stock purchase rights are not assumed or substituted by the successor
corporation in a merger or asset sale.
2000 Employee Stock Purchase Plan. As of February 15, 2000, a total of
300,000 shares of common stock have been reserved for issuance under our 2000
employee stock purchase plan, plus annual increases on the first day of each
fiscal year beginning 2001 equal to the lesser of:
. 675,000 shares;
. 2% of our outstanding shares as of such date; or
. a lesser amount determined by the board of directors.
The 2000 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, contains 24 month offering periods.
The offering periods generally start on the first trading day on or after May
15 and November 15 of each year, except for the first such offering period,
which will commence on the first trading day on or after the effective date of
this offering and ends on the last trading day on or before November 14, 2000.
Subsequent offering periods will each have a six-month duration commencing on
the first trading day on or after May 15 and November 15 of each year.
Employees are eligible to participate if they are employed by us or any
participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, the following employees may not be
granted options to purchase stock under the purchase plan:
. any employee who immediately after the grant would own stock possessing
5% or more of the total combined voting power or value of all classes of
our capital stock; or
. any employee whose rights to purchase stock under all of our employee
stock purchase plans accrues at a rate which exceeds $25,000 worth of
stock for each calendar year.
45
<PAGE>
Participants may purchase common stock through payroll deductions of up to
15% of the participant's compensation. The maximum number of shares a
participant may purchase during a six month offering period is 2,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is 85% of the lower of the fair market value
of the common stock at the beginning of the offering period and the fair market
value of the common stock at end of the offering period.
The purchase plan provides that in the event we merge with or into another
company, or we sell substantially all of our assets, each outstanding option
may be assumed or substituted by the successor company. If the successor
company refuses to assume or substitute the options, the offering period then
in progress will be shortened and a new exercise date will be set, which will
occur before the proposed merger or sale.
The purchase plan will become effective on the effective date of this
offering and will terminate ten years thereafter, unless sooner terminated by
the board of directors. The board has the authority to amend or terminate the
purchase plan, except that no such action may adversely affect any outstanding
rights to purchase stock.
401(k) Savings Plan
We sponsor a 401(k) savings in which eligible employees may participate. The
401(k) savings plan is intended to qualify under Sections 401(a) and 401(k) of
the Internal Revenue Code of 1986, as amended. Contributions to the 401(k)
savings plan and income earned on such contributions are not taxable to
employees until withdrawn from the 401(k) savings plan. Subject to restrictions
imposed by the Internal Revenue Code on highly compensated employees, employees
may generally defer up to 15% of their pre-tax earnings up to the statutorily
prescribed annual limit, which is $10,500 for the 2000 calendar year, and to
have the amount of such reduction contributed to the 401(k) savings plan. The
401(k) savings plan permits, but does not require, additional matching
contributions to the 401(k) savings plan. To date, we have not made any
matching contributions to the 401(k) savings plan. The 401(k) savings plan may
be amended or terminated by us at anytime, and in our sole discretion.
46
<PAGE>
RELATED PARTY TRANSACTIONS
Equity Investment Transactions
In October and December 1996, we sold 2,250,006 shares of Series A preferred
stock for $0.24 per share. In June and August 1997, we sold 1,050,000 shares of
Series B preferred stock for $0.67 per share. In June and August 1998, we sold
2,445,089 shares of Series C preferred stock for $3.26 per share. In June and
August 1999, we sold 2,357,906 shares of Series D preferred stock for $5.89 per
share. In January 2000, we issued 3,809,994 shares of Series E preferred stock,
for $10.67 per share, in connection with our acquisition of Transcription. Upon
consummation of this offering, each outstanding share of Series A, Series B,
Series C and Series D preferred stock will automatically convert into one share
of common stock. Listed below are the directors, executive officers, and
stockholders who beneficially own 5% or more of our securities who participated
in these financings.
<TABLE>
<CAPTION>
#/Shares
Directors, Executive Series A Series B Series C Series D Series E Aggregate of Common
Officers Preferred Preferred Preferred Preferred Preferred Cash Stock upon
and 5% Stockholders Stock Stock Stock Stock Stock Consideration Conversion
-------------------- --------- --------- --------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Entities affiliated with
Mohr, Davidow
Ventures(a)............ -- -- 1,687,116 -- -- $ 5,500,000 1,687,116
Thomas Kailath(b)....... 416,667 -- 19,500 -- -- 163,579 436,167
Narendra Gupta(c)....... 416,666 -- 338,248 -- -- 1,202,705 754,914
Abbas El Gamal.......... 416,667 -- -- -- -- 100,000 416,667
Roger Sturgeon.......... -- -- -- -- 2,388,715 25,479,632 2,388,715
Kevin MacLean........... -- -- -- -- 1,194,356 12,739,808 1,194,356
</TABLE>
- --------
(a) The Mohr, Davidow Ventures shares include shares purchased by Mohr,
Davidow Ventures V, L.P. and Mohr, Davidow Ventures V, L.P., as nominee
for MDV Entrepreneur's Network Fund II (A), L.P. and MDV Entrepreneur's
Network Fund II (B), L.P. Entities affiliated with Mohr, Davidow Ventures
also hold warrants exercisable for an aggregate of 150,000 shares of
Series C preferred stock, at an exercise price per share of $3.26, for an
additional aggregate cash consideration of $489,000. Mr. Davidow, a
partner of Mohr, Davidow Ventures and a director of our company, disclaims
beneficial ownership of the securities held by these entities except for
his proportional interest in the entities.
(b) Includes shares held by Paul V. Kailath Revocable Trust u/a/d 10/1/89 and
Priya S. Kailath Revocable Trust u/a/d 10/1/89. Includes 145,833 shares of
Series A preferred stock and 19,500 shares of Series C preferred stock
held by a limited number of relatives of Dr. Kailath.
(c) Includes shares held by Dr. Gupta, as custodian, for his minor children.
Includes 31,500 shares of Series C preferred stock held by a limited
number of relatives of Dr. Gupta.
Restricted Stock Purchase Agreements
Mr. Davidow.
In November 1999, Mr. Davidow exercised an option grant to purchase 150,000
shares of common stock and entered into a restricted stock purchase agreement
regarding the shares. Pursuant to the restricted stock purchase agreement, we
have the right to repurchase any of the unvested shares upon termination of his
services. As of February 15, 2000, 93,750 shares held by Mr. Davidow remain
unvested. All 150,000 of Mr. Davidow's shares will be released from our
repurchase option on June 24, 2002. Mr. Davidow paid the $1.00 exercise price
per share for such shares in cash. In addition, Mr. Davidow's stock option
agreement provides that if we enter into any transaction which involves a
change of control, the shares held by Mr. Davidow will automatically vest in
full. Generally, a "change of control" is defined to include mergers, asset
sales or other transactions involving a transfer of at least 50% of our
securities.
47
<PAGE>
Mr. Mora.
In May and December 1999, Mr. Mora exercised option grants to purchase an
aggregate of 412,500 shares of common stock and entered into restricted stock
purchase agreements regarding the shares. Pursuant to the restricted stock
purchase agreements, we have the right to repurchase any of the unvested shares
upon his termination of employment. As of February 15, 2000, an aggregate of
412,500 shares held by Mr. Mora remain unvested. All 412,500 of Mr. Mora's
shares will be released from our repurchase option on December 27, 2003. Mr.
Mora paid the $0.50 exercise price per share for 195,000 of such shares by
delivery of two-year full-recourse promissory note bearing interest at 4.90%
per annum, compounded annually. Mr. Mora paid the $1.00 exercise price per
share for the remaining 217,500 shares by delivery of a two-year full-recourse
promissory note bearing interest at 5.74% per annum, compounded annually. Each
of the notes is secured by the shares of common stock purchased by Mr. Mora. As
of February 15, 2000, approximately $320,226 in unpaid principal and interest
was outstanding in the aggregate under the notes. In addition, each of Mr.
Mora's option agreements provide that:
. upon a change of control of our company, 50% of the shares subject to the
options held by Mr. Mora that have not vested as of six months after the
change of control shall vest in full; as of February 15, 2000, an
aggregate of 412,500 shares have not vested; and
. if Mr. Mora's employment is terminated as a result of an involuntary or
constructive termination within 12 months of the change of control, all
of the shares subject to the options held by Mr. Mora will vest in full.
Mr. Sharan.
In October 1998 and March and December 1999, Mr. Sharan received option
grants to purchase an aggregate of 412,500 shares of common stock and entered
into restricted stock purchase agreements regarding the shares. Pursuant to the
restricted stock purchase agreements, we have the right to repurchase any of
the unvested shares upon his termination of employment. As of February 15,
2000, an aggregate of 342,188 shares held by Mr. Sharan remain unvested. All
342,188 of Mr. Sharan's shares will be released from our repurchase option on
October 21, 2003. Mr. Sharan paid the $0.33 exercise price for 151,500 of such
shares by delivery of a two-year full-recourse promissory note bearing interest
at 5.88% per annum, compounded annually. Mr. Sharan paid the $1.00 exercise
price per share for 187,500 of such shares by delivery of a two-year full-
recourse promissory note bearing interest at 5.88% per annum, compounded
annually. Each of the notes is secured by shares of common stock purchased by
Mr. Sharan. As of February 15, 2000, approximately $238,747 in unpaid principal
and interest was outstanding in the aggregate under the notes. Mr. Sharan paid
the remainder of the exercise price of such shares in cash. In addition, each
of Mr. Sharan's option agreements provided that:
. upon a change of control of our company, 50% of the shares subject to the
options held by Mr. Sharan that have not vested as of six months after
the change of control shall vest in full; as of February 15, 2000, an
aggregate of 342,188 shares have not vested; and
. if Mr. Sharan's employment is terminated as a result of an involuntary or
constructive termination within 12 months of the change of control, all
of the shares subject to the options held by Mr. Sharan will vest in
full.
Mr. Herlitz.
In February and December 1999, Mr. Herlitz received option grants to
purchase an aggregate of 255,000 shares of our common stock. Mr. Herlitz has
exercised and entered into restricted stock purchase agreements regarding all
172,500 shares of the February 1999 option grant and 25,782 shares of the
82,500 shares of common stock subject to the December 1999 option grant.
Pursuant to the restricted stock purchase agreements, we have the right to
repurchase any of the unvested shares upon his termination of employment. As of
February 15, 2000, 129,375 shares of the February 1999 option grant and 25,782
shares of the December 1999 option grant held by Mr. Herlitz remain unvested.
All 198,282 of Mr. Herlitz's shares will
48
<PAGE>
be released from our repurchase option on December 14, 2003. Mr. Herlitz paid
the $0.33 exercise price per share for 172,500 of the shares, and the $1.00
exercise price per share for the remaining 25,782 shares, in cash. The
remaining 56,718 shares subject to the December 1999 option grant held by Mr.
Herlitz have not been exercised, but are exercisable at any time at an exercise
price per share of $1.00. In addition, each of Mr. Herlitz's option agreements
provide that:
. upon a change of control of our company, 50% of the shares subject to the
options held by Mr. Herlitz that have not vested as of six months after
the change of control shall vest in full; as of February 15, 2000, an
aggregate of 211,875 shares have not vested; and
. if Mr. Herlitz's employment is terminated as a result of an involuntary
or constructive termination within 12 months of the change of control,
all of the shares subject to the options held by Mr. Herlitz will vest in
full.
Mr. Traub.
In November and December 1999, Mr. Traub received option grants to purchase
an aggregate of 232,500 shares of common stock. Mr. Traub has exercised and
entered into restricted stock purchase agreements for 37,500 shares of the
150,000 shares of common stock subject to the November 1999 option grant and
20,625 of the 82,500 shares of common stock subject to the December 1999 option
grant. Pursuant to the restricted stock purchase agreements, we have the right
to repurchase any of the unvested shares upon his termination of employment. As
of February 15, 2000, all of the 58,125 shares held by Mr. Traub remain
unvested. All 58,125 of Mr. Traub's shares will be released from our repurchase
option on December 27, 2003. Mr. Traub paid the $1.00 exercise price per share
for all such shares in cash. The remaining 174,375 shares subject to the option
grants held by Mr. Traub have not been exercised, but are exercisable at any
time at an exercise price per share of $1.00. In addition, each of Mr. Traub's
option agreements provide that:
. upon a change of control of our company, 50% of the shares subject to the
options held by Mr. Traub that have not vested as of six months after the
change of control shall vest in full; as of February 15, 2000, an
aggregate of 232,500 shares have not vested; and
. if Mr. Traub's employment is terminated as a result of an involuntary or
constructive termination within 12 months of the change of control, all
of the shares subject to the options held by Mr. Traub will vest in full.
Mr. Jones.
In April 1999, Mr. Jones exercised an option grant to purchase 150,000
shares of common stock and entered into a restricted stock purchase agreement
regarding the shares. Pursuant to the restricted stock purchase agreement, we
have the right to repurchase any of the unvested shares upon termination of his
services. As of February 15, 2000, 93,750 shares held by Mr. Jones remain
unvested. All 150,000 of Mr. Jones' shares will be released from our repurchase
option on June 24, 2002. Mr. Jones paid the $0.33 exercise price per shares for
such shares in cash. In addition, Mr. Jones' stock option agreement provides
that if we enter into any transaction which involves a change of control, the
shares held by Mr. Jones will automatically vest in full.
Mr. Sturgeon.
In February 2000, Mr. Sturgeon exercised an option grant to purchase an
aggregate of 225,000 shares of common stock and entered into a restricted stock
purchase agreement regarding the shares. Pursuant to the restricted stock
purchase agreement, we have the right to repurchase any of the unvested shares
upon his termination of employment from Transcription. As of February 15, 2000,
all 225,000 shares held by Mr. Sturgeon remain unvested. All 225,000 of Mr.
Sturgeon's shares will be released from our repurchase option on January 1,
2004. Mr. Sturgeon paid the $2.67 exercise price per share for such shares in
cash. In addition, Mr. Sturgeon's restricted stock purchase agreement provides
that in the event of Mr. Sturgeon's termination of employment from
Transcription due to death or disability prior to January 1, 2002, 6.25% of the
shares will be
49
<PAGE>
released from our repurchase option for each three month period, measured from
January 1, 2000, for which Mr. Sturgeon completed employment with Transcription
prior to his termination as a result of death or disability. Further:
. upon a change of control of our company, 50% of the shares subject to
options held by Mr. Sturgeon that have not vested as of the later of
January 2, 2002 or six months after the change of control shall vest in
full; as of February 15, 2000, an aggregate of 225,000 shares have not
vested; and
. if Mr. Sturgeon's employment is terminated as a result of an involuntary
or constructive termination within 12 months of the change of control,
all of the shares subject to options held by Mr. Sturgeon will vest in
full.
Mr. MacLean.
In February 2000, Mr. MacLean exercised an option grant to purchase an
aggregate of 225,000 shares of common stock and entered a restricted stock
purchase agreement regarding the shares. Pursuant to the restricted stock
purchase agreement, we have the right to repurchase any of the unvested shares
upon his termination of employment from Transcription. As of February 15, 2000,
all 225,000 shares held by Mr. MacLean remain unvested. All 225,000 of Mr.
MacLean's shares will be released from our repurchase option on January 1,
2004. Mr. MacLean paid the $2.67 exercise price per share for such shares by
delivery of a one-year full-recourse promissory note bearing interest at 8.0%
per annum, compounded annually. The note is secured by the shares of common
stock purchase by Mr. MacLean. As of February 15, 2000, approximately $601,973
in unpaid principal and interest was outstanding under the note. In addition,
in the event Mr. MacLean's employment with Transcription is terminated prior to
January 1, 2002 as a result of death or disability, the shares will be released
from our repurchase option according to the same accelerated schedule described
under Mr. Sturgeon's restricted stock purchase agreement above. Further:
. upon a change of control of our company, 50% of the shares subject to
options held by Mr. MacLean that have not vested as of the later of
January 2, 2002 or six months after the change of control shall vest in
full; as of February 15, 2000, an aggregate of 225,000 shares have not
vested; and
. if Mr. MacLean's employment is terminated as a result of an involuntary
termination within 12 months of the change of control, all of the shares
subject to options held by Mr. MacLean will vest in full.
Mr. Pati.
In February 2000, Mr. Pati exercised an option grant to purchase an
aggregate of 600,000 shares of common stock and entered into a restricted stock
purchase agreement regarding the shares. Pursuant to the restricted stock
purchase agreement, we have the right to repurchase any of the unvested shares
upon his termination of employment. As of February 15, 2000, all 600,000 shares
held by Mr. Pati remain unvested. All 600,000 of Mr. Pati's shares will be
released from our repurchase option on February 1, 2004. Mr. Pati paid the
$2.67 exercise price per share for the shares by delivery of a two-year full-
recourse promissory note bearing interest at 6.45% per annum, compounded
annually. The note is secured by the shares of common stock purchase by Mr.
Pati. As of February 15, 2000, approximately $1,601,696 in unpaid principal and
interest was outstanding under the note. In addition, Mr. Pati's option
agreement provides that:
. upon a change of control of our company, 50% of the shares subject to the
options held by Mr. Pati that have not vested as of six months after the
change of control shall vest in full; as of February 15, 2000, an
aggregate of 600,000 shares have not vested; and
. if Mr. Pati's employment is terminated as a result of an involuntary
termination within 12 months of the change of control, all of the shares
subject to options held by Mr. Pati will vest in full.
50
<PAGE>
Mr. Wang.
In February 2000, Mr. Wang exercised an option grant to purchase an
aggregate of 499,999 shares of common stock and entered into a restricted stock
purchase agreement regarding the shares. Pursuant to the restricted stock
purchase agreement, we have the right to repurchase any of the unvested shares
upon his termination of employment. As of February 15, 2000, all 499,999 shares
held by Mr. Wang remain unvested. All 499,999 of Mr. Wang's shares will be
released from our repurchase option on February 1, 2004. Mr. Wang paid the
$2.67 exercise price per share for the shares by delivery of a two-year full-
recourse promissory note bearing interest at 6.45% per annum, compounded
annually. The note is secured by the shares of common stock purchase by Mr.
Wang. As of February 15, 2000, approximately $1,334,746 in unpaid principal and
interest was outstanding under the note. In addition, Mr. Wang's option
agreement provides that:
. upon a change of control of our company, 50% of the shares subject to the
options held by Mr. Wang that have not vested as of six months after the
change of control shall vest in full; as of February 15, 2000, an
aggregate of 499,999 shares have not vested; and
. if Mr. Wang's employment is terminated as a result of involuntary or
constructive termination within 12 months of the change of control, all
of the shares subject to the options held by Mr. Pati will vest in full.
Acquisition of Transcription
Agreement and Plan of Reorganization.
Pursuant to an agreement and plan of reorganization, dated December 21,
1999, among Transcription, Transcription Enterprises Limited, Mr. Sturgeon, Mr.
MacLean and us, we acquired Transcription. The acquisition was effective
January 1, 2000 and, as a result, Transcription is now our wholly-owned
subsidiary.
The consideration paid by us for Transcription Enterprises Limited was a
combination of stock and promissory notes. We issued 3,809,994 shares of our
Series E preferred stock, which the parties agreed had a fair market value of
$10.67 per share. Mr. Sturgeon received 2,388,715 of such shares, or an
aggregate of $25,479,632, and Mr. MacLean received 1,194,356 of such shares, or
an aggregate of $12,739,808. We also issued an aggregate principal amount of
$40,000,000 in promissory notes, $5,000,000 of which has already been paid by
us. As of January 1, 2000, the aggregate principal amounts of the notes
outstanding to Mr. Sturgeon and Mr. MacLean is approximately $21,943,574 and
$10,971,787, respectively.
As collateral security for the payment of any indemnification obligations of
the former shareholders of Transcription Enterprises Limited, subject to a
deductible of $100,000, 1,904,995 shares of the Series E preferred stock we
issued to such shareholders were pledged to us. Such shares were withheld from
the former shareholders, on a pro rata basis, and are being held in escrow with
an escrow agent. 1,194,357 of the shares of Series E preferred stock issued to
Mr. Sturgeon and 597,178 of the shares of Series E preferred stock issued to
Mr. MacLean have been pledged to us and are in escrow. Generally, all of the
pledged shares to be issued to the former shareholders of Transcription
Enterprises Limited, other than Mr. Sturgeon and Mr. MacLean, or approximately
113,460 shares, will be released from the escrow upon the closing of this
offering. The remaining pledged shares, approximately 1,791,535 shares, will be
released to Mr. Sturgeon and Mr. MacLean as follows:
. 50% of such shares will be released on January 1, 2001; and
. the remaining 50% of the pledged shares will be released on January 1,
2002.
Pursuant to the reorganization agreement, 55% of a specified amount of the
accounts receivable of Transcription Enterprises Limited is to be distributed
to the former shareholders of the company, on a pro rata basis, as such
receivables are collected by Transcription. We are entitled to retain 45% of
such accounts receivable, plus all fees associated with maintenance, support or
other services rendered by Transcription Enterprises Limited on such accounts.
We currently anticipate that we will collect and retain approximately
51
<PAGE>
$1,126,000 of the accounts receivables and maintenance services and distribute
approximately $1,253,000 of such receivables to the former shareholders of
Transcription Enterprises Limited. Of that $1,253,000 amount, Mr. Sturgeon and
Mr. MacLean are to receive $786,000 and $393,000, respectively.
Promissory Notes.
We issued an aggregate principal amount of $40,000,000 in promissory notes,
with each note dated January 1, 2000, to the ten former shareholders of
Transcription Enterprises Limited. An aggregate principal amount of $5,000,000
under the notes was paid by us to such shareholders shortly after January 1,
2000. The remaining $35,000,000 in unpaid principal amount under the notes
bears interest at a rate of 8.0% per annum. The unpaid principal amount, plus
accrued interest, is due and payable in 16 equal quarterly installments of
approximately $2,187,500, commencing on April 1, 2000, and thereafter on July
1, October 1 and December 31, with the final installments due December 31,
2003. With some limitations, the notes may be prepaid in whole or in part by us
at any time, without penalty.
The holders of a majority of the outstanding aggregate principal amount of
the notes have the option to set-off, on behalf of all holders of the notes,
any indemnification obligations owned to us under the agreement and plan of
reorganization against the outstanding aggregate principal amount of the notes.
Any such set-off is to be on a pro rated basis.
In the event of our default under the notes, the outstanding aggregate
principal amounts of the notes, and all accrued interest on the notes, will be
immediately due and payable. Events of default under the notes include:
. default in the payment of principal or interest on a payment date;
. our general nonpayment of our debts as they become due, or the
institution of bankruptcy proceedings against us which we do not cure
within 60 days;
. the entry of an order for relief relating to bankruptcy, or an order
ordering our liquidation or winding up; or
. our default of a material term under the security agreement which is not
cured within 30 days.
Security Agreement.
Pursuant to the security agreement, dated January 1, 2000, the former
shareholders of Transcription Enterprises Limited were granted a security
interest in the assets of Transcription, including, without limitation, all
software, licenses, intellectual property and receivables. In addition,
Transcription agreed to several standards covenants for such agreements,
including without limitation to preserve and protect the assets and pay all
material taxes on the assets as they become due. Upon our event of default
under the notes, or Transcription's default of a material term of the security
agreement which is not cured within 30 days, the former shareholders of
Transcription Enterprises Limited may foreclose on Transcription's assets.
Other Transactions
We have entered into indemnification agreements with each of our executive
officers and directors.
We have granted options to certain of our executive officers and directors.
Please see "Management--Director Compensation" and "--Option Grants in Last
Fiscal Year" and "Related Party Transactions--Restricted Stock Purchase
Agreements."
Holders of preferred stock are entitled to certain registration rights with
respect to the common stock issued or issuable upon conversion of the preferred
stock. Please see "Description of Capital Stock--Registration Rights."
We believe that all related-party transactions described above were on terms
no less favorable than could have been otherwise obtained from unrelated third
parties.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock, as of February 15, 2000, and as
adjusted to reflect the sale of common stock offered by us in this offering,
for:
. each person who we know beneficially owns more than 5% of the common
stock;
. each of our directors;
. each executive officer named in the Summary Compensation Table; and
. all of our directors and officers as a group.
Unless otherwise indicated, the principal address of each of the
stockholders below is c/o Numerical Technologies, Inc., 70 West Plumeria Drive,
San Jose, California 95134. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and includes voting or
investment power with respect to the securities. Except as indicated by
footnote, and subject to applicable community property laws, each person
identified in the table possesses sole voting and investment power with respect
to all shares of common stock shown held by them. The number of shares of
common stock outstanding used in calculating the percentage for each listed
person includes shares of common stock underlying options or warrants held by
such person that are exercisable within 60 days of February 15, 2000, but
excludes shares of common stock underlying options or warrants held by any
other person. Percentage of beneficial ownership is based on 23,540,505 shares
of common stock outstanding as of February 15, 2000, after giving effect to the
conversion of all outstanding shares of preferred stock upon the closing of
this offering. The numbers shown in the table assume no exercise by the
underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Shares Owned
Prior to the Percentage
Offering Beneficially Owned
------------ ------------------------------
Number Before Offering After Offering
------------ --------------- --------------
<S> <C> <C> <C>
5% Stockholders:
Funds affiliated with Mohr,
Davidow Ventures(a).............. 1,837,116 7.8% 6.3%
Directors and Executive Officers:
Buno Pati(b)...................... 3,118,500 13.2 10.7
Roger Sturgeon(c)................. 2,613,715 11.1 9.0
Yao-Ting Wang(d).................. 2,592,499 11.0 8.9
William H. Davidow(a) (e)......... 1,994,616 8.4 6.8
Kevin MacLean(c).................. 1,419,356 6.0 4.9
Thomas Kailath(f)................. 1,071,414 4.6 3.7
Narendra K. Gupta(g).............. 954,414 4.1 3.3
Abbas El Gamal(h)................. 649,167 2.8 2.2
Richard Mora(i)................... 412,500 1.8 1.4
Atul Sharan(j).................... 412,500 1.8 1.4
Harvey Jones(e)................... 310,873 1.3 1.1
Lars Herlitz(k)................... 255,000 1.1 *
John Traub(l)..................... 236,746 1.0 *
All executive officers and
directors as a group (13)
persons)(m)...................... 16,041,300 67.0 54.4
</TABLE>
- --------
* Less than 1%
(a) Principal address is 2775 Sand Hill Road, Suite 240, Menlo Park, CA 94025.
Number of shares includes 1,569,018 shares held by Mohr, Davidow Ventures
V, L.P., 118,098 shares held by Mohr, Davidow Ventures V, L.P., as nominee
for MDV Entrepreneur's Network Fund II (A), L.P. and MDV Entrepreneur's
Network Fund II (B), L.P., a warrant issued to Mohr, Davidow Ventures V,
L.P. to purchase 139,500 shares exercisable within 60 days of February 15,
2000 and a warrant issued to
53
<PAGE>
Mohr, Davidow Ventures V, L.P., as nominee for MDV Entrepreneur's Network
Fund II(A), L.P. and MDV Entrepreneur's Network Fund II (B), L.P. to
purchase 10,500 shares exercisable within 60 days of February 15, 2000.
Mr. Davidow, a director of our company, is a partner at Mohr, Davidow
Ventures. Mr. Davidow disclaims beneficial ownership of the shares held by
these entities except to the extent of his proportional interest in the
entities.
(b) Includes 600,000 shares issued upon exercise of a stock option, all of
which are subject to a repurchase option we hold as of February 15, 2000.
(c) Includes 225,000 shares issued upon exercise of a stock option, all of
which are subject to a repurchase option we hold as of February 15, 2000.
(d) Includes 499,999 shares issued upon exercise of a stock option, all of
which are subject to a repurchase option we hold as of February 15, 2000.
(e) Includes 150,000 shares issued upon exercise of stock options, 93,750 of
which are subject to a repurchase option we hold as of February 15, 2000,
and an option to purchase 7,500 shares exercisable within 60 days of
February 15, 2000.
(f) Includes 676,080 shares held by Thomas and Sarah Kailath Revocable Living
Trust Dated 02/15/89, 185,001 shares held by Thomas Kailath, Trustee of
the Paul V. Kailath Irrevocable Trust UAD 10-1-89, 205,833 shares held by
Thomas Kailath, Trustee of the Priya S. Kailath Irrevocable Trust
UAD 10-1-89, and an option to purchase 7,500 shares exercisable within 60
days of February 15, 2000.
(g) Includes 225,000 shares held directly by Dr. Gupta, all of which were
issued upon exercise of a stock option, 42,188 of which are subject to a
repurchase option we hold as of February 15, 2000, 306,748 shares held by
Naren and Vinita Gupta Living Trust dated 12/2/94, 416,666 shares held by
Mr. Gupta as custodian for his minor children, and an option to purchase
7,500 shares exercisable within 60 days of February 15, 2000.
(h) Includes 225,000 shares held by El Gamal Family Partnership, all of which
were issued upon exercise of a stock option by Dr. El Gamal, 42,188 of
which are subject to a repurchase option we hold as of February 15, 2000,
and an option to purchase 7,500 shares exercisable within 60 days of
February 15, 2000.
(i) All of such shares issued upon exercise of stock options, all of which are
subject to a repurchase option we hold as of February 15, 2000. Includes
54,000 shares held by Mr. Mora as custodian for his minor children.
(j) All of such shares issued upon exercise of stock options, 342,188 of which
are subject to a repurchase option we hold as of February 15, 2000.
Includes 19,500 shares held by Mr. Sharan as custodian for his minor
child.
(k) Includes 198,282 shares issued upon exercise of stock options, 155,157 of
which are subject to a repurchase option we hold as of February 15, 2000,
and options to purchase 56,718 shares exercisable within 60 days of
February 15, 2000.
(l) Includes 58,125 shares issued upon exercise of stock options, all of
which are subject to a repurchase option we hold as of February 15, 2000,
and options to purchase 174,375 shares exercisable within 60 days of
February 15, 2000.
(m) Includes an aggregate of:
. 2,789,845 shares of which are subject to a repurchase option we hold as
of February 15, 2000;
. 3,381,406 shares issued upon exercise of stock options; and
. options and warrants to purchase 418,593 shares exercisable within 60
days of February 15, 2000.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, our authorized capital stock will
consist of 100,000,000 shares of common stock, $0.0001 par value, and 5,000,000
shares of preferred stock, $0.0001 par value.
The following summary of the rights of the common stock and preferred stock
does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of our amended and restated certificate of
incorporation and bylaws which are included as exhibits to the registration
statement of which this prospectus is a part and by the provisions of Delaware
law.
Common Stock
After giving effect to the three for two forward stock split of the all
outstanding common stock and preferred stock and the conversion of all
previously outstanding preferred stock into shares of common stock, as of
February 15, 2000, there were 23,540,505 shares of common stock outstanding
held of record by approximately 191 stockholders. There will be 29,074,505
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of certain outstanding options or
warrants, after giving effect to the sale of common stock in the offering.
Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to the following rights:
. to receive dividends out of assets legally available therefor at such
times and in such amounts as the board of directors from time to time may
determine;
. one vote for each share held on all matters submitted to a vote of
stockholders; and
. upon our liquidation, dissolution or winding-up, to share ratably in all
assets remaining after payment of liabilities and the liquidation of any
preferred stock.
Cumulative voting for the election of directors is not authorized by our
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election. The
common stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Each outstanding share of common stock is, and all
shares of common stock to be outstanding upon completion of this offering will
be, upon payment therefor, duly and validly issued, fully paid and
nonassessible.
Preferred Stock
Upon the consummation of this offering, each outstanding share of Series A,
Series B, Series C, Series D and Series E preferred stock will automatically
convert into one share of common stock. Pursuant to our amended and restated
certificate of incorporation, the board of directors has the authority, without
further action by the stockholders, to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the designations, powers,
preferences, privileges, which may be greater than the rights of the common
stock. The board, without stockholder approval, can issue preferred stock with
voting, conversion or other rights that could adversely affect the voting power
and other rights of the holders of common stock. Preferred stock could thus be
issued quickly with terms calculated to delay or prevent a change in control of
our company or make removal of management more difficult. Additionally, the
issuance of preferred stock may have the effect of decreasing the market price
of the common stock. At present, there are no shares of preferred stock
outstanding, and we have no plans to issue any of the preferred stock.
Registration Rights
Upon completion of the offering, the holders of an aggregate of
approximately 17,481,325 shares of common stock will be entitled to certain
rights with respect to the registration of such shares under the Securities Act
of 1933. Under the terms of the 1999 second amended and restated shareholders
rights
55
<PAGE>
agreement, as amended, if we propose to register any of its securities under
the Securities Act of 1933, either for our own account or for the account of
other security holders, these holders are entitled to notice of such
registration and are entitled to include shares of common stock in the
registration. The rights are subject to conditions and limitations, among them
the right of the underwriters of an offering subject to the registration to
limit the number of shares included in such registration. A limited number of
the holders of these rights may also require us to file a registration
statement under the Securities Act of 1933 with respect to their shares of
common stock and we are required to use our best efforts to effect such
registration, subject to conditions and limitations. Furthermore, stockholders
with registration rights may require us to file additional registration
statements on Form S-3, subject to conditions and limitations.
Delaware Anti-Takeover Law and Certain Charter and Bylaws Provisions
Delaware Anti-Takeover Statute. We are subject to Section 203 of the
Delaware General Corporation Law. In general, these provisions prohibit a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that the
stockholder became an interested stockholder, unless the transaction in which
the person became an interested stockholder is approved in a manner presented
in Section 203 of the Delaware General Corporation Law.
Generally, a "business combination" is defined to include mergers, asset or
stock sales and other transactions resulting in financial benefit to a
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years, did own, 15% or
more of a corporation's outstanding voting stock.
Certificate of Incorporation and Bylaws. Our certificate of incorporation
and bylaws include provisions that:
. allow the board of directors to issue, without further action by the
stockholders, up to 5,000,000 shares of undesignated preferred stock;
. require that any action to be taken by our stockholders be effected at a
duly called annual or special meeting and not by written consent;
. divide the board of directors into three classes, with each class serving
for a term of three years;
. prohibit cumulative voting in the election of directors;
. require that special meetings of our stockholders be called only by the
board of directors, the chairman of the board, the chief executive
officer and the president;
. establish an advance notice procedure for stockholder proposals to be
brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to the board of directors; and
. require that certain amendments to the certificate of incorporation and
the bylaws require the approval of the holders of at least 66 2/3% of the
voting power of all outstanding stock.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the board and in the policies formulated by the
board and to discourage certain types of transactions that may involve an
actual or threatened change of control of our company. These provisions are
designed to reduce our vulnerability to an unsolicited proposal for a takeover
that does not contemplate the acquisition of all of our outstanding shares or
an unsolicited proposal for the restructuring or sale of all or part of our
company. These provisions, however, could discourage potential acquisition
proposals and could complicate, delay or prevent a change in control of our
company. They may also have the effect of preventing changes in our management.
We believe that the benefits of increased protection of our potential ability
to negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure us outweighs the disadvantages of discouraging these
proposals, including proposals that are priced above the then current market
value of our common stock, because, among other things, negotiation of these
proposals could result in an improvement of their terms.
56
<PAGE>
Transfer Agent and Registrar
The transfer agent and registrar for common stock is ChaseMellon Shareholder
Services, L.L.C.
Listing
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "NMTC." We have not applied to list our common stock on any
other exchange or quotation system.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market
following the offering could cause the prevailing market price of our common
stock to fall and impede our ability to raise equity capital at a time and on
terms favorable to us.
Upon completion of the offering, we will have outstanding an aggregate of
29,074,505 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or outstanding
warrants after February 15, 2000. Of these outstanding shares, the 5,534,000
shares sold in the offering will be freely tradable without restriction or
further registration under the Securities Act of 1933, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act of
1933. The remaining 23,540,505 shares of common stock outstanding upon
completion of the offering and held by existing stockholders will be
"restricted securities" as that term is defined in Rule 144 under the
Securities Act of 1933. Restricted shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act of 1933, which rules
are summarized below, or another exemption. Sales of the restricted shares in
the public market, or the availability of such shares for sale, could adversely
affect the market price of the common stock.
All officers, directors and certain other holders of common stock have
entered into contractual "lock-up" agreements providing that they will not
offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of shares of common stock owned by them or that could be purchased by
them through the exercise of options or warrants for a period of 180 days after
the date of this prospectus without the prior written consent of Credit Suisse
First Boston Corporation. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, additional shares will be available beginning 181
days after the effective date of the offering, subject in some cases to certain
volume limitations.
Of the remaining restricted shares:
. 2,098,818 shares are subject to our repurchase option in the event of
termination of employment; and
. 3,809,994 shares will not be eligible for sale pursuant to Rule 144 until
the expiration of a one-year holding period on January 1, 2001.
Beginning 181 days after the date of this prospectus, approximately 112,983
additional shares subject to vested options will be available for sale subject
to compliance with Rule 701 and upon the expiration of agreements not to sell
such shares entered into between the underwriters and such stockholders. Any
shares subject to lock-up agreements may be released at any time without notice
by the underwriters.
In general, under Rule 144 as currently in effect, beginning 91 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned restricted shares for at least one year, including
persons who may be deemed to be our "affiliates", would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 290,745 shares immediately after the offering; or
. the average weekly trading volume of the common stock as reported through
the Nasdaq National Market during the four calendar weeks preceding the
filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned for at least two years the restricted shares proposed to be
sold, including the holding period of any prior owner except an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
58
<PAGE>
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 permits resales of shares issued
prior to the date the issuer becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, pursuant to certain compensatory benefit
plans and contracts commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirements. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options, including exercises after the date the issuer becomes
so subject. Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 91 days
after the date of this prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year minimum holding period
requirements.
We have agreed not to sell or otherwise dispose of any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock, or enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the common stock, for a
period of 180 days after the date of this prospectus, without the prior written
consent of Credit Suisse First Boston Corporation, subject to limited
exceptions.
We intend to file a registration statement under the Securities Act of 1933
covering the shares of common stock subject to outstanding options or reserved
for issuance under the 2000 stock plan, 1997 stock plan and 2000 employee stock
purchase plan. This registration statement is expected to be filed
simultaneously with the effectiveness of the registration statement covering
the shares of common stock offered in this offering and will automatically
become effective upon filing. Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates and the expiration of a 180-day lockup period, be available for
sale in the open market, except to the extent that such shares are subject to
our vesting restrictions or the contractual restrictions described above.
59
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, dated 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Chase Securities, Inc.
and SG Cowen Securities Corporation are acting as representatives, the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ------
<S> <C>
Credit Suisse First Boston Corporation................................
Chase Securities, Inc. ...............................................
SG Cowen Securities Corporation.......................................
----
Total...............................................................
====
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase shares of common stock in the offering if any are purchased, other
than those shares covered by the over-allotment option described below. The
underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares from us at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-Allotment Over-allotment Over-Allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $ $ $ $
Expenses paid by us..... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5.0% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the data of this prospectus.
Our officers and directors and certain other stockholders, including holders
of our preferred stock and warrants, have agreed that they will not offer,
sell, contract to sell pledge or otherwise dispose of, directly or indirectly,
any shares of our common stock or securities convertible into or exchangeable
or exercisable for shares of our common stock,
60
<PAGE>
or publicly disclose the intention to make any such offer, sale, pledge or
disposal, without, in each case, the prior written consent of Credit Suisse
First Boston Corporation for a period of 180 days after the date of this
prospectus.
The underwriters have reserved for sale, at the initial public offering
price up to shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in the offering. The number of shares available for
sale to the general public in the offering will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same terms as
the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We will apply to list the shares of common stock on The Nasdaq Stock
Market's National Market.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The underwriters may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the representatives of the underwriters to underwriters that may
make Internet distributions on the same basis as other allocations. Other than
the prospectus in electronic format, the information contained on any
underwriter's web site or on any web site maintained by an underwriter is not
part of this prospectus or the registration statement of which this prospectus
forms a part, has not been approved or endorsed by us or any underwriter in its
capacity as an underwriter and should not be relied upon by investors.
Prior to the offering, there has been no public market for the common stock.
The initial public offering price for the common stock will be determined by
negotiation between us and the representatives, and does not reflect the market
price for the common stock following the offering. Among the principal factors
considered in determining the initial public offering price will be:
. the information in this prospectus and otherwise available to the
representatives;
. market conditions for initial public offerings;
. the history of and prospects for the industry in which we will compete;
. the ability of our management;
. our prospects for future earnings;
. the present state of our development and our current financial condition;
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies; and
. the general condition of the securities markets at the time of this
offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934, as amended.
. Over-allotment involves sales in excess of the offering size, which
creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq Stock Markets National Market or otherwise and, if
commenced, may be discontinued at any time.
61
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that: (i) such purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws; (ii) where
required by law, such purchaser is purchasing as principal and not as agent;
and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against the
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
62
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Certain legal matters in connection with
this offering will be passed upon for the underwriters by Morrison & Forrester,
LLP, Palo Alto, California. WS Investment Company, an investment partnership
composed of certain current and former members of and persons associated with
Wilson Sonsini Goodrich & Rosati, Professional Corporation, as well as an
individual attorney of this firm, beneficially own an aggregate of 87,000
shares of our common stock.
EXPERTS
The balance sheets of Numerical Technologies, Inc. at December 31, 1998 and
1999 and the statements of operations, of stockholders' equity and of cash
flows for each of the three years in the period ended December 31, 1999,
included in this prospectus, have been included herein in reliance upon the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The balance sheets of Transcription Enterprises Limited at December 31, 1998
and 1999 and the statements of operations, of shareholders' equity and of cash
flows for the years then ended, included in this prospectus, have been included
herein in reliance upon the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, under the Securities Act of 1933, a registration statement on Form S-1
relating to the common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits
and schedules thereto. For further information with respect to our company and
the shares we are offering by this prospectus you should refer to the
registration statement, including the exhibits and schedules thereto. You may
inspect a copy of the registration statement without charge at the Public
Reference Section of the Securities and Exchange Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 or at the Securities and Exchange
Commission's regional offices at 5670 Wilshire Boulevard, 11th Floor, Los
Angeles, California 90036. The public may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission.
The Securities and Exchange Commission also maintains an Internet site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's World Wide Web address is
http://www.sec.gov.
We intend to furnish holders of the common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing
unaudited condensed financial information for the first three quarters of each
fiscal year. We intend to furnish such other reports as it may determine or as
may be required by law.
63
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Numerical Technologies, Inc.
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
Unaudited Pro Forma Combined Financial Information
Overview................................................................... F-19
Unaudited Pro Forma Combined Balance Sheet................................. F-20
Unaudited Pro Forma Combined Statement of Operations....................... F-21
Notes to Unaudited Pro Forma Combined Financial Information................ F-22
Transcription Enterprises Ltd.
Report of Independent Accountants.......................................... F-24
Balance Sheets............................................................. F-25
Statements of Operations................................................... F-26
Statements of Shareholders' Equity (Deficit)............................... F-27
Statements of Cash Flows................................................... F-28
Notes to Financial Statements.............................................. F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The reincorporation and three-for-two stock split described in Note 1 to the
financial statements have not been consummated at February 2, 2000. When they
have been consummated, we will be in a position to furnish the following
report:
To the Board or Directors and
Stockholders of
Numerical Technologies, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Numerical Technologies, Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 2, 2000
F-2
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity
----------------- December 31,
1998 1999 1999
------- -------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 4,973 $ 13,486
Accounts receivable......................... 1,083 1,819
Prepaid and other........................... 60 394
------- --------
Total current assets...................... 6,116 15,699
Property and equipment, net................... 456 1,613
Other assets.................................. 39 293
------- --------
$ 6,611 $ 17,605
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 239 $ 613
Accrued expenses............................ 1,341 1,945
Deferred revenue............................ 2,216 2,642
------- --------
Total current liabilities................. 3,796 5,200
------- --------
Commitments (See Note 3)
Stockholders' equity:
Convertible preferred stock, $0.0001 par
value:
Authorized: 12,253 shares;
Issued and outstanding: 5,745 and 8,103
shares in 1998 and 1999, respectively, and
none in pro forma (unaudited).............. 1 1 $ --
Common stock, $0.0001 par value:
Authorized: 30,000 shares;
Issued and outstanding: 7,727 and
9,570 shares in 1998 and 1999,
respectively, and 17,673 in pro forma
(unaudited)................................ 1 1 1
Additional paid in capital.................... 12,090 50,100 50,101
Receivable from stockholders.................. (5) (315) (315)
Deferred stock compensation................... (1,938) (21,220) (21,220)
Accumulated deficit........................... (7,334) (16,162) (16,162)
------- -------- --------
Total stockholders' equity................ 2,815 12,405 $ 12,405
------- -------- ========
$ 6,611 $ 17,605
======= ========
</TABLE>
The accompanying notes are an integral part of financial statements.
F-3
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Revenue............................................. $ 620 $ 736 $ 5,492
------ ------- -------
Costs and expenses:
Cost of revenue................................... 57 127 307
Research and development.......................... 993 2,721 4,816
Sales and marketing............................... 58 1,404 4,277
General and administrative........................ 131 2,355 1,303
Amortization of deferred stock compensation....... -- 862 3,990
------ ------- -------
Total costs and expenses........................ 1,239 7,469 14,693
------ ------- -------
Loss from operations................................ (619) (6,733) (9,201)
Interest income..................................... 35 182 373
------ ------- -------
Net loss............................................ $ (584) $(6,551) $(8,828)
====== ======= =======
Net loss per common share, basic and diluted........ $(0.08) $ (0.89) $ (1.21)
====== ======= =======
Weighted average common shares, basic and diluted... 7,397 7,373 7,290
====== ======= =======
Pro forma net loss per common share, basic and
diluted (unaudited)................................ $ (0.62)
=======
Pro forma weighted average common shares, basic and
diluted (unaudited)................................ 14,156
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Receivable Deferred
Stock Common Stock Additional from Stock
------------- -------------- Paid in Stock- Compen- Accumulated
Shares Amount Shares Amount Capital holders sation Deficit Total
------ ------ ------ ------ ---------- ---------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 2,250 $ -- 7,083 $ 1 $ 538 $ -- $ -- $ (199) $ 340
Exercise of common stock
options................ -- -- 847 -- 23 -- -- -- 23
Issuance of Series B
preferred stock and
warrants, net of
issuance costs of $7... 1,050 -- -- -- 746 (50) -- -- 696
Net loss................ -- -- -- -- -- -- -- (584) (584)
----- ----- ----- --- ------- ----- -------- -------- -------
Balance, December 31,
1997................... 3,300 -- 7,930 1 1,307 (50) -- (783) 475
Exercise of common stock
options................ -- -- 825 -- 61 (5) -- -- 56
Return of common stock.. -- -- (525) -- -- -- -- -- --
Repurchase of common
stock.................. -- -- (503) -- (2) -- -- -- (2)
Issuance of Series C
preferred stock and
warrants, net of
issuance costs of $47.. 2,445 1 -- -- 7,924 -- -- -- 7,925
Repayment of note
receivable............. -- -- -- -- -- 50 -- -- 50
Deferred stock
compensation related to
grants of stock options
and issuance of common
stock.................. -- -- -- -- 2,800 -- (2,800) -- --
Amortization of deferred
stock compensation..... -- -- -- -- -- -- 862 -- 862
Net loss................ -- -- -- -- -- -- -- (6,551) (6,551)
----- ----- ----- --- ------- ----- -------- -------- -------
Balance, December 31,
1998................... 5,745 1 7,727 1 12,090 (5) (1,938) (7,334) 2,815
Exercise of common stock
options................ -- -- 2,001 -- 1,333 (315) -- -- 1,018
Repurchase of common
stock.................. -- -- (158) -- (20) -- -- -- (20)
Issuance of Series D
preferred stock, net of
issuance
costs of $455.......... 2,358 -- -- -- 13,425 -- -- -- 13,425
Repayment of note
receivable............. -- -- -- -- -- 5 -- -- 5
Deferred stock
compensation related to
grants of stock options
and issuance of common
stock.................. -- -- -- -- 23,272 -- (23,272) -- --
Amortization of deferred
stock compensation..... -- -- -- -- -- -- 3,990 -- 3,990
Net loss................ -- -- -- -- -- -- -- (8,828) (8,828)
----- ----- ----- --- ------- ----- -------- -------- -------
Balance, December 31,
1999................... 8,103 $ 1 9,570 $ 1 $50,100 $(315) $(21,220) $(16,162) $12,405
===== ===== ===== === ======= ===== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------
1997 1998 1999
----- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $(584) $(6,551) $(8,828)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................ 24 99 340
Amortization of deferred stock compensation......... 862 3,990
Changes in assets and liabilities:
Accounts receivable............................... (323) (758) (736)
Prepaid and other................................. (4) (67) (334)
Other assets...................................... (7) (31) (254)
Accounts payable.................................. 90 111 374
Accrued expenses.................................. 81 1,244 604
Deferred revenue.................................. 127 1,834 426
----- ------- -------
Net cash used in operating activities........... (596) (3,257) (4,418)
----- ------- -------
Cash flows from investing activities:
Purchases of property and equipment................... (82) (455) (1,497)
----- ------- -------
Net cash used in investing activities........... (82) (455) (1,497)
----- ------- -------
Cash flows from financing activities:
Proceeds from exercise of common stock options........ 23 56 1,018
Proceeds from issuance of preferred stock............. 696 7,925 13,425
Repurchase of common stock............................ -- (2) (20)
Repayment of notes receivable for preferred and common
stock................................................ -- 50 5
Proceeds from related party loan...................... -- 250 --
Repayment of related party loan....................... -- (250) --
----- ------- -------
Net cash provided by financing activities....... 719 8,029 14,428
----- ------- -------
Net increase in cash and cash equivalents............. 41 4,317 8,513
Cash and cash equivalents at beginning of year........ 615 656 4,973
----- ------- -------
Cash and cash equivalents at end of year.............. $ 656 $ 4,973 $13,486
===== ======= =======
Supplemental disclosures noncash financing activities:
Stockholder notes receivable exchanged for common
stock or preferred stock........................... $ 50 $ 5 $ 315
===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Numerical Technologies, Inc. (the "Company") designs and develops
proprietary technologies and software products that enable the design and
manufacture of integrated circuits with subwavelength feature sizes. The
Company markets and sells its products and services to semiconductor
manufacturers, resellers and original equipment manufacturers primarily in
North America, Europe, Japan and the Pacific Rim.
Reincorporation and stock split
In January 2000, the Company's Board of Directors authorized the
reincorporation of the Company in the State of Delaware. As a result of the
reincorporation, the Company is authorized to issue 100,000,000 shares of
$0.0001 par value Common Stock and 5,000,000 shares of $0.0001 par value
Preferred Stock. In January 2000, the Company's Board of Directors approved a
three-for-two share split of the Company's Preferred and Common Stock. The
share split will take effect immediately prior to the closing of the initial
public offering. All share and per share information have been adjusted to
reflect the reincorporation and the share split.
Certain risks and concentrations
At December 31, 1999, substantially all of the Company's cash and cash
equivalents were invested with two financial institutions.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The
Company had amounts receivable from one customer representing 86% and four
customers representing 84% of accounts receivable at December 31, 1998 and
1999, respectively. The Company has experienced no losses and does not consider
allowance for doubtful accounts necessary at December 31, 1998 and 1999.
In 1997, four customers accounted for 40%, 29%, 19% and 12% of total
revenues. In 1998, three customers accounted for 37%, 30% and 25% of total
revenues. In 1999, three customers accounted for 23%, 17%, and 16% of total
revenues.
Financial instruments
The carrying amount of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
expenses, approximate fair value due to their short maturities.
Cash and cash equivalents
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase and money market funds to be cash
equivalents. At December 31, 1999, cash and cash equivalents included
restricted cash of $204,000 related to a certificate of deposit issued as
collateral for a Letter of Credit.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated on a straight-line basis over their
estimated useful lives of 2 to 3 years. When assets are sold or retired, the
cost and related accumulated depreciation is removed from the accounts and the
resulting gains or losses are included in the statement of operations.
F-7
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Software development costs
Software development costs incurred in the research and development of new
products and enhancements to existing products are charged to expense as
incurred. Software development costs are capitalized after technological
feasibility has been established. The period between achievement of
technological feasibility, which the Company defines as the establishment of a
working model, until the general availability of such software to customers,
has been short, and software development costs qualifying for capitalization
have been insignificant. Accordingly, the Company has not capitalized any
software development costs since its inception.
Income taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
The Company recognizes revenues in accordance with the provisions of
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition", as
amended by SOP 98-4 and 98-9. The Company's revenues are derived from
intellectual property and software licenses and maintenance and technical
services. Revenues are recognized for the various contract elements based upon
vendor-specific objective evidence ("VSOE") of fair value of each element. VSOE
for the services element of contracts is based upon rates the Company charges
for services and based upon the complexity of the services and experience of
the personnel performing the services and such services are separately priced
in the contract. VSOE for annual maintenance is established with the stated
future renewal rates included in the contract. If VSOE of fair value does not
exist but postcontract customer services ("PCS") is the only undelivered
element, the Company recognized the fee including up-front payments for
licenses, under the arrangement ratably over the contractual PCS period.
License revenues, including up-front fees, are recognized when persuasive
evidence of an agreement exists, the product has been delivered, no significant
post-delivery obligations remain, the license fee is fixed or determinable and
collection of the fee is probable. Revenue for technical services is recognized
as the services are performed. Maintenance services are typically priced based
on a percentage of the license fee and have a one-year term, renewable
annually. Services provided to customers under maintenance agreements include
technical product support and unspecified product upgrades. Deferred revenues
include billings in excess of recognized revenue and payments received in
advance of revenue recognition.
Prior to the adoption of SOP 97-2, on January 1, 1998, the Company
recognized revenue for software and intellectual property upon delivery if
remaining obligations were insignificant and collection of the resulting
accounts receivable was probable. Revenue from software maintenance contracts,
including amounts unbundled from license, were deferred and recognized ratably
over the period of the contract. The adoption of SOP 97-2, SOP 98-4 and 98-9
have not had and are not expected to have a material impact on the Company's
results of operations, financial position or cash flows.
F-8
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-based compensation
The Company accounts for its stock based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees" and complies with the disclosure
provisions of Statement of Financial Accounting Standard No. 123 ("SFAS
No. 123"). Deferred compensation recognized under APB No. 25 is amortized over
the vesting period on an accelerated basis using the model presented in
Financial Accounting Standards Board Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN
No. 28"). Accordingly, the percentages of the deferred compensation amortized
in the first, second, third and fourth years following the option grant date
are approximately 52%, 27%, 15% and 6%, respectively, for options with a
four-year vesting period.
Net loss per share
The basic net loss per share is computed by dividing the net loss
attributable to common stockholders for the period by the weighted average
number of the common shares outstanding during the period. The diluted net loss
per share is the same as the basic net loss per share for the periods presented
because common equivalent shares, composed of common shares subject to
repurchase and common shares issuable upon the exercise of stock options and
warrants and upon conversion of convertible preferred shares, are considered
when their effect would be dilutive. In 1997, 1998 and 1999, 4,337,000,
7,580,000 and 11,976,000, respectively, antidilutive securities including
options, warrants and convertible preferred stock were excluded from the net
loss per share computation.
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 1999 is
computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of convertible
preferred shares into common shares effective upon the closing of the Company's
initial public offering on an as-if-converted basis. Pro forma diluted net loss
per share is computed using the pro forma weighted average number of common and
common equivalent shares outstanding. Common equivalent shares, composed of
common shares subject to repurchase and common shares issuable upon the
exercise of stock options and warrants, are not included in pro forma diluted
net loss per share as such shares are antidilutive. Antidilutive securities
totaling 3,873,000 including options and warrants were excluded from the pro
forma net loss per share computation.
Pro forma December 31, 1999 balance sheet (unaudited)
Upon consummation of the offering, all shares of convertible preferred stock
outstanding will convert into an aggregate of 8,103,000 shares of common stock.
The effect of this conversion has been reflected in the accompanying unaudited
pro forma consolidated balance sheet as of December 31, 1999.
Comprehensive income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"), FAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. There was no difference between the
Company's net loss and its total comprehensive loss for each of the periods
presented.
Recent accounting pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, or SFAS 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 establishes new standards of
F-9
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 will be effective for fiscal years beginning after June 15,
2000. The Company does not currently hold derivative instruments or engage in
hedging activities.
NOTE 2--BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
<S> <C> <C>
Property and equipment:
Computer equipment......................................... $ 393 $1,362
Furniture and equipment.................................... 133 490
Computer software.......................................... 63 234
------ ------
589 2,086
Less accumulated depreciation.............................. (133) (473)
------ ------
$ 456 $1,613
====== ======
Accrued expenses:
Payroll and related expenses............................... $1,259 $1,204
Other accrued expenses..................................... 82 741
------ ------
$1,341 $1,945
====== ======
</TABLE>
NOTE 3--COMMITMENTS
Operating leases
The Company leases its facility under a noncancelable operating lease which
expires in May 2004. The Company has the option to renew the lease for three
years. The lease requires a security deposit of $272,000 in the form of cash
and a letter of credit. The letter of credit is secured by a $204,000
certificate of deposit, which was considered restricted cash at December 31,
1999. The terms of the lease provide for rental payments on a graduated scale.
The Company recognized rent expense on a straight-line basis over the period,
and has accrued for rent expense incurred but not paid. The Company is
responsible for maintenance, insurance and taxes.
Minimum lease payments as of December 31, 1999 for noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
Lease
Year Payments
---- --------
<S> <C>
2000.............................................................. $ 723
2001.............................................................. 748
2002.............................................................. 770
2003.............................................................. 793
2004.............................................................. 478
------
$3,512
======
</TABLE>
Rent expense was $60,000, $229,000 and $474,000 for 1997, 1998 and 1999,
respectively.
F-10
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 4--CAPITAL STOCK
Convertible preferred stock
At December 31, 1999, the amounts, terms and liquidation values of Series A,
Series B, Series C, Series D and Series E convertible preferred stock are as
follows:
<TABLE>
<CAPTION>
Common
Shares
Reserved
Issued and for Liquidation
Series Amount Designated Outstanding Conversion Value
------ -------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
A.................. $ 538 2,250 2,250 2,250 $ 540
B.................. 693 1,050 1,050 1,050 700
C.................. 7,636 2,595 2,445 2,445 7,971
D.................. 13,425 2,548 2,358 2,358 13,880
E.................. -- 3,810 -- -- --
-------- ------ ----- ----- -------
$ 22,292 12,253 8,103 8,103 $23,091
======== ====== ===== ===== =======
</TABLE>
Each share of preferred stock is convertible into common stock on a one-for-
one basis subject to adjustment for certain changes in capitalization and
certain dilutive issuances. Conversion of preferred stock into common stock is
at the option of the holder, and is automatic upon the earlier of (1) for
Series A, Series B, Series C and Series D preferred stock the election of
holders of at least a majority of the outstanding shares of Series A, Series B,
Series C and Series D preferred stock voting as a class, and for Series E
preferred stock the election of holders of at least a majority of the
outstanding shares of Series E preferred stock voting as a class, or (2) the
closing of a public offering of the Company's common stock at a price per share
of not less than $10.67 and an aggregate offering price of not less than
$15,000,000. The holders of shares of preferred stock are entitled to the
number of votes equal to the number of shares of common stock into which the
preferred shares are convertible.
The holders of preferred stock may receive noncumulative dividends of $0.02,
$0.07, $0.33, $0.47 and $0.85, per share per annum for Series A, Series B,
Series C, Series D and Series E preferred stock, respectively, when and as
declared by the Board of Directors. No cash dividends may be paid to holders of
common stock during any year until dividends of $0.02, $0.07, $0.33, $0.47 and
$0.85 per share for Series A, Series B, Series C, Series D and Series E
preferred stock, respectively, have been paid in that year. No dividends have
been declared to date. The holders of preferred stock have certain registration
rights.
The holders of Series E preferred have preference of the holders of common
stock and all other series of preferred stock in liquidation to the extent of
$10.67 per share plus all declared but unpaid dividends. The holders of Series
D preferred stock have preference over the holders of common stock and Series
A, Series B and Series C preferred stock in liquidation to the extent of $5.89
per share plus all declared but unpaid dividends. The holders of Series C
preferred stock have preference over the holders of common stock and Series A
and Series B preferred stock in liquidation to the extent of $3.26 per share
plus all declared but unpaid dividends. Thereafter, Series A and Series B have
preference over common stock in liquidation to the extent of $0.24 and $0.67
per share, respectively, plus all declared but unpaid dividends. The holders of
common stock are then entitled to share ratably in the remaining assets, based
on the number of shares of common stock held by each stockholder.
Stock Option Plans
1997 Stock Option Plan
Under the Company's 1997 Stock Option Plan (the "1997 Plan"), 6,197,000
shares of the Company's common stock are reserved for issuance to employees,
directors and consultants. Options granted under the
F-11
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
1997 Plan may be incentive stock options or non-statutory stock options. Stock
purchase rights may also be granted under the 1997 Plan. Incentive stock
options may only be granted to employees. The 1997 Plan, which is administered
by the board of directors, provides generally that the option price shall not
be less than the fair market value of the shares on the date of grant and that
no portion may be exercised beyond ten years from that date. Under the 1997
Plan, stock options vest over a period that is limited to five years, but are
typically granted with a four year vesting period. Each option outstanding
under the 1997 Plan may be exercised in whole or in part at any time.
Exercised but unvested shares are subject to repurchase by the Company at the
initial exercise price. At December 31, 1999, 2,315,000 shares were subject to
repurchase.
Activity under this plan is as follows:
<TABLE>
<CAPTION>
Outstanding Shares
------------------- Weighted
Shares Number Average
Available of Price Per Exercise
for Grant Shares Share Price
--------- ------ ----------- --------
<S> <C> <C> <C> <C>
Options reserved upon adoption of the
plan.................................. 1,107
Options granted........................ (905) 905 $ 0.03-0.07 $0.03
Options exercised...................... (848) $ 0.03 $0.03
------ ------
Balances, December 31, 1997............ 202 57 $ 0.07 $0.07
Options reserved upon amendment of the
plan.................................. 1,591
Options granted........................ (1,236) 1,236 $0.03-$0.17 $0.17
Options exercised...................... (825) $0.03-$0.17 $0.33
Shares repurchased..................... 35
Options cancelled...................... 47 (47) $ 0.33 $0.08
------ ------
Balances, December 31, 1998............ 639 421 $ 0.33 $0.33
Options reserved upon amendment of the
plan.................................. 3,498
Options granted........................ (3,019) 3,019 $0.33-$1.00 $0.81
Options exercised...................... (2,001) $0.03-$1.00 $0.67
Shares repurchased..................... 158
Options cancelled...................... 31 (31) $ 0.33
------ ------
Balances, December 31, 1999............ 1,307 1,408 $ 0.88 $0.88
====== ======
</TABLE>
The weighted average grant date fair value of options granted during 1997,
1998 and 1999 was $0.08, $3.45, and $11.85, respectively.
The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Options Upon Exercise
Options Outstanding Subject to Repurchase
------------------------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.33-
$1.00 1,408 9.73 $0.88 1,303 $0.88
</TABLE>
Deferred Stock Compensation
During 1999 and 1998, the Company issued stock purchase rights and options
to certain employees under the 1997 Plan with exercise prices below the
deferred fair market value of the Company's common stock at the date of grant.
In accordance with the requirements of APB 25, the Company has recorded
deferred
F-12
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
compensation for the difference between the purchase price of stock issued to
employees under stock options and the fair market value of the Company's stock
at the date of grant. This deferred compensation is amortized to expense over
the period during which the Company's right to repurchase the stock lapses or
options become exercisable, generally four years. At December 31, 1999, the
Company had recorded deferred compensation related to these options in the
total amount of $26.0 million of which $862,000 and $3,990,000 had been
amortized to expense during 1998 and 1999, respectively. Future compensation
expense from options granted through December 31, 1999 is estimated to be $11.2
million, $5.9 million, $3.0 million and $1.1 million for 2000, 2001, 2002 and
2003, respectively.
The stock-based compensation for the three years in the period ended
December 31, 1999 has been allocated across the relevant functional expense
categories in the statement of operations as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1997 1998 1999
---- ---- ------
(in thousands)
<S> <C> <C> <C>
Cost of revenue............................................ $ -- $ 22 $ 117
Research and development................................... -- 465 1,836
Sales and marketing........................................ -- 361 1,444
General and administrative................................. -- 14 593
---- ---- ------
$ -- $862 $3,990
==== ==== ======
</TABLE>
Pro forma stock-based compensation
Had compensation expense for the 1997 Plan been determined based on the fair
value at the grant date for options granted in 1999, 1998 and 1997 consistent
with the provisions of SFAS No. 123, the Company's net loss and net loss per
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December
31,
------------------------
1997 1998 1999
------ ------- -------
(in thousands, except
per share data)
<S> <C> <C> <C>
Net loss
As reported...................................... $ (584) $(6,551) $(8,828)
====== ======= =======
Pro forma........................................ $ (585) $(6,558) $(8,946)
====== ======= =======
Net loss per common share, basic and diluted
As reported...................................... $(0.08) $ (0.89) $ (1.21)
====== ======= =======
Pro forma........................................ $(0.08) $ (0.89) $ (1.23)
====== ======= =======
</TABLE>
The increases in the pro forma amounts above reflect the incremental fair
value over the intrinsic value recognized as part of deferred stock
compensation.
The fair value of each option grant is calculated on the date of grant using
the minimum value method under the Black-Scholes pricing model with a
volatility factor of effectively zero as described by SFAS No. 123, an expected
divident yield of 0%, and with the following assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate........................ 5.3%-6.3% 5.3%-5.6% 4.8%-6.1%
Expected life (years).......................... 5 5 5
</TABLE>
F-13
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Warrants
In June 1997, the Company issued immediately exercisable warrants to
purchase 195,000 shares of the Company's Series B preferred Stock at an
exercise price of $0.67 per share. These warrants were issued to a customer of
the Company in connection with the issuance of Series B preferred stock and
entering into a licensing and services contract (see Note 6). The Company
determined the fair value of such warrants to be approximately $53,000 using
the Black-Scholes model and the following assumptions: no future dividends,
volatility of 60%, a weighted average risk-free interest rate of 5.88% and a
term of 2 years. The warrants expired in June 1999.
In June 1998, in connection with the issuance of Series C preferred stock,
the Company issued immediately exercisable warrants to purchase 150,000 shares
of the Company's Series C preferred stock at an exercise price of $3.26 per
share. The Company determined the fair value of such warrants to be
approximately $289,000 using the Black-Scholes model and the following
assumptions: no future dividends, volatility factor of 60%, a weighted average
risk-free interest rate of 4.73% and a term of 5 years. The warrants will
expire upon the earlier of June 2003 or the closing of a public offering of the
Company's common stock at a price per share of not less than $6.40 and an
aggregate offering price of not less than $15,000,000. At December 31, 1999,
150,000 shares of Series C preferred stock are reserved for the exercise of the
warrants. The Company expects these warrants will be exercised upon the initial
public offering and will recognize a charge of approximately $778,000 related
to the beneficial conversion feature of these warrants.
Notes receivable from Stockholders
During 1999, an officer of the Company exercised stock options in exchange
for notes receivable totaling $315,000, which are secured by the underlying
shares of common stock. The notes accrue interest at rates ranging from 4.9% to
5.7% per annum, and are payable, with principal, in 2001.
NOTE 5--INCOME TAXES
The components of the net deferred tax asset comprise:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998 1999
(in thousands) ----- ------- -------
<S> <C> <C> <C>
Net operating loss carryforward..................... $240 $ 1,323 $ 2,675
Research and development credit carryforward........ 50 222 382
Accrued liabilities................................. 65 450 1,444
Valuation allowance................................. (355) (1,995) (4,501)
----- ------- -------
$ -- $ -- $ --
===== ======= =======
</TABLE>
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Annually, management evaluates the recoverability of the deferred tax assets
and the level of the valuation allowance. At such time as it is determined that
it is more likely than not that deferred tax assets are realizable the
valuation allowance will be reduced.
F-14
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company had the following carryforwards and credits at December 31,
1999:
<TABLE>
<CAPTION>
Expiration
Date Amount
(in thousands) ---------- ------
<S> <C> <C>
Net operating loss carryforwards
Federal................................................. 2010-2019 $6,904
State................................................... 2002-2004 5,611
Research and development credits
Federal................................................. Indefinite $ 217
State................................................... Indefinite 165
</TABLE>
For federal and state tax purposes, a portion of the Company's net operating
loss and tax credit carryforwards may be subject to certain limitations on
annual utilization due to an "Ownership Change," as defined by federal and
state tax law.
NOTE 6--RELATED PARTY TRANSACTIONS
During 1997, the Company received $120,000 from a Series B preferred
stockholder under a licensing and service contract negotiated concurrently with
the purchase of Series B preferred stock and warrants to purchase Series B
preferred stock. As the fair value of these warrants was determined to be
approximately $53,000, such amount was allocated to the warrants. The warrants
expired unexercised in June 1999.
During 1998, the chairman loaned the Company $250,000 for a period of 2
months at an annual interest rate of 8%. The loan was repaid in 1998.
NOTE 7--EMPLOYEE BENEFIT PLAN
The Company sponsors the Numerical Technologies, Inc. 401(k) Retirement Plan
(the "401(k) Plan"). The 401(k) Plan provides for tax deferred automatic salary
deductions. Under the terms of the 401(k) Plan, employees over the age of 21
are eligible to participate after completing three months of employment. The
Company is permitted to make contributions to the 401(k) Plan as determined by
the Board of Directors. No Company contributions were made to the 401(k) Plan
in 1999, 1998 or 1997.
NOTE 8--OPERATING SEGMENTS
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement requires enterprises to
report information about operating segments in annual financial statements and
selected information about reportable segments in interim financial reports. It
also establishes standards for related disclosures about products, geographic
areas and major customers. The method for determining what information to
report is based upon the "management" approach, which requires the Company to
report certain financial information related to continuing operations that is
provided to the Company's chief operating decision-maker for the purpose of
evaluating financial performance and resource allocation. The Company's chief
operating decision-maker reviews revenue by both geography and customer. The
Company is not organized into business units nor does it capture expenses or
allocate resources based on segmentation of its business. Therefore, the
Company believes that it operates in a single segment.
F-15
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following is a summary of the Company's revenue attributed to the
geographic regions in which the technology and services are delivered:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ------
<S> <C> <C> <C>
United States............................................... $380 $626 $4,300
Japan....................................................... -- 105 516
Taiwan...................................................... -- -- 558
Korea....................................................... -- -- 117
Germany..................................................... 215 5 1
Other....................................................... 25 -- --
---- ---- ------
Total....................................................... $620 $736 $5,492
==== ==== ======
</TABLE>
The Company has no long-lived assets outside the United States in any of the
years presented.
NOTE 9--SUBSEQUENT EVENTS
Acquisition of Transcription
On January 1, 2000, Numerical Technologies, Inc. (" Numerical" or the "
Company") acquired Transcription Enterprises Ltd. ("Transcription"), a company
incorporated in California. Under the terms of the acquisition, the Company
issued 3,810,000 shares of Series E Convertible Preferred Stock and $40.0
million in notes payable for all of the outstanding stock of Transcription. The
total purchase price was $86.0 million, including acquisition costs of
$250,000. The transaction will be accounted for as a purchase.
Under the terms of the agreement, Numerical acquired specified accounts
receivable of Transcription, consisting of 45% of accounts receivable for
license fees, plus all fees associated with maintenance, support and other
services rendered by Transcription on such accounts. The allocation of the
purchase price is as follows: (in thousands):
<TABLE>
<S> <C>
Net tangible assets................................................. $ 243
In process research and development................................. 300
Developed technology................................................ 7,400
Customer base....................................................... 14,300
Covenants not to compete............................................ 2,700
Work force.......................................................... 1,500
Trade name.......................................................... 200
Goodwill............................................................ 59,327
-------
$85,970
=======
</TABLE>
The estimated purchase price was allocated to the identifiable assets
acquired and the liabilities assumed based upon the fair market value on the
acquisition date. The net tangible assets consist primarily of accounts
receivable, property and equipment, and other liabilities. Because the in-
process technology had not reached the stage of technological feasibility at
the acquisition date and had no alternative future use, the amount was
immediately charged to operations. The amounts allocated to developed
technology and customer base and trade name are amortized over the estimated
useful life of five years. The amounts allocated to covenants not to
F-16
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
compete and work force are being amortized over the estimated useful lives of
two and four years, respectively. The excess amount of the purchase price over
the fair market value of the identifiable assets acquired is accounted for as
goodwill and is being amortized over its estimated useful life of five years.
The valuation for the intangible assets has been determined using management's
assumptions and the report from an independent appraiser.
The following unaudited pro forma consolidated financial information
reflects the results of operations for the years ended December 31, 1999, as if
the acquisition had occurred on January 1, 1999, and after giving effect to
purchase accounting adjustments. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what operating
results would have been had the acquisition actually taken place on January 1,
1999, and may not be indicative of future operating results.
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
---------------------
(unaudited)
(in thousands, except
per share data)
<S> <C>
Revenues............................................... $ 19,159
Loss from operations................................... (17,912)
Net loss............................................... (20,022)
Basic and diluted net loss per share................... $ (2.75)
</TABLE>
Under the terms of the acquisition agreement, the $40 million note is
secured by substantially all the assets of Transcription. The note bears
interest at the rate of 8% per annum. $5 million was due and paid upon issuance
of the note, with the remaining principal amount due and payable in 16 equal
quarterly installments of $2.2 million, commencing on April 1, 2000 and
thereafter on each of calendar quarter with the final installment being due on
January 1, 2004. All interest accrued to each payment is due and payable on
such payment date. As described below, the major stockholders of Transcription
have the right to setoff certain indemnification claims against the interest
and principal of the note otherwise due.
2000 Stock Option Plan
On January 24, 2000, the Company approved the 2000 Stock Option/Stock
Issuance Plan (the "2000 Plan"), under which all remaining shares available for
grant under the Company's 1997 Stock Option Plan and 3,000,000 additional
shares of the Company's common stock has been authorized for issuance. The 2000
Plan is intended to serve as a successor to the 1997 Stock Option Plan and has
term similar to those of the 1997 Plan. Under the 2000 Plan, the term of the
options is generally ten years with a vesting requirement of 25% after one year
of service and monthly, thereafter, fully vesting upon completion of the fourth
year of service. Pursuant to the 2000 Plan, the board of directors has the
discretion to grant options to non-employee directors. The director option
component will not become effective until the date of this offering. Each
nonemployee director who first becomes a board member after the date of this
offering may be granted options for up to 30,000 shares. In addition, each non-
employee director may be granted options for up to 7,500 shares annually.
2000 Employee Stock Purchase Plan
On January 24, 2000, the Company approved the Company's 2000 Employee Stock
Purchase Plan (the "ESPP") and authorized 300,000 shares to be issued under the
ESPP. Under the ESPP, employees are granted the right to purchase shares of
common stock at a price per share that is 85% of the lesser of: the fair market
value of the shares at (i) the beginning of a rolling twenty-four-month
offering period, or (ii) the end of each semi-annual purchase period. The ESPP
will become effective on the effective date of this offering.
F-17
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-based compensation
On February 1, 2000, the Company granted under the 1997 and 2000 Plans
approximately 2,007,000 options to purchase the Company's common stock. In
connection with these stock option grants, the Company recognized deferred
compensation of approximately $16,990,000, which is being amortized over
vesting periods for the related options of generally four years.
F-18
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
OVERVIEW
On January 1, 2000, Numerical Technologies, Inc. (" Numerical" or the "
Company") acquired Transcription Enterprises Ltd. ("Transcription"), a company
incorporated in California. Under the terms of the acquisition, the Company
issued 3,810,000 shares of Series E Convertible Preferred Stock and $40.0
million in notes payable for all of the outstanding stock of Transcription. The
total purchase price was $86.0 million, including acquisition costs of
$250,000.
Under the terms of the agreement, Numerical acquired specified accounts
receivable of Transcription, consisting of 45% of accounts receivable for
license fees, plus all fees associated with maintenance, support and other
services rendered by Transcription on such accounts. The transaction will be
accounted for as a purchase.
The allocation of the purchase price is as follows (in thousands):
<TABLE>
<S> <C>
Net tangible assets................................................. $ 243
In process research and development................................. 300
Developed technology................................................ 7,400
Customer base....................................................... 14,300
Covenants not to compete............................................ 2,700
Work force.......................................................... 1,500
Trade name.......................................................... 200
Goodwill............................................................ 59,327
-------
$85,970
=======
</TABLE>
The estimated purchase price was allocated to the identifiable assets
acquired and the liabilities assumed based upon the fair market value on the
acquisition date.The net tangible assets consist primarily of accounts
receivable, property and equipment and other liabilities. Because the in-
process technology has not reached the stage of technological feasibility at
the acquisition date and had no alternative future use, the amount was
immediately charged to operations. The amounts allocated to developed
technology, customer base and trade name are amortized over the estimated
useful life of five years. The amounts allocated to covenants not to compete
and work force are being amortized over the estimated useful lives of two and
four years, respectively. The excess amount of the purchase price over the fair
market value of the identifiable assets acquired is accounted for as goodwill
and is being amortized over its estimated useful life of five years. The
valuation for the intangible assets has been determined using management's
assumptions and the preliminary report from an independent appraiser.
The accompanying unaudited pro forma combined balance sheet gives effect to
the acquisition of Transcription as if such transaction had occurred on
December 31, 1999, by consolidating the balance sheet of Transcription at
December 31, 1999.
The accompanying unaudited pro forma combined statement of operations gives
effect to the acquisition of Transcription as if it had occurred on January 1,
1999, by consolidating the results of operations of Transcription for the year
ended December 31, 1999 with the results of operations of Numerical for the
year ended December 31, 1999.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the transaction had
been consummated at the dates indicated, nor is it necessarily indicative of
future operating results or the financial position of the combined companies.
F-19
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
Numerical Transcription Pro forma
------------ ------------- ----------------------
December 31, December 31,
1999 1999 Adjustments Combined
------------ ------------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $ 13,486 $ 132 $ (250)(a) $ 8,236
(132)(b)
(5,000)(c)
Accounts receivable...... 1,819 2,424 (1,298)(b) 2,945
Prepaid and other........ 394 31 (31)(b) 394
-------- ------ ------- --------
Total current assets... 15,699 2,587 (6,711) 11,575
Property and equipment,
net....................... 1,613 211 -- 1,824
Intangible assets.......... -- -- 85,427 (a) 85,427
Other assets............... 293 42 (42)(b) 293
-------- ------ ------- --------
$ 17,605 $2,840 $78,674 $ 99,119
======== ====== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......... $ 613 $ 75 $ (75)(b) $ 613
Accrued expenses......... 1,945 72 (72)(b) 1,945
Deferred revenue......... 2,642 3,410 (2,316)(a) 3,736
Current portion notes
payable................. -- -- 8,750 (a) 8,750
-------- ------ ------- --------
Total current
liabilities........... 5,200 3,557 6,287 15,044
Long term notes payable.... -- -- 31,250 (a) 26,250
(5,000) (c)
-------- ------ ------- --------
Total liabilities.......... 5,200 3,557 (32,537) 41,294
-------- ------ ------- --------
Stockholders' equity:
Preferred Stock.......... 1 -- (1)(h) --
Common Stock............. 1 43 (43)(b) 2
1 (h)
Additional paid-in
capital................. 50,100 -- 45,720 (a) 95,820
Receivable from
stockholders............ (315) -- -- (315)
Deferred stock
compensation............ (21,220) -- (21,220)
Accumulated deficit...... (16,162) (760) 760 (b) (16,462)
(300)(d)
-------- ------ ------- --------
Total stockholders'
equity................ 12,405 (717) 46,137 57,825
-------- ------ ------- --------
$ 17,605 $2,840 $78,674 $ 99,119
======== ====== ======= ========
</TABLE>
F-20
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Numerical Transcription Pro forma
--------- ------------- ----------------------
For the Year Ended
December 31, 1999 Adjustment Combined
------------------------ ---------- --------
<S> <C> <C> <C> <C>
Revenue................... $ 5,492 $13,667 $ -- $ 19,159
-------- ------- -------- --------
Costs and expenses:
Cost of revenue......... 307 1,050 1,480 (f) 2,837
Research and
development............ 4,816 1,580 863 (f) 7,259
Sales and marketing..... 4,277 857 3,669 (f) 8,803
General and
administrative......... 1,303 920 94 (f) 2,317
Amortization of deferred
stock compensation..... 3,990 -- -- 3,990
Amortization of
goodwill............... -- -- 11,865 (f) 11,865
-------- ------- -------- --------
Total costs and
expenses............. 14,693 4,407 17,971 37,071
-------- ------- -------- --------
Income (loss) from
operations............... (9,201) 9,260 (17,971)(e) (17,912)
Interest income (expense),
net...................... 373 55 (2,538)(e) (2,110)
-------- ------- -------- --------
Income (loss) before
provision for income
taxes.................... (8,828) 9,315 (20,509) (20,022)
Provision for income
taxes.................... -- 120 (120)(g) --
-------- ------- -------- --------
Net income (loss)......... $(8,828) $ 9,195 $(20,389) $(20,022)
======== ======= ======== ========
Net loss per common share,
basic and diluted, for
pro forma financial
statements............... $ (1.21) $ (2.75)(h)
======== ========
Weighted average common
shares, basic and
diluted, for pro forma
financial statements..... 7,290 7,290 (h)
======== ========
Net loss per common share,
basic and diluted pro
forma assuming conversion
of all outstanding
preferred stock and
warrants:
Basic and diluted....... $(1.11)
========
Weighted average
shares................. 10,676 (h) 17,966
======== ========
</TABLE>
F-21
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(unaudited)
The following adjustments were reflected in the unaudited pro forma
combined condensed balance sheet.
(a) To record the acquisition of Transcription assuming the issuance of
3,810,000 shares of Numerical's Series E valued at $45.7 million and the
issuance of notes of $40 million in debt.
Under purchase accounting, the total purchase price will be allocated to
the acquired assets and liabilities of Transcription based on the relative
fair values as described in the overview. The amounts and components of the
purchase price, along with the allocation of the purchase price to assets
purchased are as follows (in thousands):
<TABLE>
<S> <C>
Series E Preferred Stock............................................ $45,720
Notes Payable....................................................... 40,000
Estimated transaction costs......................................... 250
-------
Gross Purchase Price.............................................. 85,970
In process research and development charge.......................... (300)
-------
Net Purchase price................................................ $85,670
=======
Assets Acquired:
Accounts Receivable............................................... $ 1,126
Deferred Revenue.................................................. (1,094)
Net fixed Assets.................................................. 211
-------
Fair value of net tangible assets acquired...................... 243
Developed Technology.............................................. 7,400
Customer Base..................................................... 14,300
Non-compete agreement............................................. 2,700
Workforce......................................................... 1,500
Trademark......................................................... 200
Goodwill.......................................................... 59,327
-------
Net assets acquired............................................. $85,670
=======
</TABLE>
(b) To reflect the elimination of certain assets and liabilities of
Transcription that were not purchased or assumed by Numerical.
(c) To record principal payment of $5.0 million upon issuance of the notes
payable. The balance of the notes payable of $35 million is expected to be
paid upon the consummation of the IPO.
(d) To record a charge for in-process research and development.
The following adjustments have been reflected in the unaudited pro forma
combined condensed statement of operations:
(e) To record interest expense on notes payable at the stated interest rate of
8.0% per annum on the unpaid principal, assuming a $5 million payment upon
issuance and four quarterly payments of $2.2 million as per the terms of
the note.
F-22
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION--(Continued)
(Unaudited)
(f) To record the amortization of identifiable intangible assets and goodwill
related to the acquisition of Transcription as if the transaction occurred
on January 1, 1999 as follows:
<TABLE>
<CAPTION>
Estimated
Useful Annual
Value Life Amortization
------- --------- ------------
<S> <C> <C> <C>
Developed Technology.......................... $ 7,400 5 years $ 1,480
Customer Base................................. 14,300 5 years 2,860
Non-compete agreement......................... 2,700 2 years 1,350
Workforce..................................... 1,500 4 years 375
Tradename..................................... 200 5 years 40
Goodwill...................................... 59,327 5 years 11,865
-------
$17,970
=======
</TABLE>
(g) To reflect the pro forma combined net loss position resulting in no tax
provision on a combined basis.
(h) To reflect the shares of Series E convertible preferred stock issued in
conjunction with the acquisition of Transcription on an "as if converted"
basis. Antidilutive securities totaling 3,723,000, including options and
warrants were excluded from the pro forma net loss per share.
<TABLE>
<CAPTION>
Pro Forma
-------------------
As-If
Combined Converted
-------- ---------
<S> <C> <C>
Combined Pro Forma Net Loss............................... $(20,022) $(20,022)
======== ========
Weighted Average Common Shares, basic and diluted......... 7,290 7,290
As if conversion of Series A, B, C and D preferred stock.. -- 6,866
As if conversion of Series E preferred stock.............. -- 3,810
-------- --------
7,290 17,966
======== ========
Pro forma net loss per share, basic and diluted........... $ (2.76) $ (1.11)
======== ========
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of
Transcription Enterprises Limited
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Transcription
Enterprises Limited at December 31, 1998 and 1999, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 21, 2000
F-24
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash
equivalents.............. $1,497 $ 132
Accounts receivable....... 2,147 2,424
Prepaid and other......... 90 31
------ ------
Total current assets.... 3,734 2,587
Property and equipment,
net........................ 197 211
Other assets................ 3 42
------ ------
$3,934 $2,840
====== ======
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable.......... $ 23 $ 75
Accrued expenses.......... 273 72
Deferred revenue.......... 2,584 3,410
------ ------
Total current
liabilities............ 2,880 3,557
------ ------
Shareholders' equity:
Common stock, no par value:
Authorized: 10,000 shares;
Issued and outstanding:
798 shares............... 43 43
Retained earnings
(deficit)................ 1,011 (760)
------ ------
Total shareholders'
equity (deficit)....... 1,054 (717)
------ ------
$3,934 $2,840
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------
1998 1999
--------- ---------
<S> <C> <C>
Revenue:
License.................................................. $ 7,162 $ 5,708
Service.................................................. 7,396 7,959
--------- ---------
Total revenue.......................................... 14,558 13,667
--------- ---------
Costs and expenses:
Cost of revenue.......................................... 789 1,050
Research and development................................. 1,704 1,580
Sales and marketing...................................... 779 857
General and administrative............................... 885 920
--------- ---------
Total costs and expenses............................... 4,157 4,407
--------- ---------
Income from operations..................................... 10,401 9,260
Interest income............................................ 78 55
--------- ---------
Income before provision for income taxes................... 10,479 9,315
Provision for income taxes................................. 118 120
--------- ---------
Net income................................................. $ 10,361 $ 9,195
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Common Stock Retained
------------- Earnings
Shares Amount (Deficit) Total
------ ------ --------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1997.................. 798 $43 $ 1,376 $ 1,419
Net income................................ -- -- 10,361 10,361
Distributions to shareholders............. -- -- (10,726) (10,726)
--- --- -------- --------
Balance, December 31, 1998.................. 798 43 1,011 1,054
Net income................................ -- -- 9,195 9,195
Distributions to shareholders............. -- -- (10,966) (10,966)
--- --- -------- --------
Balance, December 31, 1999.................. 798 $43 $ (760) $ (717)
=== === ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Years
Ended
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 10,361 $ 9,195
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation............................................ 91 129
Changes in assets and liabilities:
Accounts receivable................................... 72 (277)
Prepaid and other..................................... (38) 59
Other assets.......................................... (1) (39)
Accounts payable...................................... 8 52
Accrued expenses...................................... (40) (201)
Deferred revenue...................................... 511 826
-------- --------
Net cash provided by operating activities........... 10,964 9,744
-------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (152) (143)
-------- --------
Net cash used in investing activities............... (152) (143)
-------- --------
Cash flows from financing activities:
Distrubutions to shareholders............................. (10,726) (10,966)
-------- --------
Net cash used in financing activities............... (10,726) (10,966)
-------- --------
Net increase (decrease) in cash and cash equivalents...... 86 (1,365)
Cash and cash equivalents at beginning of year............ 1,411 1,497
-------- --------
Cash and cash equivalents at end of year.................. $ 1,497 $ 132
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Transcription Enterprises Limited (the "Company") was incorporated in
California in May 1986 as an S Corporation to develop and market integrated
software products and services that provide semiconductor manufacturers with an
interactive graphics system for fracturing and verifying photomask pattern
data.
Certain risks and concentrations
At December 31, 1998 and 1999, substantially all of the Company's cash and
cash equivalents were invested with four major financial institutions.
The Company markets and sells its products and services to end users and
original equipment manufacturers primarily in North America, Europe and Japan.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The
Company had accounts receivable from one customer representing 10% and one
customer representing 27% of accounts receivable at December 31, 1998 and 1999,
respectively.
In 1998 and 1999, the Company had one customer who accounted for 12%, and
15% of sales, respectively.
The Company operates in one industry segment. The following is a summary of
the Company's revenue by geographic operations. Revenues are attributed to the
countries in which the products and services are delivered:
<TABLE>
<CAPTION>
U.S. Japan Pac Rim Europe Other Total
------ ------ ------- ------ ----- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
1998.............................. $6,846 $2,814 $2,383 $2,131 $384 $14,558
1999.............................. 6,400 3,101 1,654 2,005 507 13,667
</TABLE>
The Company had no material long-lived assets outside of the United States.
Financial instruments
The carrying amount of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate fair value due to their short maturities.
Cash and cash equivalents
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase and money market funds to be cash
equivalents.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated on a straight-line basis over their
estimated useful lives of 3 years.
F-29
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
Research and development costs
Costs related to research, design and development of products are charged to
research and development expenses as incurred. Software development costs are
capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release to
customers. The Company has not capitalized any software development costs to
date, as such costs have not been significant.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
The Company recognizes revenues in accordance with the provisions of
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition", as
amended by SOP 98-4 and 98-9. The Company's revenues are derived from licenses
of its software and technology and from services the Company provides to its
customers. Revenues are recognized for the various contract elements based upon
vendor-specific objective evidence ("VSOE") of fair value of each element. If
VSOE of fair value exists only for undelivered elements, the Company recognizes
fees assigned to the delivered element(s) as the difference between the total
arrangement fee and the VSOE of the undelivered element.
License revenues are recognized when persuasive evidence of an agreement
exists, the software and technology has been delivered, no significant post-
delivery obligations remain, the license fee is fixed or determinable and
collection of the fee is probable.
Services revenues consist of maintenance fees. Maintenance agreements are
typically priced based on a percentage of the product license fee and have a
one-year term, renewable annually. Services provided to customers under
maintenance agreements include technical product support and unspecified
product upgrades. Deferred revenues from advanced payments for maintenance
agreements are recognized ratably over the term of the contract, which is
typically one year.
Comprehensive income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. There was no difference between the
Company's net income and its total comprehensive income for 1999, 1998, and
1997.
Recent accounting pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, or SFAS 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the statement of financial position,
and that the corresponding gains or losses be reported either in the statement
of operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. SFAS 133 will be effective for fiscal
years beginning after June 15, 2000. The Company does not currently hold
derivative instruments or engage in hedging activities.
F-30
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 2--BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
(in
thousands)
<S> <C> <C>
Property and equipment:
Computer equipment......................................... $ 753 $ 895
Furniture and equipment.................................... 14 15
------ ------
767 910
Less accumulated depreciation.............................. (570) (699)
------ ------
$ 197 $ 211
====== ======
Accrued expenses:
Payroll and related expenses............................... $ 248 $ 65
Other accrued expenses..................................... 25 7
------ ------
$ 273 $ 72
====== ======
</TABLE>
NOTE 3--COMMITMENTS
Operating leases
The Company leases its facility under a noncancelable operating lease, which
expires in January 2001. The Company has the option to renew the lease for five
years. The Company is responsible for maintenance, insurance and taxes.
Minimum lease payments as of December 31, 1999 for noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
Year Lease Payments
---- --------------
<S> <C>
2000.......................................................... $73
2001.......................................................... 6
---
$79
===
</TABLE>
Rent expense was $70,000, $67,000 and $61,000 for 1999, 1998 and 1997,
respectively.
NOTE 4--INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company is not subject
to federal corporate income taxation. Rather, the Company's shareholders
include their respective portions of taxable income in their individual income
tax returns. Therefore, no provision or liability for federal income taxes has
been included in these financial statements.
The state of California generally conforms to the federal provisions
recognizing S corporations as pass-through entities. However, California
imposes a 1.5% tax at the entity level. The income tax provisions for 1998 and
1999 consist of current state tax expense.
F-31
<PAGE>
TRANSCRIPTION ENTERPRISES LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 5--PROFIT SHARING PLAN
For the years ended December 31, 1998 and 1999, the company had a
discretionary profit sharing plan under which ten percent of the Company's
profits were redistributed to the employees, a portion of which is invested in
a retirement fund (up to a maximum allowable by the IRS) and the balance is
paid to the employee. The plan was terminated upon the effective date of the
merger described in Note 6.
NOTE 6--SUBSEQUENT EVENT
On January 1, 2000, the Company was acquired by and became a wholly-owned
subsidiary of Numerical Technologies, Inc. (the Parent). Under the terms of the
acquisition Agreement, each share of the common stock of the Company was
converted to 4.778 shares of Series E Preferred Stock and $50.1575 in principal
amount of a Promissory Note. The maximum consideration to be paid by the
Company pursuant to the Merger is 3,810,000 shares of Series E preferred stock
plus $40.0 million in aggregate principal amount of Notes. The Promissory Notes
are secured by the assets of the Company.
F-32
<PAGE>
[LOGO OF NUMERICAL TECHNOLOGIES]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the sale of common stock being registered. All amounts are estimates,
except the registration fee, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<CAPTION>
Amount To
Be Paid
---------
<S> <C>
Registration Fee................................................ $ 21,841
NASD Fee........................................................ 7,500
Nasdaq Listing Fee.............................................. 95,000
Legal Fees and Expenses......................................... 510,000
Accounting Fees and Expenses.................................... 400,000
Printing and Engraving Expenses................................. 275,000
Blue Sky Fees and Expenses...................................... 8,000
Transfer Agent Fees............................................. 25,000
Miscellaneous................................................... 257,659
---------
Total......................................................... 1,600,000
=========
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
As permitted by Section 145 of the Delaware General Corporation Law, the
registrant's amended and restated certificate of incorporation includes a
provision that eliminates the personal liability of its directors for monetary
damages for breach or alleged breach of their duty of care. In addition, as
permitted by Section 145 of the Delaware General Corporation Law, the bylaws of
the registrant provide that: (1) the registrant is required to indemnify its
directors and executive officers and persons serving in such capacities in
other business enterprises at the registrant's request, to the fullest extent
permitted by Delaware law, including in those circumstances in which
indemnification would otherwise be discretionary; (2) the registrant may, in
its discretion, indemnify employees and agents in those circumstances where
indemnification is not required by law; (3) the registrant is required to
advance expenses, as incurred, to its directors and executive officers in
connection with defending a proceeding, except that it is not required to
advance expenses to a person against whom the registrant brings a claim for
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct, knowing violation of law or deriving an improper personal benefit;
(4) the rights conferred in the bylaws are not exclusive, and the registrant is
authorized to enter into indemnification agreements with its directors,
executive officers and employees; and (5) the registrant may not retroactively
amend the bylaw provisions in a way that is adverse to such directors,
executive officers and employees in these matters.
The registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers that provide the maximum indemnity
allowed to directors and executive officers by Section 145 of the Delaware
General Corporation Law and the bylaws, as well as certain additional
procedural protections. In addition, such indemnification agreements provide
that the registrant's directors and executive officers will be indemnified to
the fullest possible extent not prohibited by law against all expenses,
including attorney's fees, and settlement amounts paid or incurred by them in
any action or proceeding, including any derivative action by or in the right of
the registrant, on account of their services as directors or executive officers
of the registrant or as directors or officers of any other company or
enterprise when they are serving in such capacities at the request of the
registrant. The registrant will not be obligated pursuant to the
indemnification agreements to indemnify or advance expenses to an indemnified
party with respect to proceedings or claims initiated by the
II-1
<PAGE>
indemnified party and not by way of defense, except with respect to proceedings
specifically authorized by the registrant's board of directors or brought to
enforce a right to indemnification under the indemnification agreement, the
registrant's bylaws or any statute or law. Under the agreements, the registrant
is not obligated to indemnify the indemnified party (1) for any expenses
incurred by the indemnified party with respect to any proceeding instituted by
the indemnified party to enforce or interpret the agreement, if a court of
competent jurisdiction determines that each of the material assertions made by
the indemnified party in such proceeding was not made in good faith or was
frivolous; (2) for any amounts paid in settlement of a proceeding unless the
registrant consents to such settlement; (3) with respect to any proceeding
brought by the registrant against the indemnified party for willful misconduct,
unless a court determines that each of such claims was not made in good faith
or was frivolous; (4) on account of any suit in which judgment is rendered
against the indemnified party for an accounting of profits made from the
purchase or sale by the indemnified party of securities of the registrant
pursuant to the provisions of (S)16(b) of the Securities Exchange Act of 1934,
and related laws; (5) on account of the indemnified party's conduct which is
finally adjudged to have been knowingly fraudulent or deliberately dishonest,
or to constitute willful misconduct or a knowing violation of the law; (6) an
account of any conduct from which the indemnified party derived an improper
personal benefit; (7) on account of conduct the indemnified party believed to
be contrary to the best interests of the registrant or its stockholders; (8) on
account of conduct that constituted a breach of the indemnified party's duty of
loyalty to the registrant or its stockholders; or (9) if a final decision by a
court having jurisdiction in the matter shall determine that such
indemnification is not lawful.
The indemnification provision in the bylaws and the indemnification
agreements entered into between the registrant and its directors and executive
officers may be sufficiently broad to permit indemnification of the
registrant's officers and directors for liabilities arising under the
Securities Act of 1933.
Reference is made to the following documents filed as exhibits to this
registration statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit
Document Number
- -------- -------
<S> <C>
Form of Underwriting Agreement........................................ 1.1
Certificate of Incorporation of the registrant........................ 3.1
Form of Amended and Restated Certificate of Incorporation of the
registrant to be filed upon closing of the offering.................. 3.2
Bylaws of registrant.................................................. 3.3
Form of Indemnification Agreement entered into by the registrant with
each of its directors and executive officers......................... 10.1
</TABLE>
Item 15. Recent Sales of Unregistered Securities
Since January 1, 1997, the registrant has issued and sold the securities
described below.
(a) From January 1, 1997 to February 15, 2000, the registrant issued and
sold an aggregate of 5,759,964 shares of unregistered common stock to 98
directors, officers, employees, former employees and consultants at prices
ranging from $0.03 to $2.67 per share, for aggregate cash consideration of
approximately $6,077,984, of which approximately $4,086,332 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).
II-2
<PAGE>
(b) On June 27, 1997 and August 26, 1997, the registrant issued and sold (1)
in the aggregate 1,050,000 shares of unregistered Series B preferred stock at a
price per share of $0.67, and (2) an unregistered warrant to purchase 195,000
shares of unregistered Series B preferred stock, with an exercise price per
share of $0.67, to certain investors for an aggregate cash consideration of
$700,000. These shares and warrant were sold pursuant to a Series B preferred
stock and warrant purchase agreement between the registrant and such investors.
The warrant expired, unexercised, on June 27, 1999. The registrant relied upon
Section 4(2) of the Securities Act of 1933 and Regulation D, Rule 506, in
connection with the sale of these securities. The sale of Series B preferred
stock and warrant were made in compliance with all of the terms of Rules 501
and 502 of Regulation D, there were no more than 35 investors, as calculated
pursuant to Rule 501(e) of Regulation D, and each investor who was not an
accredited investor represented to the registrant that it had such knowledge
and experience in financial and business matters that it was capable of
evaluating the merits and risks of the investment.
(c) On June 5, 1998 and August 4, 1998, the registrant issued and sold (1)
in the aggregate 2,445,089 shares of unregistered Series C preferred stock at a
price per share of $3.26, and (2) unregistered warrants to purchase 150,000
shares of unregistered Series C preferred stock, with an exercise price per
share of $3.26, to certain investors for aggregate cash consideration of
approximately $7,970,998. The shares and warrants were sold pursuant to a
Series C preferred stock and warrant purchase agreement between the registrant
and such investors. The warrants may be exercised in whole or in part at any
time prior to the completion of this offering, at which time they expire. The
warrants may be exercised for cash or pursuant to a net exercise provision
contained therein. The registrant relied upon Section 4(2) of the Securities
Act of 1933 and Regulation D, Rule 506, in connection with the sale of these
securities. The sale of Series C preferred stock and warrants were made in
compliance with all of the terms of Rules 501 and 502 of Regulation D, there
were no more than 35 investors, as calculated pursuant to Rule 501(e) of
Regulation D, and each investor who was not an accredited investor represented
to the registrant that it had such knowledge and experience in financial and
business matters that it was capable of evaluating the merits and risks of the
investment.
(d) On June 24, 1999 and August 31, 1999, the registrant sold in the
aggregate 2,357,906 shares of unregistered Series D preferred stock at a price
per share of $5.89 to certain investors for aggregate cash consideration of
approximately $13,880,230. The shares were sold pursuant to a Series D
preferred stock purchase agreement between the registrant and such investors.
The registrant relied upon Section 4(2) of the Securities Act of 1933 and
Regulation D, Rule 506, in connection with the sale of these shares. The sale
of Series D preferred stock was made in compliance with all of the terms of
Rules 501 and 502 of Regulation D, there were no more than 35 investors, as
calculated pursuant to Rule 501(e) of Regulation D, and each investor who was
not an accredited investor represented to the registrant that it had such
knowledge and experience in financial and business matters that it was capable
of evaluating the merits and risks of the investment.
(e) On January 1, 2000, the registrant issued and sold to the shareholders
of Transcription Enterprises Limited (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.
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.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.**
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.**
3.1 Certificate of Incorporation of registrant.*
3.2 Form of Amended and Restated Certificate of Incorporation of registrant
to be filed upon the closing of the offering made under the registration
statement.
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.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
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.*
10.7 Lease Agreement, dated June 15, 1999, by and between the registrant and
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, as amended on January 24,
2000.**
10.15 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
between the registrant and Atul Sharan, as amended on January 24,
2000.**
10.16 Stock Option Agreement--Early Exercise, dated February 3, 1999, by and
between the registrant and Lars Herlitz, as amended on January 24,
2000.**
10.17 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
between the registrant and Lars Herlitz, as amended on January 24,
2000.**
10.18 Stock Option Agreement--Early Exercise, dated November 17, 1999, by and
between the registrant and John Traub, as amended on January 24, 2000.**
10.19 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
between the registrant and John Traub, as amended on January 24, 2000.**
10.20 Stock Option Agreement--Early Exercise, dated July 15, 1998, between the
registrant and Harvey Jones.*
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
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.**
21.1 Subsidiaries of the registrant.*
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (See page II-6).*
27.1 Financial Data Schedule.*
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ 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.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions referenced in Item 14 of this
registration statement or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities, other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding, is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the
II-5
<PAGE>
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Jose, State of California, on this 3rd day of March 2000.
NUMERICAL TECHNOLOGIES, INC.
/s/ Yagyensh C. Pati
By: _________________________________
Yagyensh C. Pati
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Yagyensh C. Pati President and Chief March 3, 2000
______________________________________ Executive Officer and
Yagyensh C. Pati Director (Principal
Executive Officer)
/s/ Richard Mora Chief Financial Officer March 3, 2000
______________________________________ and Vice President,
Richard Mora Operations (Principal
Financial and Accounting
Officer)
* Chairman of the Board March 3, 2000
______________________________________
William Davidow
* Director and Chief March 3, 2000
______________________________________ Technology Officer
Yao-Ting Wang
* Director March 3, 2000
______________________________________
Thomas Kailath
* Director March 3, 2000
______________________________________
Narendra Gupta
* Director March 3, 2000
______________________________________
Abbas El Gamal
* Director March 3, 2000
______________________________________
Harvey Jones
* Director and Fellow March 3,2000
______________________________________
Roger Sturgeon
/s/ Richard Mora March 3, 2000
*By: _________________________________
Richard Mora
attorney-in-fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.**
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.**
3.1 Certificate of Incorporation of registrant.*
3.2 Form of Amended and Restated Certificate of Incorporation of registrant
to be filed upon the closing of the offering made under the registration
statement.
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.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
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
CarrAmerica Realty Corporation.*
10.6 Lease Agreement, dated May 10, 1999, 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, as amended on January 24,
2000.**
10.15 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
between the registrant and Atul Sharan, as amended on January 24,
2000.**
10.16 Stock Option Agreement--Early Exercise, dated February 3, 1999, by and
between the registrant and Lars Herlitz, as amended on January 24,
2000.**
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.17 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
between the registrant and Lars Herlitz, as amended on January 24,
2000.**
10.18 Stock Option Agreement--Early Exercise, dated November 17, 1999, by and
between the registrant and John Traub, as amended on January 24, 2000.**
10.19 Stock Option Agreement--Early Exercise, dated December 27, 1999, by and
between the registrant and John Traub, as amended on January 24, 2000.**
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.**
21.1 Subsidiaries of the registrant.*
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (See page II-6).*
27.1 Financial Data Schedule.*
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ 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.
<PAGE>
Exhibit 3.2
FORM OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NUMERICAL TECHNOLOGIES, INC.
Numerical Technologies, Inc., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), certifies that:
A. The name of the Corporation is Numerical Technologies, Inc. The
original Certificate of Incorporation was filed with the Secretary
of State of the State of Delaware on February 2, 2000.
B. This Amended and Restated Certificate of Incorporation was duly
adopted in accordance with the provisions of Sections 242 and 245 of
the Delaware General Corporation Law by the Board of Directors of
the Corporation.
C. This Amended and Restated Certificate of Incorporation was approved
by written consent of the stockholders pursuant to Section 228 of
the Delaware General Corporation Law.
D. The Certificate of Incorporation of the Corporation is hereby
amended and restated in its entirety as follows:
I.
The name of this corporation is Numerical Technologies, Inc. (the
"Corporation").
II.
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
III.
The purpose of this Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
IV.
The Corporation is authorized to issue two classes of shares designated
respectively Common Stock, par value $0.0001 per share (the "Common Stock"), and
Preferred Stock, par value $0.0001 per share (the "Preferred Stock"). The total
number of shares of Common Stock the Corporation
<PAGE>
shall have authority to issue is 100,000,000 and the total number of shares of
Preferred Stock the Corporation shall have authority to issue is 5,000,000.
The Preferred Stock may be issued from time to time in one or more series
pursuant to a resolution or resolutions providing for such issue duly adopted by
the Board of Directors (authority to do so being hereby expressly vested in the
Board of Directors). With respect to such series, the Board of Directors is
authorized (i) to determine the number of shares of any such series and the
designation thereof, (ii) to determine or alter the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock and (iii) within the limits and restrictions stated in
any resolution or resolutions of the Board of Directors originally fixing the
number of shares constituting any series, to increase (but not above the total
number of authorized shares of the class) or decrease (but not below the number
of shares of such series then outstanding) the number of shares of any such
series subsequent to the issue of shares of that series.
Each share of Preferred Stock issued by the Corporation, if reacquired by
the Corporation (whether by redemption, repurchase, conversion to Common Stock
or other means), shall upon such reacquisition resume the status of authorized
and unissued shares of Preferred Stock, undesignated as to series and available
for designation and issuance by the Corporation in accordance with the
immediately preceding paragraph.
The Corporation shall from time to time in accordance with the laws of the
State of Delaware increase the authorized amount of its Common Stock if at any
time the number of shares of Common Stock remaining unissued and available for
issuance shall not be sufficient to permit conversion of the Preferred Stock.
V.
To the fullest extent permitted by the General Corporation Law of the State
of Delaware as the same exists or may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director.
Neither any amendment, modification nor repeal of this Article, nor the
adoption of any provision of this Amended and Restated Certificate of
Incorporation inconsistent with this Article, shall eliminate, reduce or
adversely affect, any right or protection of a director of the Corporation
existing hereunder with respect to any act or omission occurring prior to such
amendment, modification, repeal or adoption of an inconsistent provision.
VI.
No action that is required or permitted to be taken by the stockholders of
the Corporation at any annual or special meeting of stockholders may be effected
by the written consent of stockholders in lieu of a meeting of stockholders.
VII.
No stockholder will be permitted to cumulate votes at any election of
directors.
-2-
<PAGE>
VIII.
The Board of Directors shall be divided into three classes, the members of
each class to serve for a term of three years; provided that the directors shall
be elected as follows: at the first annual meeting of the stockholders after
the date hereof, the directors in the first class shall be elected for a term of
three years, at the second annual meeting after the date hereof, the directors
in the second class shall be elected for a term of three years, and at the third
annual meeting after the date hereof, the directors in the third class shall be
elected for a term of three years. The Board of Directors by resolution shall
nominate the directors to be elected for each class. At subsequent annual
meetings of stockholders, a number of directors shall be elected equal to the
number of directors with terms expiring at that annual meeting. Directors
elected at each such subsequent annual meeting shall be elected for a term
expiring with the annual meeting of stockholders three years thereafter. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of directors in each class as
nearly equal as possible, and any additional director of any class elected to
fill a vacancy resulting from an increase in such class shall hold office for a
term that shall coincide with the remaining term of that class, but in no case
will a decrease in the number of directors shorten the term of any incumbent
director.
IX.
The Board of Directors of the Corporation is expressly authorized to adopt,
amend or repeal the Bylaws of the Corporation, but the stockholders may make
additional by-laws and may alter or repeal any by-law whether adopted by them or
otherwise.
Notwithstanding any other provision of this Amended and Restated
Certificate of Incorporation, the Bylaws of the Corporation or any provision of
law which might otherwise permit a lesser vote or no vote, but in addition to
any affirmative vote of the holders of any particular class or series of stock
of the Corporation required by law, this Amended and Restated Certificate of
Incorporation or any Preferred Stock designation, the affirmative vote of sixty-
six and two-thirds percent (66-2/3%) of the voting power of the then outstanding
shares of the voting stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required for
the modification, amendment or repeal of Section 2.2 (Annual Meeting), Section
2.3 (Special Meeting), Section 2.5 (Advance Notice of Stockholder Nominees and
Stockholder Business), Section 3.3 (Election and Term of Office of Directors)
and Section 3.4 (Resignation and Vacancies) of the Bylaws of the Corporation or
of Article VIII or this Article IX of this Amended and Restated Certificate of
Incorporation.
X.
Elections of directors need not be by written ballot except and to the
extent provided in the Bylaws of the Corporation.
XI.
The Corporation is to have perpetual existence.
-3-
<PAGE>
XII.
The number of directors which constitute the whole Board of Directors of
the Corporation shall be designated in the Bylaws of the Corporation.
XIII.
Advance notice of new business at stockholders' meetings and stockholder
proposals and stockholder nominations for the election of directors shall be
given in the manner and to the extent provided in the Bylaws of the Corporation.
XIV.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the laws of the State of Delaware)
outside of the State of Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the Bylaws of the Corporation.
XV.
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by the laws of the State of Delaware,
and all rights conferred herein are granted subject to this reservation.
-4-
<PAGE>
IN WITNESS WHEREOF, Numerical Technologies, Inc. has caused this Amended
and Restated Certificate of Incorporation to be signed by Yagyensh C. Pati, its
President and Chief Executive Officer, as of the date below.
Dated: April [__], 2000
------------------------------------
Yagyensh C. Pati
-5-
<PAGE>
EXHIBIT 4.2
AMENDMENT AGREEMENT
-------------------
This Amendment Agreement ("Agreement") is entered into as of January 14,
---------
2000 by and between (i) Numerical Technologies, Inc., a California corporation
(the "Company"), (ii) the purchasers of the Company's Series A Preferred Stock
-------
(the "Series A Purchasers") pursuant to the Company's Series A Preferred Stock
-------------------
Purchase Agreement dated October 19, 1996, (iii) the purchasers of the Company's
Series B Preferred Stock (the "Series B Purchasers") pursuant to the Series B
-------------------
Preferred Stock Purchase Agreement dated June 27, 1997, (iv) the purchasers of
the Company's Series C Preferred Stock (the "Series C Purchasers") pursuant to
-------------------
the Series C Preferred Stock Purchase Agreement dated June 5, 1998, (v) the
purchasers of the Company's Series D Preferred Stock (the "Series D Purchasers")
-------------------
pursuant to the Series D Preferred Stock Purchase Agreement dated June 4, 1999,
(vi) the former shareholders of Transcription Enterprises Limited who acquired
shares of the Company's Series E Preferred Stock (the "Series E Purchasers")
-------------------
(collectively, the Series A Purchasers, the Series B Purchasers, the Series C
Purchasers, the Series D Purchasers and the Series E Purchasers are referred to
as the "Purchasers") pursuant to an Agreement and Plan of Reorganization dated
----------
December 21, 1999, and (vii) Yagyensh C. Pati, Yao-Ting Wang, Thomas Kailath and
Michael C Grant (collectively, the "Founders").
--------
RECITALS
The Company desires to amend the 1999 Second Amended and Restated
Shareholders Rights Agreement, dated January 1, 2000 (the "Rights Agreement"),
----------------
attached hereto as Exhibit A, to amend Sections 4 and 5 of the Rights Agreement
---------
to provide (i) the right of first refusal granted to the Purchasers in Section 4
shall terminate of the Company's initial public offering (the "IPO"), and (ii)
---
the Board of Directors (the "Board") observer rights and Board representation
-----
rights in Section 5 shall terminate on the IPO.
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
1. Amendments.
----------
(a) A new Section 4.2 shall be added to Section 4 which shall provide
as follows:
"4.2 Termination. The rights and obligations granted under
-----------
this Section 4 shall terminate and be of no further force and effect
upon the initial public offering of the Company."
(b) A new Section 5.3 shall be added to Section 5 which shall provide
as follows:
"5.3 Termination. The rights and obligations granted under this
-----------
Section 5 shall terminate and be of no further force and effect upon
the initial public offering of the Company."
<PAGE>
2. Miscellaneous.
-------------
(a) Waiver. By execution of this Agreement, the undersigned hereby
------
waives any registration rights such person or entity may have in connection
with the Company's proposed initial public offering and related
Registration Statement on Form S-1 to be filed with the Securities and
Exchange Commission.
(b) Governing Law. This Agreement shall be governed in all respects by
-------------
the internal laws of the Sate of California.
(c) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original and all of
which together shall constitute one instrument.
(d) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties
hereto.
(e) Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not considered in
construing or interpreting this Agreement.
-2-
<PAGE>
The foregoing Agreement is hereby executed as of the date first above
written.
"COMPANY"
NUMERICAL TECHNOLOGIES, INC.,
a California corporation
/s/ Yagyensh C. Pati
------------------------------------------
Yagyensh C. Pati
Chief Executive Officer and President
"SERIES A PURCHASERS"
ABBAS EL GAMAL - SMITH BARNEY INC. SEP
CUSTODIAN ACCT. #449-61489-19
By: /s/ James Marguet
---------------------------------------
Title: VP Investments
------------------------------------
/s/ Chiang Cheng-Te
------------------------------------------
Chiang Cheng-Te
/s/ Naren Gupta
------------------------------------------
Naren K. Gupta, As Custodian for Anneka
Rupali Gupta under the California Uniform
Transfers to Minors Act
/s/ Naren Gupta
------------------------------------------
Naren K. Gupta, As Custodian for Serena
Sapna Gupta under the California Uniform
Transfers to Minors Act
------------------------------------------
Thomas Kailath, Trustee of the Paul V.
Kailath Irrevocable Trust UAD 10/1/89
/s/ T. Kailath (Trustee)
------------------------------------------
Thomas Kailath, Trustee of the Priya S.
Kailath Irrevocable Trust UAD 10/1/89
/s/ Sanko Lan
------------------------------------------
Hsin-Chang Sanko Lan
/s/ Marc Levenson
------------------------------------------
Marc D. Levenson
-3-
<PAGE>
/s/ Li-Hsiang Lin
------------------------------------------
Li-Hsiang Lin
ROUNDSWAY CORPORATION
By: /s/ Jen-Chang Lan
---------------------------------------
Title: Chairman
------------------------------------
/s/ George Verghese
------------------------------------------
George Verghese and
/s/ Ann Kailath
------------------------------------------
Ann Kailath
-4-
<PAGE>
"SERIES B PURCHASERS"
INTEL CORPORATION
By:
---------------------------------------
Title:
------------------------------------
/s/ John V. Roos
------------------------------------------
John V. Roos
WS INVESTMENT COMPANY 97B
By:
---------------------------------------
Title:
------------------------------------
-5-
<PAGE>
"SERIES C PURCHASERS"
/s/ Mahmoud Eltorai
------------------------------------------
Mahmoud Eltorai &
/s/ Janet Eltorai
------------------------------------------
Janet Eltorai, Trustees of the Mahmoud &
Janet Eltorai Revocable Trust Deed, Dated
5/31/89
GOEL FAMILY PARTNERSHIP
By: /s/ Prabhu Goel
---------------------------------------
Title: G.P.
------------------------------------
/s/ Ash Gupta
------------------------------------------
Ash Gupta &
/s/ Anita Gupta
------------------------------------------
Anita Gupta
/s/ Ash Gupta
------------------------------------------
Ash Gupta as Custodian for Ankush Gupta
Under the New York Uniform Transfers to
Minors Act
/s/ Ash Gupta
------------------------------------------
Ash Gupta as Custodian for Aman Gupta Under
the New York Uniform Transfers to Minors Act
NAREN AND VINITA GUPTA LIVING TRUST DATED
12/2/94
By: /s/ Naren Gupta
---------------------------------------
Title: Trustee
------------------------------------
-6-
<PAGE>
THE JONES LIVING TRUST
By: /s/ Harvey Jones
---------------------------------------
Title: Co-Trustee
------------------------------------
/s/ John Kailath
------------------------------------------
John Kailath
/s/ Kailath
------------------------------------------
John Kailath &
/s/ Elizabeth Kailath
------------------------------------------
Elizabeth Kailath
/s/ Victor Lawrence
------------------------------------------
Victor Lawrence
/s/ Hua-Yu Liu
------------------------------------------
Hua-Yu Liu
THE LUNDY 1996 CHARITABLE TRUST
By: /s/ Francis E. Lundy
---------------------------------------
Title: Trustee
------------------------------------
MACIAS & RYAN, INC.
By: /s/ signature illegible
---------------------------------------
Title: President and CEO
------------------------------------
MARKETECH INTERNATIONAL CORPORATION
By: /s/ Margaret Kao
---------------------------------------
Title: President
------------------------------------
-7-
<PAGE>
MOHR, DAVIDOW VENTURES V, L.P.
BY: FIFTH MDV PARTNERS, L.L.C., GENERAL
PARTNER
By: /s/ Nancy J. Schoendorf
---------------------------------------
Title: Member
------------------------------------
MOHR, DAVIDOW VENTURES V, L.P. As nominee
for MDV ENTREPRENEUR'S NETWORK FUND II (A),
L.P. AND MDV ENTREPRENEURS' NETWORK FUND II
(B), L.P.
BY: FIFTH MDV PARTNERS, L.L.C., GENERAL
PARTNER
By: /s/ Nancy J. Schoendorf
---------------------------------------
Title: Member
------------------------------------
/s/ Martin Shea
------------------------------------------
Martin Shea and
/s/ Reshmie Shea
------------------------------------------
Reshmie Shea
TECHNO PRECISION, INC.
By: /s/ signature illegible
---------------------------------------
Title: President
------------------------------------
/s/ Ashok Vaish
------------------------------------------
Ashok K. Vaish and
/s/ Gita Vaish
------------------------------------------
Gita Vaish, Trustees, Vaish Trust Dated
11/26/90
/s/ Philip R. Wiser
------------------------------------------
Philip R. Wiser
-8-
<PAGE>
"SERIES D PURCHASERS"
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Joseph H. Gleberman
---------------------------------------
Name: Joseph H. Gleberman
Title: Vice President
STONE STREET FUND 1999, L.P.
By: Stone Street 1999 Corp.,
its general partner
By: /s/ Katherine L. Nissenbaum
---------------------------------------
Name: Katherine L. Nissenbaum
Title: Vice President
INDEX VENTURES I (Jersey) L.P.
By: /s/ Julia Chapman
---------------------------------------
Name: Mrs. Julia Chapman
Title: Director of the General Partner
Index Venture Associates I Limited
INDEX VENTURES I (Delaware) L.P.
By: /s/ Julia Chapman
---------------------------------------
Name: Mrs. Julia Chapman
Title: Director of the General Partner
Index Venture Associates I Limited
-9-
<PAGE>
"FOUNDERS"
------------------------------------------
Michael C. Grant
/s/ T. Kailath
------------------------------------------
Thomas Kailath
/s/ Yagyensh C. Pati
------------------------------------------
Yagyensh C. Pati
/s/ Yao-Ting Wang
------------------------------------------
Yao-Ting Wang
-10-
<PAGE>
SECOND CLOSING "SERIES D PURCHASERS"
CHAIRMAN ENTERPRISES CO., LTD.
By: /s/ Ching Lien Kuo
---------------------------------------
Name: Ching Lien Kuo
Title: Chairman of the Board
/s/ Tony S. Hsu
------------------------------------------
Tony S. Hsu and
/s/ Lily Pao Hsu
------------------------------------------
Lily Pao Hsu, as Trustees, or any Successor
Trustee, under the Tony and Lily Hsu Family
Trust created by Tony S. Hsu and Lily Pao
Hsu, as Trustors, dated November 8, 1980
INDUSTRIAL TECHNOLOGY INVESTMENT CORPORATION
By: /s/ Andrew C. Wang
---------------------------------------
Name: Andrew C. Wang
Title: Chairman
KANEMATSU ELECTRONICS LTD.
By: /s/ K. Izumi
---------------------------------------
Name: Katsuhiko Izumi
Title: General Manager
/s/ Richard L. King
------------------------------------------
Richard L. King
/s/ Kevin M. Monahan
------------------------------------------
Kevin M. Monahan
TAIWAN MASK CORPORATION
By: /s/ Parkson Chen
---------------------------------------
Name:
Title:
-11-
<PAGE>
A.J. STEIN FAMILY PARTNERSHIP
DATED 03/21/88
By: /s/ Alfred J. Stein
---------------------------------------
Name:
Title:
GATEHOUSE INVESTORS, LLC
By: /s/ C. Snyder
---------------------------------------
Name: Curt Snyder
Title: Managing Member
/s/ John P. Traub
------------------------------------------
John P. Traub or
/s/ Carol G. Traub
------------------------------------------
Carol G. Traub
-12-
<PAGE>
"SERIES E PURCHASERS"
/s/ Kevin MacLean
------------------------------------------
Kevin MacLean
/s/ Roger Sturgeon
------------------------------------------
Roger Sturgeon
/s/ Diana Schuyler /s/ Robert Schuyler
------------------------------------------
Robert and Diana Schuyler
/s/ Maxine Nation
------------------------------------------
Maxine Nation
/s/ Verna McDonald
------------------------------------------
Verna McDonald
/s/ M.R. Alamillo
------------------------------------------
Mark R. Alamillo
/s/ Camille Russell-Davis
------------------------------------------
Camille Russell-Davis
/s/ Linn M. Wenger
------------------------------------------
Linn Wenger
/s/ Todd Pegelow
------------------------------------------
Todd Pegelow
/s/ Monique Cary
------------------------------------------
Monique Cary
-13-
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
2630 Walsh Avenue
Santa Clara, CA 95051
1999 SECOND AMENDED AND RESTATED
SHAREHOLDER RIGHTS AGREEMENT
January 1, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
SECTION 1 Information Rights.................................................................... 2
1.1 Financial Information................................................................ 2
1.2 Termination of Covenants............................................................. 3
SECTION 2 Restrictions on Transferability of Securities; Compliance with Securities Act;
Registration Rights.......................................................................... 4
2.1 Restrictions on Transferability...................................................... 4
2.2 Certain Definitions.................................................................. 4
2.3 Restrictive Legend................................................................... 6
2.4 Restrictions on Transfer; Notice of Proposed Transfers............................... 7
2.5 Requested Registration............................................................... 8
2.6 Company Registration................................................................. 10
2.7 Registration on Form S-3............................................................. 11
2.8 Limitations on Subsequent Registration Rights........................................ 12
2.9 Expenses of Registration............................................................. 12
2.10 Registration Procedures.............................................................. 13
2.11 Indemnification...................................................................... 13
2.12 Information by Holder................................................................ 14
2.13 Rule 144 Reporting................................................................... 15
2.14 Transfer of Registration Rights...................................................... 15
2.15 Standoff Agreement................................................................... 15
2.16 Termination of Registration Rights................................................... 16
2.17 Suspension of Sales.................................................................. 16
SECTION 3 Co-Sale Rights........................................................................ 16
3.1 Right to Participate................................................................. 16
3.2 Qualified Participation.............................................................. 17
3.3 Continuing Rights.................................................................... 17
3.4 Termination.......................................................................... 17
SECTION 4 Right of First Refusal................................................................ 18
4.1 Right of First Refusal............................................................... 18
SECTION 5 Board Rights.......................................................................... 19
5.1 Board Visitation Right............................................................... 19
5.2 Board Representation................................................................. 20
SECTION 6 Miscellaneous......................................................................... 21
6.1 Governing Law........................................................................ 21
6.2 Survival............................................................................. 21
6.3 Successors and Assigns............................................................... 21
6.4 Entire Agreement; Amendment.......................................................... 21
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
6.5 Notices, etc......................................................................... 22
6.6 Delays or Omissions.................................................................. 22
6.7 Counterparts......................................................................... 22
6.8 Severability......................................................................... 22
6.9 Titles and Subtitles................................................................. 23
6.10 Confidentiality...................................................................... 23
6.11 Entire Agreement; Effect on 1999 Rights Agreement.................................... 23
</TABLE>
-ii-
<PAGE>
NUMERICAL TECHNOLOGIES, INC.
1999 SECOND AMENDED AND RESTATED SHAREHOLDER RIGHTS AGREEMENT
This 1999 Second Amended and Restated Shareholder Rights Agreement (the
"Agreement") is made as of January 1, 2000 by and among (i) Numerical
Technologies, Inc., a California corporation (the "Company"), (ii) the
purchasers of the Company's Series A Preferred Stock (the "Series A Purchasers")
pursuant to the Company's Series A Preferred Stock Purchase Agreement dated
October 19, 1996 (the "Series A Agreement"), (iii) the purchasers of the
Company's Series B Preferred Stock (the "Series B Purchasers") pursuant to the
Company's Series B Preferred Stock and Warrant Purchase Agreement dated June 27,
1997 (the "Series B Agreement"), (iv) the purchasers of the Company's Series C
Preferred Stock (the "Series C Purchasers") pursuant to the Company's Series C
Preferred Stock and Warrant Purchase Agreement dated June 5, 1998 (the "Series C
Agreement"), (v) the purchasers of the Company's Series D Preferred Stock (the
"Series D Purchasers") pursuant to the Company's Series D Preferred Stock
Purchase Agreement dated June 4, 1999 (the "Series D Agreement"), (vi) the
shareholders of Transcription Enterprises Limited ("TE") who acquire the
Company's Series E Preferred Stock (the "Series E Purchasers," and collectively
with the Series A Purchasers, the Series B Purchasers, the Series C Purchasers,
and the Series D Purchasers, collectively referred to herein as the
"Purchasers") pursuant to the Reorganization Agreement (as defined below), and
(vii) Yagyensh C. Pati, Yao-Ting Wang, Thomas Kailath and Michael C. Grant
(collectively, the "Founders").
R E C I T A L S
---------------
A. The Company, the Series A Purchasers and the Founders are parties to
the Shareholder Rights Agreement, dated as of October 19, 1996 (the "Original
Rights Agreement"), pursuant to which the Series A Purchasers and the Founders
were granted certain rights, including but not limited to registration rights.
B. The Company, the Series A Purchasers, the Series B Purchasers and the
Founders are parties to the Amended and Restated Shareholder Rights Agreement,
dated as of June 27, 1997 (the "Prior Rights Agreement"), pursuant to which the
Series A Purchasers, the Series B Purchasers and the Founders were granted
certain rights, including but not limited to registration rights. The Prior
Rights Agreement superseded and replaced the Original Rights Agreement in its
entirety.
C. The Company, the Series A Purchasers, the Series B Purchasers, the
Series C Purchasers and the Founders are parties to the 1998 Amended and
Restated Shareholder Rights Agreement, dated as of June 5, 1998 (the "1998
Rights Agreement"), pursuant to which the Series A Purchasers, the Series B
Purchasers, the Series C Purchasers and the Founders were granted certain
rights, including but not limited to registration rights. The 1998 Rights
Agreement superseded and replaced the Prior Rights Agreement in its entirety.
<PAGE>
D. The Company, the Series A Purchasers, the Series B Purchasers, the
Series C Purchasers, the Series D Purchasers, and the Founders are parties to
the 1999 Amended and Restated Shareholder Rights Agreement, dated as of June 4,
1999 (the "1999 Rights Agreement"), pursuant to which the Series A Purchasers,
the Series B Purchasers, the Series C Purchasers, the Series D Purchasers and
the Founders were granted certain rights, including but not limited to
registration rights. The 1999 Rights Agreement superseded and replaced the Prior
Rights Agreement in its entirety.
E. Pursuant to the Agreement and Plan or Reorganization, dated December
21, 1999, among the Company, Transcription Enterprises Limited, Inc., a wholly
owned subsidiary of the Company ("Sub"), TE and certain shareholders of TE (the
"Reorganization Agreement"), TE merged with and into Sub ("Merger"), with Sub as
the surviving corporation (the "Surviving Corporation"), and in connection with
the Merger, the shareholders of TE exchanged all of the outstanding shares of
capital stock of TE (the "TE Shares") owned by such shareholders for shares of
Series E Preferred Stock of the Company, amounts in cash and indebtedness
evidenced by promissory notes of the Company (the "Notes").
F. In order to induce the shareholders of TE to approve the Merger and to
accept the Series E Preferred Stock as part of the Merger Consideration (as
defined in the Reorganization Agreement), the Series E Purchasers and the
Company agree to provide for the rights set forth herein.
G. The Company has requested and the holders, holding at least a majority
of the shares of the Company's Common Stock issued or issuable upon conversion
of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, and Series D Preferred Stock have agreed, pursuant to Section 6.4 of the
1999 Rights Agreement to amend and restate in its entirety the 1999 Rights
Agreement, in the manner set forth herein.
H. The Purchasers agree to be bound by all of the terms and conditions of
this Agreement. The Founders are parties to this Agreement for purposes of
Sections 2.6, 2.9 through 2.17, 3 and 6 only.
NOW, THEREFORE, the parties agree as follows:
SECTION 1
Information Rights
------------------
1.1 Financial Information
---------------------
(a) Within ninety (90) days after the end of each fiscal year, the Company
shall deliver to each Purchaser audited consolidated balance sheets of the
Company and its subsidiaries, if any, as of the end of such fiscal year, and
audited consolidated statements of income and consolidated statements of changes
in financial position of the Company and its subsidiaries, if any,
-2-
<PAGE>
for such year, prepared in accordance with generally accepted accounting
principles, all in reasonable detail.
(b) Within forty-five (45) days after the end of the first, second and
third quarterly accounting periods in each fiscal year of the Company, the
Company shall deliver to each Series A Purchaser, each Series B Purchaser, each
Series C Purchaser, each Series D Purchaser and each Series E Purchaser who
continues to hold at least an aggregate of 50,000 shares (appropriately adjusted
for any recapitalizations, stock combinations, stock dividends, stock splits and
the like with respect to such shares (a "Recapitalization")) of the Company's
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
(including the shares of Series C Preferred Stock issuable upon exercise of the
Series C Warrants (as such term is defined in the Series D Agreement)), Series D
Preferred Stock, or Series E Preferred Stock, as the case may be, or Common
Stock issued or issuable pursuant to conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, or
Series E Preferred Stock, as the case may be, an unaudited consolidated balance
sheet of the Company and its subsidiaries, if any, as of the end of each such
quarterly period, and unaudited consolidated statements of income and
consolidated statements of changes in financial condition of the Company and its
subsidiaries for such period prepared in accordance with generally accepted
accounting principles (other than for accompanying notes), subject to changes
resulting from year-end audit adjustments, all in reasonable detail and signed
by the principal financial or accounting officer of the Company.
(c) The rights granted pursuant to Section 1.1 may not be assigned or
otherwise conveyed by any Purchaser, or by any subsequent transferee of any such
rights without the prior written consent of the Company except as authorized in
this Section. After giving notice to the Company, the Series A Purchasers, the
Series B Purchasers, the Series C Purchasers, the Series D Purchasers, or the
Series E Purchasers, without the Company's consent, may assign the rights
granted pursuant to Section 1.1 to any transferee, other than a competitor of
the Company, who acquires (or acquires a warrant exercisable for) Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, or Series E Preferred Stock, as the case may be, convertible
into at least an aggregate of 50,000 shares of the Company's Common Stock
(appropriately adjusted for any Recapitalization).
1.2 Termination of Covenants.
------------------------
The obligations of the Company set forth in this Section 1 shall
terminate and be of no further force or effect at such time as the Company is
required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
SECTION 2
---------
Restrictions on Transferability of Securities;
----------------------------------------------
Compliance with Securities Act; Registration Rights
---------------------------------------------------
2.1 Restrictions on Transferability. The Series A Preferred Stock, the
-------------------------------
Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred
Stock, the Series E Preferred
-3-
<PAGE>
Stock and the Conversion Stock (as defined below) shall not be sold, assigned,
transferred or pledged except upon the conditions specified in this Section 2.
The Series A Purchasers, the Series B Purchasers, the Series C Purchasers, the
Series D Purchasers, and the Series E Purchasers will cause any proposed
purchaser, assignee, transferee, or pledgee of any such shares held by the
Series A Purchasers, the Series B Purchasers, the Series C Purchasers, the
Series D Purchasers, or the Series E Purchasers, as the case may be, to agree to
take and hold such securities subject to the provisions and upon the conditions
specified in this Section 2.
2.2 Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Closing Date" shall mean the Effective Date (as defined in the
Reorganization Agreement) of the Merger.
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Conversion Stock" means the Common Stock issued or issuable pursuant to
conversion of the Preferred Stock, including without limitation the Common Stock
issuable upon conversion of the Series C Preferred Stock issuable upon exercise
of the Series C Warrants. For purposes only of Sections 2.6, 2.9 through 2.17,
3 and 6 hereof, "Conversion Stock" shall also be deemed to mean any Common Stock
held by a Founder.
"Holder" shall mean (i) any Purchaser holding Registrable Securities
(including Preferred Stock) and (ii) any person holding Registrable Securities
to whom the rights under this Section 2 have been transferred in accordance with
Section 2.14 hereof. For purposes only of Sections 2.6, 2.9 through 2.16 and 5
hereof, "Holder" shall also be deemed to mean any Founder.
"Initiating Holders" shall mean Holders in the aggregate of greater than
25% of the Registrable Securities.
"Preferred Stock" shall mean the Series A Preferred Stock issued pursuant
to the Series A Agreement, the Series B Preferred Stock issued pursuant to the
Series B Agreement, the Series C Preferred Stock issued pursuant to the Series C
Agreement or upon exercise of the Series C Warrants, the Series D Preferred
Stock issuable pursuant to the Series D Agreement, the Series E Preferred Stock
issuable pursuant to the Reorganization Agreement, and any additional shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, or Series E Preferred Stock, as the case may be,
issued in respect of such shares upon a Recapitalization. For purposes of this
Agreement, Series C Preferred Stock shall be deemed to include any shares of
Series C Preferred Stock issuable or issued upon exercise of the Series C
Warrants, and all rights of the Series C Purchasers with respect to their shares
of capital stock of the Company contained herein shall apply to such shares of
Series C Preferred Stock issuable or issued upon exercise of the Series C
Warrants.
-4-
<PAGE>
"Registrable Securities" means (i) the Conversion Stock and (ii) any Common
Stock of the Company issued or issuable in respect of the Conversion Stock upon
any Recapitalization, or similar event, or any Common Stock otherwise issuable
with respect to the Conversion Stock; provided, however, that shares of Common
Stock or other securities shall only be treated as Registrable Securities if and
so long as they have not been (A) sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction, or (B)
sold or are, in the opinion of counsel for the Company, available for sale in a
single transaction exempt from the registration and prospectus delivery
requirements of the Securities Act so that all transfer restrictions and
restrictive legends with respect thereto are removed upon the consummation of
such sale.
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses, except as otherwise stated
below, incurred by the Company in complying with Sections 2.5, 2.6, 2.7 and 2.10
hereof, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company, blue sky fees and expenses, the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company) and the reasonable fees and disbursements of one counsel for all
Holders.
"Restricted Securities" shall mean the securities of the Company required
to bear the legend set forth in Section 2.3 hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the Holders and, except as set forth above, all reasonable fees and
disbursements of counsel for any Holder.
"Series E Conversion Stock" shall mean the Common Stock issued or issuable
pursuant to conversion of the Series E Preferred Stock.
"Series E Restricted Securities" shall mean the securities of the Company
required to bear the legend set forth in Section 2.3(b) hereof.
"Series E Registrable Securities" means (i) the Series E Conversion Stock
and (ii) any Common Stock of the Company issued or issuable in respect of the
Series E Conversion Stock upon any Recapitalization, or similar event, or any
Common Stock otherwise issuable with respect to the Series E Conversion Stock;
provided, however, that shares of Common Stock or other securities shall only be
treated as Series E Registrable Securities if and so long as they have not been
(A) sold to or through a broker or dealer or underwriter in a public
distribution or a public securities
-5-
<PAGE>
transaction, or (B) sold or are, in the opinion of counsel for the Company,
available for sale in a single transaction exempt from the registration and
prospectus delivery requirements of the Securities Act so that all transfer
restrictions and restrictive legends with respect thereto are removed upon the
consummation of such sale.
2.3 Restrictive Legend.
------------------
(a) Series A Preferred, Series B Preferred, Series C Preferred, and
---------------------------------------------------------------
Series D Preferred Legend. Each certificate representing (i) the Preferred
- -------------------------
Stock (other than the Series E Preferred Stock), or (ii) the Registrable
Securities (other than the Series E Registrable Securities) shall (unless
otherwise permitted by the provisions of Section 2.4 below) be stamped or
otherwise imprinted with a legend in the following form (in addition to any
legend required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.
(b) Series E Preferred Legend. Each certificate representing (i) the
-------------------------
Series E Preferred or (ii) the Series E Registrable Securities shall (unless
otherwise permitted by the provisions of Section 2.4(b) below) be stamped or
otherwise imprinted with legends in the following form (in addition to any
legend required under applicable state securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR
AN EXEMPTION THEREFROM UNDER SAID ACT. THE SECURITES DURING A PERIOD OF NINE
MONTHS FROM DATE OF ISSUANCE OF SUCH SECURITIES MAY ONLY BE RESOLD TO PERSONS
RESIDENT WITHIN THE STATE OF CALIFORNIA AND IN ACCORDANCE WITH RULE 147 OF THE
SECURITIES ACT OF 1933. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE
SECURITIES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN
REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE
CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION. SUCH
TRANSFER RESTRICTIONS ARE BINDING ON TRANSFEREES OF THESE SECURITIES.
(c) Consent. Each Holder consents to the Company making a notation on
-------
its records and giving instructions to any transfer agent of the Preferred Stock
or the Common Stock in order to implement the restrictions on transfer
established in this Section 2.
-6-
<PAGE>
2.4 Restrictions on Transfer; Notice of Proposed Transfers.
------------------------------------------------------
(a) Series A Preferred, Series B Preferred, Series C Preferred and
--------------------------------------------------------------
Series D Preferred Restrictions on Transfer. The holder of each certificate
- -------------------------------------------
representing Restricted Securities (other than the Series E Restricted
Securities) by acceptance thereof agrees to comply in all respects with the
provisions of this Section 2.4. Prior to any proposed sale, assignment,
transfer or pledge of any Restricted Securities (other than (i) a transfer not
involving a change in beneficial ownership, (ii) in transactions involving the
distribution without consideration of Restricted Securities by the Holder to any
of its partners, or retired partners, or to the estate of any of its partners or
retired partners, (iii) any transfer by any Holder to (A) any individual or
entity controlled by, controlling, or under common control with, such Holder or
(B) any individual or entity with respect to which such Holder (or any person
controlled by, controlling, or under common control with, such Holder) has the
power to direct investment decisions, (iv) in transactions in compliance with
Rule 144 or (v) a transfer involving any Series E Restricted Securities), and
unless there is in effect a registration statement under the Securities Act
covering the proposed transfer, the holder thereof shall give written notice to
the Company of such holder's intention to effect such transfer, sale, assignment
or pledge. Each such notice shall describe the manner and circumstances of the
proposed transfer, sale, assignment or pledge in sufficient detail, and shall be
accompanied, at such holder's expense by either (i) a written opinion of legal
counsel, who shall be, and whose legal opinion shall be, reasonably satisfactory
to the Company, addressed to the Company, to the effect that the proposed
transfer of the Restricted Securities may be effected without registration under
the Securities Act, or (ii) a "no action" letter from the Commission to the
effect that the transfer of such securities without registration will not result
in a recommendation by the staff of the Commission that action be taken with
respect thereto, whereupon the holder of such Restricted Securities shall be
entitled to transfer such Restricted Securities in accordance with the terms of
the notice delivered by the holder to the Company. Each certificate evidencing
the Restricted Securities transferred as above provided shall bear, except if
such transfer is made pursuant to Rule 144, the appropriate restrictive legend
set forth in Section 2.3(a) above, except that such certificate shall not bear
such restrictive legend if in the opinion of counsel for such holder and the
Company such legend is not required in order to establish compliance with any
provision of the Securities Act.
(b) Series E Preferred Restrictions on Transfer. Notwithstanding
-------------------------------------------
anything to the contrary contained in Section 2.4(a) hereof, each holder of each
certificate representing any Series E Restricted Securities agrees to comply in
all respects with the provisions of this Section 2.4(b). Prior to any proposed
sale, assignment, transfer or pledge of any Series E Restricted Securities,
unless there is in effect a registration statement under the Securities Act
covering the proposed transfer or such transfer is made after a date which is
nine months after the Effective Date of the Merger, the holders of such Series E
Restricted Securities shall give the written notice to the Company of such
holder's intention to effect such transfer, sale, assignment or pledge. Each
such notice shall describe the manner and circumstances of the proposed transfer
in sufficient detail, and shall, if the Company so requests, be accompanied by
either (i) a written opinion of legal counsel who shall be satisfactory to the
Company, addressed to the Company and satisfactory in form and substance to the
Company's counsel, to the effect that the proposed transfer of the Series E
Restricted Securities is made in compliance with Rule 147 and may be effected
without registration under the Securities Act, or (ii) a "No Action" letter from
the Commission to the effect that the transfer of such Series E Restricted
-7-
<PAGE>
Securities without registration will not result in a recommendation by the staff
of the Commission that action be taken with respect thereto, whereupon the
holder of such Series E Restricted Securities shall be entitled to transfer such
Series E Restricted Securities in accordance with the terms of the notice
delivered by the holder to the Company. Each certificate evidencing the Series
E Restricted Securities transferred as above provided shall bear the appropriate
restrictive legend as set forth in Section 2.3(b) above, except that such
certificate shall not bear such restrictive legend if in the opinion of counsel
of such holder and the Company such legend is not required in order to establish
compliance with any provision of the Securities Act.
2.5 Requested Registration.
----------------------
(a) General Request for Registration.
--------------------------------
(1) Request For Registration. In case the Company shall receive
------------------------
from Initiating Holders a written request that the Company effect any
registration, qualification or compliance with respect to (1) at least twenty
five percent (25%) of the issued and outstanding Registrable Securities or (2)
not less than that number of shares of Registrable Securities which would result
in an anticipated aggregate offering price, net of underwriting discounts and
commissions, greater than two million dollars ($2,000,000) (an "IPO"), the
Company will:
(ii) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and
(iii) as soon as practicable, use its best efforts to effect
such registration, qualification or compliance (including, without limitation,
appropriate qualification under applicable blue sky or other state securities
laws and appropriate compliance with applicable regulations issued under the
Securities Act and any other governmental requirements or regulations) as may be
so requested and as would permit or facilitate the sale and distribution of all
or such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within twenty (20) days after receipt of such written notice from
the Company;
Provided, however, that the Company shall not be obligated to
take any action to effect any such registration, qualification or compliance
pursuant to this Section 2.5(a)(1):
(A) In any particular jurisdiction in which the
Company would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(B) Prior to six (6) months after the effective date
of the Company's first registered public offering of its stock;
-8-
<PAGE>
(C) During the period starting with the date sixty
(60) days prior to the Company's estimated date of filing of, and ending on the
date six (6) months immediately following the effective date of, any
registration statement pertaining to securities of the Company (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan), provided that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective;
(D) After the Company has effected two (2) such
registrations pursuant to this subparagraph 2.5(a)(l), and such registrations
have been declared or ordered effective; or
(E) If the Company shall furnish to such Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company or its shareholders for a registration statement to be filed in the
near future, then the Company's obligation to use its best efforts to register,
qualify or comply under this Section 2.5 shall be deferred for a period not to
exceed one hundred twenty (120) days from the date of receipt of written request
from the Initiating Holders; provided that the Company may not exercise this
-------- ----
deferral right more than once per twelve (12) month period.
Subject to the foregoing clauses (A) through (E), the Company
shall file a registration statement covering the Registrable Securities so
requested to be registered as soon as practicable, after receipt of the request
or requests of the Initiating Holders.
(2) Underwriting. In the event that a registration pursuant to
------------
Section 2.5(a) is for a registered public offering involving an underwriting,
the Company shall so advise the applicable Holders as part of the notice given
pursuant to Section 2.5(a)(1)(i). In such event, the right of any such Holder to
registration pursuant to Section 2.5 shall be conditioned upon such Holder's
participation in the underwriting arrangements required by this Section 2.5, and
the inclusion of such Holder's Registrable Securities in the underwriting to the
extent requested shall be limited to the extent provided herein.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by a
majority in interest of the Initiating Holders if registration is requested
pursuant to Section 2.5(a)(1), but subject to the Company's reasonable approval.
Notwithstanding any other provision of this Section 2.5, if the managing
underwriter advises the Initiating Holders in writing that marketing factors
require a limitation of the number of shares to be underwritten, then the
Company shall so advise all holders of Registrable Securities and the number of
shares of Registrable Securities that may be included in the registration and
underwriting shall be allocated among all Holders in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration. To facilitate the
allocation
-9-
<PAGE>
of shares in accordance with the above provisions, the Company or the
underwriters may round the number of shares allocated to any Holder to the
nearest 100 shares.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration, and such Registrable Securities shall not be
transferred in a public distribution prior to one hundred eighty (180) days
after the effective date of such registration, or such other shorter period of
time as the underwriters may require.
2.6 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time the
----------------------
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders, other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within twenty (20) days after receipt of such written notice from
the Company, by any Holder.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 2.6(a)(i). In such event the right of any Holder to
registration pursuant to Section 2.6 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this Section 2.6, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, then: (i) if such registration is the first
offering by the Company to the general public of its securities for its account,
the managing underwriter may exclude some or all Registrable Securities from
such registration and underwriting (provided the securities of other
shareholders are not included therein), and (ii) if such registration is other
than the first offering by the Company to the general public of its securities
for its account, the managing underwriter may (subject to the allocation
priority set forth below) limit the number of Registrable Securities to be
included in such registration and underwriting to an aggregate of not less than
thirty percent (30%) of the total number of the securities to be registered in
such registration and underwriting; provided that any shares of stock held by
-------- ----
the Founders proposed to be included in the registration and underwriting shall
be reduced to zero prior to any reductions with respect to Registrable
Securities held by any other Holders. The Company shall so advise all Holders
and other holders distributing their securities
-10-
<PAGE>
through such underwriting and the number of shares of Registrable Securities
that may be included in the registration and underwriting shall be allocated
among all the Holders in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities held by such Holder at the time of filing the
Registration Statement. To facilitate the allocation of shares in accordance
with the above provisions, the Company may round the number of shares allocated
to any Holder or holder to the nearest 100 shares. If any Holder or holder
disapproves of the terms of any such underwriting, he or she may elect to
withdraw therefrom by written notice to the Company and the managing
underwriter. Any securities excluded or withdrawn from such underwriting shall
be withdrawn from such registration, and shall not be transferred in a public
distribution prior to one hundred eighty (180) days after the effective date of
the registration statement relating thereto, or such other shorter period of
time as the underwriters may require.
(c) Right to Terminate Registration. The Company shall have the right
-------------------------------
to terminate or withdraw any registration initiated by it under this Section 2.6
prior to the effectiveness of such registration whether or not any Holder has
elected to include securities in such registration.
2.7 Registration on Form S-3.
------------------------
(a) If any Holder or Holders hold Registrable Securities equal or
convertible in the aggregate to not less than 1% of the then outstanding Common
Stock request that the Company file a registration statement on Form S-3 (or any
successor form to Form S-3) for a public offering of shares of the Registrable
Securities the reasonably anticipated aggregate price to the public of which,
net of underwriting discounts and commissions, would exceed $1,000,000, and the
Company is a registrant entitled to use Form S-3 to register the Registrable
Securities for such an offering, the Company shall use its best efforts to cause
such Registrable Securities to be registered for the offering on such form and
to cause such Registrable Securities to be qualified in such jurisdictions as
such Holder or Holders may reasonably request; provided, however, that the
Company shall not be required to effect more than two (2) registrations pursuant
to this Section 2.7 in any twelve (12) month period. The Company shall inform
other Holders of the proposed registration and offer them the opportunity to
participate. The substantive provisions of Section 2.5(a)(2) and 2.5(b)(2)
shall be applicable to each registration initiated under this Section 2.7.
(b) Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this Section 2.7 (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act; (ii) prior to the Company's
first registered public offering of its stock; (iii) if the Company, within ten
(10) days of the receipt of the request of the Initiating Holders, gives notice
of its bona fide intention to effect the filing of a registration statement
---- ----
with the Commission within ninety (90) days of receipt of such request (other
than with respect to a registration statement relating to a Rule 145
transaction, an offering solely to employees or any other registration which is
not appropriate for the registration of Registrable Securities); (iv) during the
period starting with the date sixty (60) days prior to the Company's estimated
date of filing of, and ending on the date six (6) months immediately following
the effective date of, any registration statement pertaining to securities of
the Company (other than a registration of securities in a
-11-
<PAGE>
Rule 145 transaction or with respect to an employee benefit plan), provided that
the Company is actively employing in good faith all reasonable efforts to cause
such registration statement to become effective; or (v) if the Company shall
furnish to such Holder a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors it would be
seriously detrimental to the Company or its shareholders for registration
statements to be filed in the near future, then the Company's obligation to use
its best efforts to file a registration statement shall be deferred for a period
not to exceed one hundred and twenty (120) days from the receipt of the request
to file such registration by such Holder; provided that the Company may not
-------- ----
exercise this deferral right more than once per twelve (12) month period.
2.8 Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
Closing Date, the Company shall not enter into any agreement granting any holder
or prospective holder of any securities of the Company registration rights with
respect to such securities unless (i) such new registration rights, including
standoff obligations, are on a pari passu basis with those rights of the
---- -----
Holders hereunder, or (ii) such new registration rights, including standoff
obligations, are subordinate to the registration rights granted Holders
hereunder.
2.9 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with (i) two (2) registrations pursuant to Section 2.5(a), (ii) all
registrations pursuant to Section 2.6, and (iii) all registrations pursuant to
Section 2.7 shall be borne by the Company. Unless otherwise stated, all Selling
Expenses relating to securities registered on behalf of the Holders and all
other Registration Expenses shall be borne by the Holders of such securities pro
rata on the basis of the number of shares so registered.
2.10 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 2,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense, the Company will:
(a) Prepare and file with the Commission a registration statement with
respect to such securities and use its best efforts to cause such registration
statement to become and remain effective for at least one hundred eighty (180)
days or until the distribution described in the Registration Statement has been
completed; and
(b) Furnish to the Holders participating in such registration and to
the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities.
2.11 Indemnification
---------------
(a) The Company will indemnify each Holder, each of its officers,
directors, partners and shareholders, and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Section 2, and each underwriter, if any, and each person who controls any
-12-
<PAGE>
underwriter within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading, or any violation by the Company of the Securities Act, the
Exchange Act, state securities law or any rule or regulation promulgated under
such laws applicable to the Company in connection with any such registration,
qualification or compliance, and within a reasonable period the Company will
reimburse each such Holder, each of its officers and directors, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action as such expenses are incurred; provided that the
-------- ----
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder, controlling person or underwriter and
stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and within a reasonable
period will reimburse the Company, such Holders, such directors, officers,
persons, underwriters or control persons for any legal or any other expenses
reasonably incurred, as such expenses are incurred, in connection with
investigating or defending any such claim, loss, damage, liability or action, in
each case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by such Holder and stated to be
specifically for use therein. Notwithstanding the foregoing, the liability of
each Holder under this subsection (b) shall be limited in an amount equal to the
gross proceeds before expenses and commissions to each Holder received for the
shares sold by such Holder, unless such liability arises out of or is based on
willful misconduct by such Holder.
-13-
<PAGE>
(c) Each party entitled to indemnification under this Section 2.11
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 2 unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action
and provided further, that the Indemnifying Party shall not assume the defense
for matters as to which there is a conflict of interest or separate and
different defenses. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation or which includes an admission of fault on behalf of the Indemnified
Party.
2.12 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 2.
2.13 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Exchange Act;
(b) Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements); and
(c) So long as a Holder owns any Restricted Securities to furnish to
the Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 (at any time after
ninety (90) days after the effective date of the first registration statement
filed by the Company for an offering of its securities to the general public),
and of the Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company and other information in the possession of or reasonably obtainable by
the Company as the Holder may reasonably request in availing itself of any
-14-
<PAGE>
rule or regulation of the Commission allowing the Holder to sell any such
securities without registration.
2.14 Transfer of Registration Rights. The rights to cause the Company to
-------------------------------
register securities granted Holders under Sections 2.5, 2.6 and 2.7 may be
assigned to a transferee or assignee reasonably acceptable to the Company which
acquires at least 50,000 shares (appropriately adjusted for any
Recapitalization) of Registrable Securities in connection with any transfer or
assignment of Registrable Securities by the Holders.
2.15 Standoff Agreement. In connection with any public offering of the
------------------
Company's securities, the Holder agrees, upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities, not
to sell, make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any Registrable Securities (other than those included in
the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed one
hundred eighty (180) days in the case of an initial public offering or ninety
(90) days in the case of any other public offering) from the effective date of
such registration as may be requested by the underwriters; provided that the
-------- ----
officers and directors and all 1% shareholders of the Company who own stock of
the Company also agree and remain subject to such restrictions. Notwithstanding
the foregoing, the provisions of this Section 2.15 shall not be interpreted to
restrict Goldman, Sachs & Co. and its affiliates in the normal course of their
brokerage, advisory, financing, trading, arbitrage and other of their ordinary
course activities.
2.16 Termination of Registration Rights. The registration rights granted
----------------------------------
pursuant to Section 2 shall terminate as to each Holder at such time as a public
market for the Company's Common Stock exists and all Registrable Securities held
by such Holder may, in the opinion of counsel to the Company (which opinion
shall be addressed and rendered to Holder), be sold within a given three month
period pursuant to Rule 144.
2.17 Suspension of Sales. The Company shall have the right to suspend
-------------------
sales of Registrable Securities by Holders who propose to sell such Registrable
Securities pursuant to Sections 2.5 and 2.7 hereof in the event the Company
determines, in its good faith judgment, that there exists material information
regarding the Company that has not been disclosed to the public and which is not
disclosed (or incorporated by reference) in the registration statement covering
such Registrable Securities (the "Undisclosed Material Information"). In
furtherance of the foregoing, prior to making any such sale, any such Holder
shall furnish to the Company a written notice stating that it intends to make a
sale. Within two (2) days of receipt of such notice, the Company shall provide
written notice to the Holders proposing to sell Registrable Securities as to
whether the Company shall suspend such sale due to the existence of Undisclosed
Material Information. The Holders shall suspend any further sale of Registrable
Securities pursuant to the registration statement until the Company advises such
Holders that the registration statement has been amended. In such event, the
Company shall cause the registration statement to be amended as soon as
reasonably practicable, provided that the Company shall not be required to amend
the registration statement during any time when the Company's officers and
directors are prohibited from buying or selling the Company's Common Stock
pursuant to the Company's insider trading policy. Notwithstanding the
-15-
<PAGE>
foregoing sentence, the Company shall file any amendment necessary for the
Holders to recommence their sales under the registration statement concurrently
with the commencement of any period in which directors and officers of the
Company are allowed to buy or sell Common Stock pursuant to the Company's
insider trading policy.
SECTION 3
---------
Co-Sale Rights
--------------
3.1 Right to Participate. At any time a Founder (a "Seller") proposes to
--------------------
sell or otherwise dispose of for value to a third party (the "Proposed
Transferee") any Common Stock of the Company held by such Founder (the "Offered
Securities"), such Founder shall notify the Company in writing. The Company
shall notify each Purchaser in writing (the "Sale Notice") and each Purchaser
shall have the right to participate in the sale to the Proposed Transferee upon
the same terms and conditions as the Seller, subject to the terms and conditions
set forth in this Section 3. A Purchaser shall exercise its right by delivering
to the Seller, within fifteen (15) days of the date of the Sale Notice, (i)
written notice of its intention to participate, specifying the amount of shares
Purchaser desires to sell to the Proposed Transferee, and (ii) one or more
certificates representing the number of shares of Common Stock which Purchaser
elects to sell hereunder, duly endorsed for transfer to the Proposed Transferee.
3.2 Qualified Participation. Each Purchaser (and its permitted
-----------------------
transferees) shall have the right to sell up to that number of shares of Common
Stock equal to the product of (i) the amount of Offered Securities multiplied by
(ii) a fraction, the numerator of which is the number of shares of Common Stock
(including Conversion Stock) owned by such Purchaser, and the denominator of
which is the total number of shares of Common Stock (including Conversion Stock)
owned by the Seller and the Purchasers as a group. In the event that the
Proposed Transferee desires to purchase a number of shares of Common Stock
different from the amount of the Offered Securities (the "New Amount"), the New
Amount shall be substituted for Offered Securities in the above equation for the
purpose of determining each Purchaser's participation rights. In the event of
Purchaser participation, the amount of Offered Securities which Seller is
entitled to sell on Seller's own behalf shall be reduced accordingly, and Seller
shall include such Purchaser shares in the sale of the Offered Securities.
3.3 Continuing Rights. The exercise or non-exercise of the right to
-----------------
participate hereunder with respect to a particular sale by a Seller shall not
adversely affect a Purchaser's right to participate in subsequent sales by the
same or other Sellers pursuant to this Section 3.
3.4 Termination. This Section 3 regarding Co-Sale Rights of the Agreement
shall terminate upon the earliest to occur of:
(a) the closing of the sale of Common Stock in a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act (other than a registration relating solely to an
employee benefit plan of the Company) at a public offering price
-16-
<PAGE>
(prior to underwriting commissions and expenses) of at least $16.00 per share
(appropriately adjusted for any Recapitalization) and in which the aggregate
gross proceeds received by the Company from the underwriters in such offering
equal or exceed $15,000,000.
(b) the date ten (10) years from the date of this Agreement.
(c) the consolidation, merger (but only with respect to a
consolidation or merger pursuant to which shareholders of the Company
(determined immediately prior to such consolidation or merger) hold less than
50% of the voting securities of the surviving or acquiring corporation) or sale
of all or substantially all of the assets of the Company.
SECTION 4
---------
Right of First Refusal
----------------------
4.1 Right of First Refusal. Subject to the terms and conditions specified
----------------------
in this Section 4.1, the Company hereby grants to each Purchaser a right of
first refusal with respect to future sales by the Company of its New Securities
(as hereinafter defined). A Purchaser shall be entitled to apportion the right
of first refusal hereby granted it among itself and any individual or entity
controlled by, controlling, or under common control with, such Purchaser in such
proportions as it deems appropriate. For purposes of this Section 4 only, the
term "Purchaser" or "Purchasers" shall mean any Purchaser who is an "accredited
investor" within the meaning of Regulation D, Rule 501(A), promulgated by the
Commission.
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock (the "New Securities"), the Company shall first make an offering of such
New Securities to each Purchaser in accordance with the following provisions:
(a) The Company shall deliver a notice ("Notice") to the Purchasers
stating, (i) its bona fide intention to offer such New Securities, (ii) the
number of such New Securities to be offered, and (iii) the price and terms, if
any, upon which it proposes to offer such New Securities.
(b) Within twenty (20) days after giving of the Notice, each Purchaser
may elect to purchase or obtain, at the price and on the terms specified in the
Notice, up to that portion of such New Securities which equals the proportion
that the number of shares of Common Stock issued and held, or issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, or Series E Preferred Stock then
held, by such Purchaser bears to the total number of shares of Common Stock of
the Company then outstanding (determined on a fully diluted basis (assuming the
conversion of convertible securities and the exercise of outstanding and
unexercised options and warrants)).
(c) If all New Securities referred to in the Notice which the
Purchasers are entitled to obtain pursuant to subsection 4.1(b) are not elected
to be obtained as provided in subsection 4.1(b) hereof, the Company may, during
the ninety (90) day period following the expiration of the period
-17-
<PAGE>
provided in subsection 4.1(b) hereof, offer the remaining unsubscribed portion
of such New Securities to any person or persons at a price not less than, and
upon terms no more favorable to the offeree than, those specified in the Notice.
If the Company does not enter into an agreement for the sale of the New
Securities within such period, or if such agreement is not consummated within
sixty (60) days of the execution thereof, the right provided hereunder shall be
deemed to be revived and such New Securities shall not be offered unless first
reoffered to the Purchasers in accordance herewith.
(d) Notwithstanding the foregoing, New Securities do not include (i)
securities offered to the public generally pursuant to a registration statement
under the Securities Act, (ii) securities issued in connection with a bona fide
business acquisition of or by the Company approved by the Board of Directors
(and approved by a majority of the non-employee members of the Board of
Directors (the "Outside Directors")), whether by merger, consolidation, sale of
assets, sale or exchange of stock or otherwise, (iii) shares of the Company's
Common Stock, or related options exercisable for such Common Stock, issued to
employees, officers, directors, OEMs (or other strategic partners), customers
and suppliers of, and consultants to, the Company, pursuant to any arrangement
approved by the Board of Directors of the Company (and approved by the Outside
Directors), (iv) the issuance of securities pursuant to the conversion or
exercise of convertible or exercisable securities either (A) outstanding on the
date of this Agreement or (B) issued after the date of this Agreement (provided,
in the case of clause (B), the original convertible or exercisable securities
were subject to or exempt from the right of first refusal), (v) securities
issued in connection with any Recapitalization, or (vi) shares of currently
authorized Series E Preferred Stock pursuant to the terms of the Reorganization
Agreement or shares issued or issuable upon conversion of the Series E Preferred
Stock.
(e) The right of first refusal set forth in this Section 4.1 may not
be assigned or transferred, except that such right is assignable by each
Purchaser (i) to a transferee or assignee that acquires at least 50,000 shares
of Registrable Securities from a Purchaser (appropriately adjusted for any
Recapitalization), or (ii) to any individual or entity controlled by,
controlling, or under common control with, such Purchaser, provided that (a) the
-------- ----
Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such right of first refusal is
being transferred or assigned; (b) such transferee or assignee agrees in writing
to be bound by and subject to the terms and conditions of this Agreement,
including without limitation the provisions of Section 2.15; and (c) such
transfer or assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act. For the purposes of
determining the number of shares of Registrable Securities held by a holder of
Registrable Securities, the holdings of any individual or entity controlled by,
controlling, or under common control with, such holder shall be aggregated
together; provided that all assignees and transferees who would not qualify
-------- ----
individually for assignment of the right of first refusal shall have a single
attorney-in-fact for the purpose of exercising any rights, receiving notices or
taking any action under this Section 4.1.
-18-
<PAGE>
SECTION 5
---------
Board Rights
------------
5.1 Board Visitation Right. One representative of each of (i) The Goldman
Sachs Group, Inc. ("GS"), (ii) Index Ventures I (Delaware), L.P. ("Index"), and
(iii) the Series E Purchasers shall have reasonable Board of Directors'
visitation rights. The representative of the Series E Purchasers shall be
designated by the holders of a majority of the then issued and outstanding
Series E Preferred Stock. Such visitation rights shall include (i) the right to
receive reasonable notice in advance of all Board of Directors meetings and
Board committee meetings, (ii) the right to receive, concurrently with receipt
by members of the Board of Directors, all materials, reports and other written
communications received by members of the Board of Directors, (iii) the right to
attend all Board of Directors meetings and meetings of committees thereof and
(iv) the right of the representatives to be reimbursed for their reasonable out-
of-pocket expenses in attending such Board of Director meetings, not to exceed
an aggregate of $7,000 per meeting; provided, however, that the Company shall
-------- -------
require as a condition precedent to the rights under this Section 5.1 that each
person proposing to attend any meeting of the Board of Directors or committee
thereof and each person to have access to any of the information provided by the
Company to the Board of Directors agree to hold in confidence information so
received during such meetings or otherwise (except in connection with a person's
obligations to inform GS, Index, or the Series E Purchasers so each of GS,
Index, and the Series E purchasers will have sufficient information to monitor
its investment in the Company), and provided further, however, that the Company
-------- -------
reserves the right not to provide information and to exclude such representative
from any meeting or portion thereof if delivery of such information or
attendance at such meeting or portion thereof by such representative would
result in disclosure of trade secrets to such representative and would
materially adversely impact the Company or would adversely affect the attorney-
client privilege between the Company and its counsel.
Notwithstanding anything to the contrary contained in this Section 5.1
hereof, the Series E Purchasers shall have such board visitation rights set
forth herein only at such time that the Series E Holders no longer have the
right to elect, as a class, one member of the Board of Directors in accordance
with Section 5.2 of this Agreement.
The rights set forth in this Section 5.1 shall terminate and be of no
further force or effect on the date, (i) with respect to GS, that GS (including
the holdings of any individual or entity controlled by, controlling, or under
common control with GS) holds less than 297,282 shares of the Common Stock
issued or issuable upon conversion of the Series D Preferred (appropriately
adjusted for any Recapitalization), (ii) with respect to Index, that Index
(including the holdings of any individual or entity controlled by, controlling,
or under common control with Index) holds less than 297,282 shares of the Common
Stock issued or issuable upon conversion of the Series D Preferred
(appropriately adjusted for any Recapitalization), or (iii) with respect to the
Series E Purchasers, that the Series E Purchasers (including the holdings of any
individual or entity controlled by, controlling, or under common control with
any Series E Purchaser) holds less than 50% of the shares of the Common Stock
issued or issuable upon conversion of the Series E Preferred (appropriately
adjusted for any Recapitalization).
-19-
<PAGE>
5.2 Board Representation. Except as may otherwise be consented to by the
holders of a majority of the outstanding Common Stock and Preferred Stock of the
Company, the Company shall fix and maintain the number of directors on the Board
of Directors of the Company at seven (7) members. At each election of directors
the Purchasers and the Founders (and their permitted transferees) shall vote all
of their respective capital stock so as to elect: (a) one (1) member designated
by a majority of the outstanding shares of Series E Preferred, so long as more
than 50% of the number of shares of Series E Preferred originally issued are
outstanding; and (b) the remaining six (6) directors shall be elected by a
majority of the outstanding shares of Common Stock, the Series A Preferred, the
Series B Preferred, the Series C Preferred, and the Series D Preferred together
as a class. In the event that not more than 50% of the number of shares of
Series E Preferred originally issued are outstanding, all directors shall be
elected by a majority of the Common Stock and the Preferred Stock voting
together. Any vote taken to remove any director elected pursuant to this Section
5.2, or to fill any vacancy created by the resignation or death of a director
elected pursuant to this Section 5.2, shall also be subject to the provisions of
this Section 5.2.
SECTION 6
---------
Miscellaneous
-------------
6.1 Governing Law. This Agreement shall be governed in all respects by
-------------
the internal laws of the State of California.
6.2 Survival. The covenants and agreements made herein shall survive any
--------
investigation made by the Purchasers and the closing of the transactions
contemplated hereby.
6.3 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
6.4 Entire Agreement; Amendment. This Agreement, the Series A Agreement,
the Series B Agreement, the Series C Agreement, the Series D Agreement, the
Reorganization Agreement and the other documents delivered pursuant hereto on
the Closing Date constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof, and no party
shall be liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein or therein.
Except as expressly provided herein, neither this Agreement nor any term hereof
may be amended, waived, discharged or terminated other than by a written
instrument signed by the party against whom enforcement of any such amendment,
waiver, discharge or termination is sought; provided, however, that holders of a
majority of the Common Stock issued or issuable upon conversion of the Preferred
Stock may, with the Company's prior written consent, waive, modify or amend on
behalf of all such holders, any provisions hereof. Notwithstanding the
foregoing, Section 3 of this Agreement may not be amended in a manner that
adversely affects the Founders without the written consent of the Founders, and
Section 5 of this Agreement may only be amended with the written consent of GS,
Index and a majority of the issued and outstanding shares of Series E Preferred
Stock.
-20-
<PAGE>
6.5 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed (a) if to a Purchaser, at such Purchaser's address, as shown on the
stock records of the Company, or at such other address as such Purchaser shall
have furnished to the Company in writing, or (b) if to any other holder of
Preferred Stock, at such address as such holder shall have furnished the Company
in writing, or, until any such holder so furnishes an address to the Company,
then to and at the address of the last holder of such Preferred Stock who has so
furnished an address to the Company, or (c) if to the Company, one copy should
be sent to its address set forth on the front page of this Agreement and
addressed to the attention of the President, or at such other address as the
Company shall have furnished to the Purchasers.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid.
6.6 Delays or Omissions. Except as expressly provided herein, no delay or
-------------------
omission to exercise any right, power or remedy accruing to any party to this
Agreement upon any breach or default of any other party under this Agreement,
shall impair any such right, power or remedy of such nondefaulting party nor
shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
party of any breach or default under this Agreement, or any waiver on the part
of any holder of any provisions or conditions of this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any party to this Agreement, shall be cumulative and not
alternative.
6.7 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
6.8 Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
-------- ----
it materially changes the economic benefit of this Agreement to any party.
6.9 Titles and Subtitles. The titles and subtitles used in this Agreement
--------------------
are used for convenience only and are not considered in construing or
interpreting this Agreement.
6.10 Confidentiality. Each Purchaser and Founder agrees not to use the
---------------
names of Intel Corporation, a Delaware corporation ("Intel") and Holder of
Series B Preferred Stock, or the names of Intel's affiliates or refer to Intel
or its affiliates directly or indirectly in connection with Intel's or its
affiliates' equity investment in the Company in any advertisement, news release
or professional or trade publication, or in any other manner, unless otherwise
required by law or with Intel's prior
-21-
<PAGE>
written consent, which consent will generally not be granted. Each Purchaser and
Founder further agrees to keep the terms and conditions of this Agreement in
strictest confidence, it being understood that this restriction shall not
prohibit disclosure to the parties' counsel, accountants and professional
advisors.
6.11 Entire Agreement; Effect on 1999 Rights Agreement.
----------------
(a) Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement between the parties regarding the subject matter
hereof and supersedes and cancels all prior agreements, negotiations,
correspondence, undertakings and communications of the parties, oral or written,
respecting such subject matter. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
(b) Effect on Prior Rights Agreement. The provisions of this
--------------------------------
Agreement amend and supersede any rights or obligations under the 1999 Rights
Agreement.
-22-
<PAGE>
The foregoing agreement is hereby executed as of the date first above
written.
"COMPANY"
NUMERICAL TECHNOLOGIES, INC.
a California Corporation
By: /s/ Yagyensh C. Pati
----------------------------------------
Yagyensh C. Pati, President and Chief
Executive Officer
-23-
<PAGE>
"SERIES A PURCHASERS"
ABBAS EL GAMAL - SMITH BARNEY INC.
SEP CUSTODIAN ACCT. #449-61489-19
By: /s/ J. Marguet
-------------------------------------
Title: VP Investments
----------------------------------
/s/ Chiang Cheng-Te
-----------------------------------------
Chiang Cheng-Te
/s/ Naren Gupta
-----------------------------------------
Naren K. Gupta, As Custodian for Anneka
Rupali Gupta under the California Uniform
Transfers to Minors Act
/s/ Naren Gupta
-----------------------------------------
Naren K. Gupta, As Custodian for Serena Sapna
Gupta under the California Uniform Transfers to
Minors Act
/s/ T. Kailath
-----------------------------------------
Thomas Kailath, Trustee of the Paul V. Kailath
Irrevocable Trust UAD 10/1/89
/s/ T. Kailath
-----------------------------------------
Thomas Kailath, Trustee of the Priya S. Kailath
Irrevocable Trust UAD 10/1/89
_________________________________________
Hsin-Chang Sanko Lan
/s/ Marc Levenson
-----------------------------------------
Marc D. Levenson
_________________________________________
Li-Hsiang Lin
-24-
<PAGE>
ROUNDSWAY CORPORATION
By: /s/ Jen-Chang Lan
------------------------------------
Title: Chairman
---------------------------------
/s/ George Verghese
---------------------------------------
George Verghese and
/s/ Ann Kailath
---------------------------------------
Ann Kailath
-25-
<PAGE>
"SERIES B PURCHASERS"
INTEL CORPORATION
By: /s/ Noel Lazo
------------------------------------
Title: Assistant Treasurer
_________________________________
/s/ John V. Roos
---------------------------------------
John V. Roos
WS INVESTMENT COMPANY 97B
By: /s/ James Terranova
------------------------------------
Title:
---------------------------------
-26-
<PAGE>
"SERIES C PURCHASERS"
/s/ Mahmoud Eltorai
-----------------------------------------------
Mahmoud Eltorai &
/s/ Janet Eltorai
-----------------------------------------------
Janet Eltorai, Trustees of the Mahmoud & Janet
Eltorai Revocable Trust Deed, Dated 5/31/89
GOEL FAMILY PARTNERSHIP
By:_____________________________________________
Title:__________________________________________
/s/ Ash Gupta
-----------------------------------------------
Ash Gupta &
/s/ Anita Gupta
-----------------------------------------------
Anita Gupta
/s/ Ash Gupta
-----------------------------------------------
Ash Gupta as Custodian for Ankush Gupta
Under the New York Uniform Transfers to Minors Act
/s/ Ash Gupta
-----------------------------------------------
Ash Gupta as Custodian for Aman Gupta
Under the New York Uniform Transfers to Minors Act
NAREN AND VINITA GUPTA LIVING
TRUST DATED 12/2/94
By: /s/ Naren Gupta
--------------------------------------------
Title: Trustee
-----------------------------------------
-27-
<PAGE>
THE JONES LIVING TRUST
By:
--------------------------------------------
Title:
-----------------------------------------
-----------------------------------------------
John Kailath
-----------------------------------------------
John Kailath &
-----------------------------------------------
Elizabeth Kailath
/s/ Victor B. Lawrence
-----------------------------------------------
Victor Lawrence
-----------------------------------------------
Hua-Yu Liu
THE LUNDY 1996 CHARITABLE TRUST
By: /s/ Francis E. Lundy
--------------------------------------------
Title: Trustee
-----------------------------------------
MACIAS & RYAN, INC.
By: /s/ Kathleen M. Ryan
--------------------------------------------
Title: COO
-----------------------------------------
MARKETECH INTERNATIONAL CORPORATION
By: /s/ Margaret Kao
--------------------------------------------
Title: President
-----------------------------------------
-28-
<PAGE>
MOHR, DAVIDOW VENTURES V, L.P.
BY: FIFTH MDV PARTNERS, L.L.C.,
GENERAL PARTNER
By: /s/ W.H. Davidow
--------------------------------------------
Title: Member
-----------------------------------------
MOHR, DAVIDOW VENTURES V, L.P. As
nominee for MDV ENTREPRENEUR'S
NETWORK FUND II (A), L.P. AND MDV
ENTREPRENEURS' NETWORK FUND II (B), L.P.
BY: FIFTH MDV PARTNERS, L.L.C.,
GENERAL PARTNER
By: /s/ W.H. Davidow
--------------------------------------------
Title: Member
-----------------------------------------
/s/ Martin Shea
-----------------------------------------------
Martin Shea and
/s/ Reshmie Shea
-----------------------------------------------
Reshmie Shea
TECHNO PRECISION, INC.
By: /s/ signature illegible
--------------------------------------------
Title: President
-----------------------------------------
-29-
<PAGE>
_______________________________________________
Ashok K. Vaish and
_______________________________________________
Gita Vaish, Trustees, Vaish Trust Dated
11/26/90
_______________________________________________
Philip R. Wiser
-30-
<PAGE>
"SERIES D PURCHASERS"
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Eve M. Gerriets
--------------------------------------------
Name: Eve M. Gerriets
Title: Attorney-in-fact
STONE STREET FUND 1999, L.P.
By: Stone Street 1999 Corp.,
its general partner
By: /s/ Eve M. Gerriets
--------------------------------------------
Name: Eve M. Gerriets
Title: Attorney-in-fact
BRIDGE STREET FUND 1999, L.P.
By: Stone Street 1999 Corp.,
its general partner
By:
--------------------------------------------
Name:
Title:
INDEX VENTURES I (Jersey) L.P.
By: /s/ Julia Chapman
--------------------------------------------
Name: Mrs. Julia Chapman
Title: Director of the General Partner Index
Venture Associates I Limited
INDEX VENTURES I (Delaware) L.P.
By: /s/ Julia Chapman
--------------------------------------------
Name: Mrs. Julia Chapman
Title: Index Venture Associates I Limited
-31-
<PAGE>
"FOUNDERS"
/s/ Michael C. Grant
-----------------------------------------------
Michael C. Grant
/s/ T. Kailath
-----------------------------------------------
Thomas Kailath
/s/ Yagyensh C. Pati
-----------------------------------------------
Yagyensh C. Pati
/s/ Yao-Ting Wang
-----------------------------------------------
Yao-Ting Wang
-32-
<PAGE>
SECOND CLOSING "SERIES D PURCHASERS"
CHAIRMAN ENTERPRISES CO., LTD.
By: /s/ Ching-Lien Kuo
--------------------------------------------
Name: Ching-Lien Kuo
Title: Chairman
/s/ Tony S. Hsu
-----------------------------------------------
Tony S. Hsu and
/s/ Lily Pao Hsu
-----------------------------------------------
Lily Pao Hsu, as Trustees, or any Successor
Trustee, under the Tony and Lily Hsu Family
Trust created by Tony S. Hsu and Lily Pao Hsu,
as Trustors, dated November 8, 1980
INDUSTRIAL TECHNOLOGY
INVESTMENT CORPORATION
By: /s/ Hsien Lin Shirley Chang
--------------------------------------------
Name: Hsien Lin Shirley Chang
Title: President
KANEMATSU ELECTRONICS LTD.
By: /s/ K. Izumi
--------------------------------------------
Name: Katsuhiko Izumi
Title: General Manager
/s/ Richard L. King
-----------------------------------------------
Richard L. King
/s/ Kevin M. Monahan
-----------------------------------------------
Kevin M. Monahand
TAIWAN MASK CORPORATION
By: /s/ Parkson Chen
--------------------------------------------
Name: Parkson Chen
Title:
-33-
<PAGE>
A.J. STEIN FAMILY PARTNERSHIP
DATED 03/21/88
By: /s/ Alfred J. Stein
--------------------------------------------
Name:
Title:
GATEHOUSE INVESTORS, LLC
By:____________________________________________
Name:
Title:
/s/ John P. Traub
-----------------------------------------------
John P. Traub or
/s/ Carol G. Traub
-----------------------------------------------
Carol G. Traub
-34-
<PAGE>
"SERIES E PURCHASERS"
/s/ Kevin MacLean
-----------------------------------------------
Kevin MacLean
/s/ Roger Sturgeon
-----------------------------------------------
Roger Sturgeon
/s/ Robert Schuyler / /s/ Diana Schuyler
-----------------------------------------------
Robert and Diana Schuyler
/s/ Maxine Nation
-----------------------------------------------
Maxine Nation
/s/ Verna McDonald
-----------------------------------------------
Verna McDonald
/s/ M.R. Alamillo
-----------------------------------------------
Mark R. Alamillo
/s/ Camille Russell-Davis
-----------------------------------------------
Camille Russell-Davis
/s/ Linn M. Wenger
-----------------------------------------------
Linn Wenger
/s/ Todd E. Pegelow
-----------------------------------------------
Todd Pegelow
/s/ Monique Cary
-----------------------------------------------
Monique Cary
-35-
<PAGE>
EXHIBIT 5.1
-----------
[WILSON SONSINI LETTERHEAD]
March 3, 2000
Numerical Technologies, Inc.
70 West Plumeria Drive
San Jose, California 95134
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1, as amended,
filed by Numerical Technologies, Inc., a Delaware corporation (the "Company"),
with the Securities and Exchange Commission in connection with the
registration under the Securities Act of 1933, as amended, of up to 6,364,000
shares of the Company's Common Stock (including an over-allotment of up to
830,000 shares of the Company's Common Stock granted to the underwriters) (the
"Shares"). The Shares are to be sold to the underwriters for resale to the
public as described in the Registration Statement and pursuant to the
Underwriting Agreement filed as an exhibit thereto. As legal counsel to the
Company, we have examined the proceedings proposed to be taken in connection
with the sale and issuance of the Shares.
Based upon the foregoing, we are of the opinion that the Shares, when
issued in the manner described in the Registration Statement, will be duly
authorized, validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
EXHIBIT 10.1
FORM OF NUMERICAL TECHNOLOGIES, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of ______________
by and between Numerical Technologies, Inc., a Delaware corporation (which,
together with the California corporation which was its predecessor, is known
herein as the "Company"), and _______________ ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the coverage of liability
insurance has been limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to continue to serve as officers and
directors without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Company) by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, by reason of
any action or inaction on the part of Indemnitee while an officer or director or
by reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement (if
such settlement is approved in advance by the Company, which approval shall not
be unreasonably withheld) actually and reasonably incurred by Indemnitee in
connection with such action or proceeding if Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe Indemnitee's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement
<PAGE>
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
---------------
itself, create a presumption that (i) Indemnitee did not act in good faith, (ii)
Indemnitee did not act in a manner which Indemnitee reasonably believed to be in
or not opposed to the best interests of the Company, or (iii) with respect to
any criminal action or proceeding, Indemnitee had no reasonable cause to believe
that Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Company or any subsidiary of the Company to procure a judgment in
its favor by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, by reason of
any action or inaction on the part of Indemnitee while an officer or director or
by reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) and, to the fullest extent permitted by law, amounts
paid in settlement, in each case to the extent actually and reasonably incurred
by Indemnitee in connection with the defense or settlement of such action or
proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the Company
and its stockholders, except that no indemnification shall be made in respect of
any claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Company in the performance of Indemnitee's duty to the Company and
its stockholders unless and only to the extent that the court in which such
action or suit is or was pending shall determine upon application that, in view
of all the circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for such expenses and then only to the extent that the
court shall determine.
2. Agreement to Serve. In consideration of the protection afforded by
------------------
this Agreement, if Indemnitee is a director of the Company, he agrees to serve
at least for the balance of the current term as a director and not to resign
voluntarily during such period without the written consent of a majority of the
Board of Directors. If Indemnitee is an officer of the Company not serving
under an employment contract, he agrees to serve in such capacity at least for
the balance of the current fiscal year of the Company and not to resign
voluntarily during such period without the written consent of a majority of the
Board of Directors. Following the applicable period set forth above, Indemnitee
agrees to continue to serve in such capacity at the will of the Company (or
under separate agreement, if such agreement exists) so long as he is duly
appointed or elected and qualified in accordance with the applicable provisions
of the Bylaws of the Company or any subsidiary of the Company or until such time
as he tenders his resignation in writing. Nothing contained in this Agreement
is intended to or shall create in Indemnitee any right to continued employment.
-2-
<PAGE>
3. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action or proceeding referenced in Section
1(a) or (b) hereof (but not amounts actually paid in settlement of any such
action or proceeding). Indemnitee hereby undertakes to repay such expenses
advanced only if, and to the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as authorized
hereby. The advances to be made hereunder shall be paid by the Company to
Indemnitee within twenty (20) days following delivery of a written request
therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his right to be indemnified under this Agreement, give
the Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). Notice shall be deemed received three business days after the date
postmarked if sent by domestic certified or registered mail, properly addressed;
otherwise notice shall be deemed received when such notice shall actually be
received by the Company. In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
(c) Procedure. Any indemnification provided for in Section 1 shall be
---------
made no later than forty-five (45) days after receipt of the written request of
Indemnitee. If a claim under this Agreement, under any statute, or under any
provision of the Company's Certificate of Incorporation or Bylaws providing for
indemnification, is not paid in full by the Company within forty-five (45) days
after a written request for payment thereof has first been received by the
Company, Indemnitee may, but need not, at any time thereafter submit his claim
to arbitration as described in Section 14 to recover the unpaid amount of the
claim and, subject to Section 15 of this Agreement, Indemnitee shall also be
entitled to be paid for the expenses (including attorneys' fees) of bringing
such claim. It shall be a defense to any such action (other than a claim
brought for expenses incurred in connection with any action or proceeding in
advance of its final disposition) that Indemnitee has not met the standards of
conduct which make it permissible under applicable law for the Company to
indemnify Indemnitee for the amount claimed, but the burden of proving such
defense shall be on the Company, and Indemnitee shall be entitled to receive
interim payments of expenses pursuant to Subsection 3(a) unless and until such
defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists or an arbitration panel as described in Section
14. It is the parties' intention that if the Company contests Indemnitee's
right to indemnification, the question of Indemnitee's right to indemnification
shall be for the court or arbitration panel to decide, and neither the failure
of the Company (including its Board of Directors, any committee or subgroup of
the Board of Directors, independent legal counsel, or its stockholders) to have
made a determination that indemnification of Indemnitee is proper in the
circumstances because Indemnitee has met the applicable standard of conduct
required by applicable law, nor an actual determination by the Company
(including its Board of
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<PAGE>
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its stockholders) that Indemnitee has not met such applicable
standard of conduct, shall create a presumption that Indemnitee has or has not
met the applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, which approval shall
not be unreasonably withheld, upon the delivery to Indemnitee of written notice
of its election so to do. After delivery of such notice, approval of such
counsel by Indemnitee and the retention of such counsel by the Company, the
Company will not be liable to Indemnitee under this Agreement for any fees of
counsel subsequently incurred by Indemnitee with respect to the same proceeding,
provided that (i) Indemnitee shall have the right to employ his own counsel in
any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense
or (C) the Company shall not, in fact, have employed counsel to assume the
defense of such proceeding, then the fees and expenses of Indemnitee's counsel
shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute or rule
which expands the right of a Delaware corporation to indemnify a member of its
Board of Directors or an officer, such changes shall be, ipso facto, within the
---- -----
purview of Indemnitee's rights and Company's obligations under this Agreement.
In the event of any change in any applicable law, statute or rule which narrows
the right of a Delaware corporation to indemnify a member of its Board of
Directors or an officer, such changes, to the extent not otherwise required by
such law, statute or rule to be applied to this Agreement shall have no effect
on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested directors, the
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<PAGE>
General Corporation Law of the State of Delaware, or otherwise, both as to
action in Indemnitee's official capacity and as to action in another capacity
while holding such office. The indemnification provided under this Agreement
shall continue as to Indemnitee for any action taken or not taken while serving
in an indemnified capacity even though he may have ceased to serve in such
capacity at the time of any action or other covered proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines, penalties or amounts paid in settlement actually or
reasonably incurred by him in the investigation, defense, appeal or settlement
of any civil or criminal action or proceeding, but not, however, for the total
amount thereof, the Company shall nevertheless indemnify Indemnitee for the
portion of such expenses, judgments, fines or penalties to which Indemnitee is
entitled.
6. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge
----------------------
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. Directors' and Officers' Liability Insurance. The Company shall, from
--------------------------------------------
time to time, make a good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among
other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all
policies of directors' and officers' liability insurance, Indemnitee shall be
named as an insured in such a manner as to provide Indemnitee the same rights
and benefits as are accorded to the most favorably insured of the Company's
directors, if Indemnitee is a director; or of the Company's officers, if
Indemnitee is not a director of the Company but is an officer; or of the
Company's key employees, if Indemnitee is not an officer or director but is a
key employee. Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain such insurance if the Company determines in
good faith that such insurance is not reasonably available, if the premium costs
for such insurance are disproportionate to the amount of coverage provided, if
the coverage provided by such insurance is limited by exclusions so as to
provide an insufficient benefit, or if Indemnitee is covered by similar
insurance maintained by a subsidiary or parent of the Company.
8. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent
-5-
<PAGE>
permitted by any applicable portion of this Agreement that shall not have been
invalidated, and the balance of this Agreement not so invalidated shall be
enforceable in accordance with its terms.
9. Exceptions. Any other provision herein to the contrary
-----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts or omissions
-------------
or transactions from which a director may not be indemnified under the Delaware
General Corporation Law; or
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors has approved the initiation or bringing of such claim; or
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction or the arbitration panel determines that each of the material
assertions made by the Indemnitee in such proceeding was not made in good faith
or was frivolous; or
(d) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
directors' and officers' liability insurance maintained by the Company; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Effectiveness of Agreement. To the extent that the indemnification
--------------------------
permitted under the terms of certain provisions of this Agreement exceeds the
scope of the indemnification provided for in the Delaware General Corporation
Law, such provisions shall not be effective unless and until the Company's
Certificate of Incorporation authorizes such additional rights of
indemnification. In all other respects, the balance of this Agreement shall be
effective as of the date set forth on the first page and may apply to acts or
omissions of Indemnitee which occurred prior to such date if Indemnitee was an
officer, director, employee or other agent of the Company, or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, at the time
such act or omission occurred.
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<PAGE>
11. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or agents, so that if
Indemnitee is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries.
12. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
13. Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
14. Arbitration. It is understood and agreed that the Company and
-----------
Indemnitee shall carry out this Agreement in the spirit of mutual cooperation
and good faith and that any differences, disputes or controversies shall be
resolved and settled amicably among the parties hereto. In the event that the
dispute, controversy or difference is not so settled in the above manner within
forty-five (45) days, then the matter shall be exclusively submitted to
arbitration in Santa Clara County, California before three independent
technically qualified arbitrators in accordance with the Commercial Arbitration
Rules of the American Arbitration Association and under the laws of Delaware,
without reference to conflict of laws principles. Subject to Sections 1(b) and
6, arbitration shall be the exclusive forum and the decision and award by the
arbitrator(s) shall be final and binding upon the parties concerned and may be
entered in any state court of California having jurisdiction.
15. Attorneys' Fees. In the event that any action is instituted or claim
---------------
is submitted to arbitration by Indemnitee under this Agreement to enforce or
interpret any of the terms hereof, Indemnitee shall be entitled to be paid all
court costs and expenses, including reasonable attorneys' fees, incurred by
Indemnitee with respect to such action or arbitration, unless as a part of such
action, a court of competent jurisdiction or the arbitrator(s) determines that
each of the material assertions made by
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<PAGE>
Indemnitee as a basis for such claim were not made in good faith or were
frivolous. In the event of an action instituted or a claim submitted to
arbitration by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action or claim (including with respect to
Indemnitee's counterclaims and cross-claims made in such action or arbitration),
unless as a part of such action the court or the arbitrator(s) determines that
each of Indemnitee's material defenses to such action or claim were made in bad
faith or were frivolous.
16. Notice. All notices, requests, demands and other communications under
-------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
17. Consent to Jurisdiction. The Company and Indemnitee each hereby
------------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any proceeding which arises out of or
relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California
in Santa Clara County and that any arbitration proceeding which arises out of or
relates to this Agreement shall be held in Santa Clara County, California.
18. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed in accordance with the laws of the State of Delaware as applied to
contracts between Delaware residents entered into and performed entirely within
Delaware.
19. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the
corporation effectively to bring suit to enforce such rights.
20. Continuation of Indemnification. All agreements and obligations of
-------------------------------
the Company contained herein shall continue during the period that Indemnitee is
a director, officer or agent of the Company and shall continue thereafter so
long as Indemnitee shall be subject to any possible claim or threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
arbitrational, administrative or investigative, by reason of the fact that
Indemnitee was serving in the capacity referred to herein.
21. Amendment and Termination. Subject to Section 20, no amendment,
-------------------------
modification, termination or cancellation of this Agreement shall be effective
unless in writing signed by both parties hereto.
22. Integration and Entire Agreement. This Agreement (a) sets forth the
--------------------------------
entire understanding between the parties, (b) supersedes all previous written or
oral negotiations, commitments,
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<PAGE>
understandings and agreements relating to the
subject matter hereof and (c) merges all prior and contemporaneous discussions
between the parties.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
NUMERICAL TECHNOLOGIES, INC.
By:
____________________________
Title:
__________________________
Address: 70 West Plumeria Drive
San Jose, CA 95134
AGREED TO AND ACCEPTED:
INDEMNITEE:
______________________________
Signature
______________________________
Print Name
______________________________
______________________________
Address
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<PAGE>
Exhibit 23.2
Consent of Independent Accountants
We hereby consent to the use in this Registration Statement on Form S-1 of
both our report dated February 2, 2000 relating to the financial statements of
Numerical Technologies, Inc. and our report dated January 21, 2000 relating to
Transcription Enterprises Limited. We also consent to the reference to us under
the headings "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 3, 2000
