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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number: 000-30005
NUMERICAL TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-3232104
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
70 West Plumeria Drive 95134-2134
San Jose, California (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (408) 919-1910
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares outstanding of the registrant's Common Stock, par value
$0.0001 per share, as of October 31, 2000 was 30,117,852
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NUMERICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,410 $ 13,486
Short-term investments 28,376 --
Accounts receivable 5,206 1,819
Prepaid and other 1,486 394
--------- ---------
Total current assets 60,478 15,699
Property and equipment, net 2,594 1,613
Acquired intangibles, net 72,374 --
Other assets 247 293
--------- ---------
$ 135,693 $ 17,605
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 3,925 $ 613
Accrued expenses 4,338 1,945
Deferred revenue 6,061 2,642
--------- ---------
Total current liabilities 14,324 5,200
--------- ---------
Stockholders' equity:
Convertible preferred stock, $0.0001 par value:
Authorized: 5,000 and 12,253 shares in
2000 and 1999, respectively,
Issued and outstanding: 0 and 8,103 shares in
2000 and 1999, respectively -- 1
Common stock, $0.0001 par value:
Authorized: 100,000 and 30,000 shares in
2000 and 1999, respectively,
Issued and outstanding: 30,084 and 9,570 shares in
2000 and 1999, respectively 3 1
Additional paid in capital 198,953 50,100
Receivable from stockholders (4,083) (315)
Deferred stock compensation (22,773) (21,220)
Accumulated deficit (50,731) (16,162)
--------- ---------
Total stockholders' equity 121,369 12,405
--------- ---------
$ 135,693 $ 17,605
========= =========
</TABLE>
See the accompanying notes to these condensed consolidated financial statements.
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NUMERICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
Revenue $ 6,636 $ 635 $ 14,834 $ 3,616
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Costs and expenses:
Cost of revenue 591 70 1,221 133
Research and development 3,386 1,309 9,235 2,976
Sales and marketing 2,432 1,014 6,364 2,829
General and administrative 1,277 322 3,366 760
Depreciation and amortization 4,811 109 14,571 248
Amortization of deferred
stock compensation(*) 4,865 909 15,606 2,057
-------- -------- -------- --------
Total costs and expenses 17,362 3,733 50,363 9,003
-------- -------- -------- --------
Loss from operations (10,726) (3,098) (35,529) (5,387)
Interest expense -- -- (893) --
Interest income 942 142 1,960 209
-------- -------- -------- --------
Loss before provision for income taxes (9,784) (2,956) (34,462) (5,178)
Provision for income taxes 107 -- 107 --
-------- -------- -------- --------
Net loss $ (9,891) $ (2,956) $(34,569) $ (5,178)
======== ======== ======== ========
Net loss per common share, basic and diluted $ (0.37) $ (0.41) $ (1.80) $ (0.77)
======== ======== ======== ========
Weighted average common shares outstanding,
basic and diluted 26,382 7,195 19,625 6,762
======== ======== ======== ========
(*)Amortization of deferred stock compensation
Cost of sales $ 364 $ 27 $ 789 $ 61
Research and development 2,094 418 7,098 947
Sales and marketing 1,172 329 3,758 744
General and administrative 1,235 135 3,961 305
-------- -------- -------- --------
$ 4,865 $ 909 $ 15,606 $ 2,057
======== ======== ======== ========
</TABLE>
See the accompanying notes to these condensed consolidated financial statements.
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NUMERICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine months Ended
September 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(34,569) $ (5,178)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation 767 248
Amortization of deferred stock compensation 15,606 2,057
Amortization of acquired intangibles 13,803 --
Changes in assets and liabilities:
Accounts receivable (518) (767)
Prepaid and other (919) (154)
Other assets 46 (298)
Accounts payable 1,254 (77)
Accrued expenses 1,730 184
Deferred revenue 1,925 164
-------- --------
Net cash used in operating activities (875) (3,821)
-------- --------
Cash flows from investing activities:
Purchase of short-term investments (28,376) --
Purchase of property and equipment (1,481) (920)
-------- --------
Net cash used in investing activities (29,857) (920)
-------- --------
Cash flows from financing activities:
Proceeds from Initial public offering 81,161 --
Repayment on notes payable (40,000) --
Cash received in acquisition 449
Proceeds from issuance of preferred stock -- 13,425
Proceeds from exercise of common stock options 1,144 272
Repurchase of common stock (101) (11)
Repayment of notes receivable for common stock 3 --
-------- --------
Net cash provided by financing activities 42,656 13,686
-------- --------
Net increase in cash and cash equivalents 11,924 8,945
Cash and cash equivalents at beginning of period 13,486 4,973
-------- --------
Cash and cash equivalents at end of period $ 25,410 $ 13,918
======== ========
Supplemental disclosure of cash flow information:
Stockholder notes receivable exchanged for common stock 3,771 --
======== ========
Interest paid 893 --
======== ========
</TABLE>
See the accompanying notes to these condensed consolidated financial statements.
4
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NUMERICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The unaudited condensed consolidated financial statements have been
prepared by Numerical Technologies, Inc. pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the financial position,
operating results and cash flows for those periods presented. These financial
statements should be read in conjunction with the financial statements and notes
thereto for the years ended December 31, 1999 and 1998, included in our
Registration Statement Form S-1, dated April 7, 2000, as declared effective by
the Securities and Exchange Commission on April 6, 2000. The results of
operations for the interim periods are not necessarily indicative of the results
that may be expected for any other period or for the fiscal year, which will end
on December 31, 2000.
NOTE 2 - ACQUISITION
On January 1, 2000, we acquired Transcription Enterprises Ltd.
("Transcription"), a company incorporated in California. Under the terms of the
acquisition, we issued approximately 3,810,000 shares of Series E Convertible
Preferred Stock and $40.0 million in notes payable for all of the outstanding
stock of Transcription. The total purchase price was approximately $86.0
million, including acquisition costs of approximately $250,000. The transaction
was accounted for under the purchase method of accounting.
Under the terms of the acquisition agreement, we acquired specified
accounts receivable of Transcription, consisting of 45% of accounts receivable
for license fees, plus all fees associated with maintenance, support and other
services rendered by Transcription on such accounts. The allocation of the
purchase price is as follows in thousands:
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
=======
The estimated purchase price was allocated to the identifiable assets
acquired and the liabilities assumed based upon the fair market value on the
acquisition date. The net tangible assets consist primarily of accounts
receivable, property and equipment, and other liabilities. Because the in-
process technology had not reached the stage of technological feasibility at the
acquisition date and had no alternative future use, the amount was immediately
charged to operations. The amounts allocated to developed technology and
customer base and trade name are amortized over the estimated useful life of
five years. The amounts allocated to covenants not to compete and work force are
being amortized over the estimated useful lives of two and four years,
respectively. The excess amount of the purchase price over the fair market value
of the identifiable assets acquired is accounted for as goodwill and is being
amortized over its estimated useful life of five years. The valuation for the
intangible assets has been determined using management's assumptions and the
report from an independent appraiser.
Under the terms of the acquisition agreement, $40 million in promissory
notes were secured by substantially all the assets of Transcription. Shortly
after issuance of the notes, we repaid $5.0 million of the principal, leaving a
balance of $35.0 million outstanding under the notes. The remaining principal
amount, plus interest at 8.0% per annum, was paid in full with a portion of the
net proceeds from our initial public offering completed in April 2000.
Had the acquisition of Transcription occurred on January 1, 1999, pro forma
combined revenues would have been $4,069,000 and $11,130,000 for the three
months and nine months ended September 30, 1999, after giving effect to
reduction of combined revenue related to deferred revenues on Transcription
contracts. Pro forma net loss would have been $5,926,000 or $(0.82) per share
and $16,592,000 or $(2.45) per share for the three months and nine months ended
September 30, 1999. Pro forma adjustments have been added to record the
amortization of
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identifiable intangible assets and goodwill and interest expense related to the
acquisition of Transcription as if the transaction occurred on January 1, 1999.
NOTE 3 - NET LOSS PER SHARE
Net income per share is computed in accordance with Financial Accounting
Standards Board Statement No. 128 (SFAS 128), "Earnings Per Share," which
requires the presentation of basic and diluted net income per share. Basic net
income per share is calculated using the weighted average number of common
shares outstanding during the period. Diluted net income per share is calculated
using the weighted average number of common shares and common stock equivalents,
if dilutive, outstanding during the period. Common stock equivalents include
common shares issuable upon exercise of common stock options, conversion of
preferred stock and warrants. For the periods presented, we had losses and
therefore all common stock equivalents are excluded from the computation of
diluted net loss per share because their effect is antidilutive.
Net loss per share for the nine months ended September 30, 2000 include a
non-cash preferred stock dividend of approximately $778,000 related to the
beneficial conversion of warrants exercised in April 2000.
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
For the periods presented, there were no elements of comprehensive income
(loss), except for the net losses.
NOTE 5 - OPERATING SEGMENTS
For purposes of segments reporting in accordance with SFAS No. 131, the
Company has determined that it operates in one industry segment.
The following is a summary of the Company's revenue attributed to the
geographic regions in which the technology and services are delivered (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
North America $ 3,353 $ 232 $ 8,412 $ 2,835
Asia 2,693 403 5,000 595
Europe 527 -- 1,236 186
Other 63 -- 186 -
------- ------- ------- -------
$ 6,636 $ 635 $14,834 $ 3,616
======= ======= ======= =======
NOTE 6 - LITIGATION
We are subject to various legal proceedings and claims, asserted and
unasserted, that arise in the ordinary course of business. In addition, on March
14, 2000, ASML MaskTools, Inc. filed a complaint alleging we infringe two U.S.
patents and have committed unfair or fraudulent business practice under the
California Business and Professions Code. We are currently investigating the
patents and allegations. Litigation is inherently uncertain, and an adverse
decision could limit our ability to offer some features of our optical proximity
correction, or OPC, product. Were an unfavorable ruling to occur, there exists
the possibility of a material impact on the net income for the period in which
the ruling occurs and thereafter. The parties have stipulated to a number of
delays to the litigation and no trial date has been set.
NOTE 7 - INITIAL PUBLIC OFFERING
In April 2000, we sold a total of 6,364,100 shares of common stock at
$14.00 per share through our initial public offering. The net proceeds after
underwriters' commission and fees and other costs associated with the offering
totaled approximately $81.2 million. We paid the balance of principal and
accrued interest under the notes payables issued in connection with the
acquisition of Transcription with a portion of the net proceeds. The remaining
proceeds will be used for working capital and general corporate purposes. We may
use a portion of the net proceeds to acquire businesses, products and
technologies that are complementary to our business. Pending these uses, we have
invested the net proceeds from this offering in short-term, interest-bearing,
investment grade securities.
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NOTE 8 - SUBSEQUENT EVENT
On October 27, 2000, we acquired all the outstanding capitals of Cadabra
Design Automation Inc. ("Cadabra"), a Nova Scotia limited liability company.
Under the terms of the acquisition, we issued approximately 3,170,000 shares
and options of our common stock in exchange for all of the outstanding options
and capital stock of Cadabra. The stock issued and the options assumed had an
aggregate fair market value of approximately $103 million (including
acquisition costs of approximately $2.7 million), which is expected to be
allocated as follows (in thousands):
Net tangible assets.............................. $ 1,500
In process research and development.............. 1,630
Developed technology............................. 660
Customer base.................................... 5,040
Covenants not to compete......................... 2,290
Work force....................................... 1,800
Deferred Compensation............................ 12,600
Goodwill......................................... 77,480
--------
$103,000
========
The acquisition of Cadabra is being accounted for as a purchase. The
estimated purchase price will be allocated to the identifiable assets acquired
and the liabilities assumed based upon net book value which approximated fair
market value on the acquisition date. The net tangible assets consist
primarily of cash and cash equivalents offset by assumed liabilities of
approximately $2.1 million. Because the in-process technology had not reached
the stage of technology feasibility at the acquisition date and had no
alternative future use, the amount was immediately charged to operations. The
excess amount of the purchase price over the fair market value of net tangible
assets, the developed technology, the trade name and the covenant-not-to-
compete is accounted for as goodwill. Acquired intangible assets will be
amortized over the estimated useful lives. Preliminary estimates of useful
lives for the intangible assets range from 2-4 years. Deferred Compensation
will be amortized over the remaining vested periods of 0-4 years on an
accelerated basis using the multiple options model, resulting in higher
compensation charges in earlier periods. The valuation for the intangible
assets is being determined using management's assumptions and an independent
appraiser.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, and we intend that such
forward-looking statements are subject to the safe harbors created thereby. The
forward-looking statements are based on current expectations of management. In
addition, our business and operations are subject to substantial risks and
uncertainties that could cause actual results to differ materially from those
reflected in such forward-looking statements, including those under "Factors
Which May Affect Future Results" below. We do not undertake any obligation to
publicly release the results of any revision to these forward-looking
statements.
Overview
We develop and market proprietary technologies and software products that enable
the design and manufacture of semiconductors with subwavelength feature sizes.
We derive revenue from intellectual property and software licenses, maintenance
and related technical services. To date, we have derived a significant portion
of our revenue from research and development licenses to integrated device
manufacturers, or IDMs, and foundries of our phase shifting attendant
subwavelength technologies and software licenses, as well as licenses of
photomask verification software to semiconductor equipment resellers. We expect
to enter into production licenses with semiconductor manufacturers as they adopt
our proprietary technologies for production. Production licenses grant licensees
the right to use our phase shifting intellectual property and software to design
and manufacture subwavelength integrated circuits, or ICs.
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On October 27, 2000, we completed the acquisition of Cadabra Design Automation
Inc. ("Cadabra"), a Nova Scotia limited liability company. Cadabra is a
developer of automated cell creation technology for the semiconductor industry.
Under the terms of the acquisition, we issued approximately 3,170,000 shares and
options to purchase our common stock for all of the outstanding stock and
options of Cadabra. The stock issued and the options assumed had an aggregate
fair market value of approximately $103 million. The acquisition will be
accounted for under the purchase method of accounting and accordingly the
purchase price will be allocated to the acquired assets, in-process technology,
which had not yet reached the stage of technical feasibility, goodwill and other
intangibles and recorded in the fourth quarter of 2000. A one-time non-cash
charge for in-process research and development, non-cash charges for deferred
compensation and the amortization of goodwill and other intangibles will be
recorded in the fourth quarter of 2000. These charges will have a negative
impact on earnings.
In April 2000, we sold a total of 6,364,100 shares of common stock at $14.00 per
share through our initial public offering. The net proceeds, after underwriters'
commission and fees and other costs associated with the offering, totaled
approximately $81.2 million. In April 2000, we paid the balance of principal and
accrued interest under the notes payables issued in connection with our January
2000 acquisition of Transcription Enterprises Ltd., a California limited
liability company with a portion of the net proceeds. The remaining proceeds
have been and will continue to be used for working capital and general corporate
purposes. We may use a portion of the net proceeds to acquire businesses,
products and technologies that are complementary to our business. Pending these
uses, we have invested the net proceeds from this offering in short-term,
interest-bearing, investment grade securities.
Results of Operations
Revenue. Revenue was $6.6 million and $14.8 million for the three months
and nine months ended September 30, 2000 compared to $635,000 and $3.6 million
for the same periods in 1999, representing increases of 945% and 310% for the
respective periods. These increases were primarily attributable to the continued
adoption of our total solution by companies throughout the design-to-silicon
flow, which was aided by our acquisition of Transcription in January 2000, as
evidenced by an increase in our customer base.
The breakdown of revenues by geographic regions in which the technology and
services are delivered as a percentage of total revenue is as follows:
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
North America 51% 37% 57% 78%
Asia 40 63 34 17
Europe 8 -- 8 5
Other 1 -- 1 --
--- --- --- ---
100% 100% 100% 100%
=== === === ===
Costs and Expenses
Cost of revenue. Cost of revenue was $591,000 and $1.2 million for the
three months and nine months ended September 30, 2000 compared to $70,000 and
$133,000 for the same periods in 1999. The increases were primarily due to
increased cost for engineers associated with maintenance and technical services,
which resulted from an increased customer base related to our acquisition of
Transcription in January 2000. In addition, cost of revenue increased as a
result of royalties paid to third parties in the nine months ended September 30,
2000 whereas no royalties were paid in the comparable nine-month period in 1999.
As a percent of revenue, cost of revenue was 9% and 8% for the three months and
nine months ended September 30, 2000 compared to 11% and 4% for the same periods
in 1999. We anticipate that cost of revenues will increase in dollar amount as
we support our increasing number of industry partners and customers and assist
our research and development licensees to transition into production. Our
expectation of increasing cost of revenue is a forward-looking statement.
Research and development. Research and development expenses were $3.4
million and $9.2 million for the three months and nine months ended September
30, 2000 compared to $1.3 million and $3.0 million for the same periods in 1999.
These increases were primarily due to increased costs associated with additional
personnel in our expanding research and development efforts, and to a lesser
degree to cost of personnel added as a result of our acquisition of
Transcription. Legal costs associated with increased intellectual property
activities also contributed to these increases. As a percent of revenues,
research and development expenses were 51% and 62% for the three months and nine
months ended September 30, 2000 compared to 206% and
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82% for the same periods in 1999. We anticipate that we will continue to commit
substantial resources to research and development in the future and 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. Our expectation regarding research and development
expenses increasing, but declining as a percentage of revenue, is a forward-
looking statement.
Sales and marketing. Sales and marketing expenses were $2.4 million and
$6.4 million for the three months and nine months ended September 30, 2000
compared to $1.0 million and $2.8 million for the same periods in 1999. These
increases were primarily due to additional sales and marketing personnel,
increased sales commissions and higher tradeshow expenses, and to a lesser
degree to cost of personnel added as a result of our acquisition of
Transcription. As a percent of revenues, sales and marketing expenses decreased
to 37% and 43% for the three months and nine months ended September 30, 2000
compared to 160% and 78% for the same periods 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. Our
expectation regarding sales and marketing expenses increasing, but declining as
a percentage of revenue, is a forward-looking statement.
General and administrative. General and administrative expenses were $1.3
million and $3.4 million for the three months and nine months ended September
30, 2000 compared to $322,000 and $760,000 for the same periods in 1999. These
increases were primarily the result of increased spending in personnel,
personnel-related costs and professional fees and to a lesser degree to cost of
personnel added as a result of our acquisition of Transcription. As a percent of
revenues, General and administrative expenses were 19% and 23% for the three
months and nine months ended September 30, 2000 compared to 51% and 21% for the
same periods in 1999. We expect that general and administrative expenses will
increase in dollar amounts to support increased administrative efforts, but
decline as a percentage of revenue in long term. Our expectation regarding
general and administrative expenses increasing, but decreasing as a percentage
of revenue, is a forward-looking statement.
Depreciation and amortization. Depreciation and amortization expenses were $4.8
million and $14.6 million for the three months and nine months ended September
30, 2000 compared to $109,000 and $248,000 for the same periods in 1999. These
increases were primarily the result of amortization of acquired intangibles
associated with the acquisition of Transcription in January 2000.
Amortization of deferred stock compensation. Amortization of deferred stock
compensation represents the amount of amortization related to the difference
between the exercise price of options granted and the estimated fair market
value of the underlying common stock on the date of the grant. We recognized
stock-based compensation of $4.9 million and $15.6 million for the three months
and nine months ended September 30, 2000 compared to $909,000 and $2.1 million
for the same periods in 1999. We are amortizing these amounts over the vesting
periods of the individual options, using the multiple option method.
Interest expense. Interest expense was $0 and $893,000 for the three months and
nine months ended September 30, 2000 compared to $0 for the same periods in
1999. Interest expense relates to the notes payable associated with the
acquisition of Transcription in January 2000. In April 2000, we paid the
remaining principal and interest due under these notes with proceeds from our
initial public offering.
Interest income. Interest income was $942,000 and $2.0 million for the three
months and nine months ended September 30, 2000 compared to $142,000 and
$209,000 for the same periods in 1999. The increase was primarily due to higher
average cash and short-term investment balances as a result of proceeds from our
initial public offering in April 2000.
Provision for income taxes. Provision for income taxes was $107,000 for both the
three months and nine months ended September 30, 2000 compared to $0 for the
same periods in 1999. The increase was due to provisions for foreign taxes
associated with foreign subsidiaries established in the current period as well
as withholding taxes from foreign customers.
Liquidity and Capital Resources
As of September 30, 2000, we had cash and cash equivalents and short-term
investments of $53.8 million, including restricted cash of $204,000 related to a
certificate of deposit required as collateral for a letter of credit. As of the
same date, we had working capital of $46.2 million, including deferred revenue
of $6.1 million. Deferred revenue represents the excess of amount billed from
licensees over revenue recognized on license and maintenance contracts.
Net cash used in operating activities was $875,000 during the nine month period
ended September 30, 2000, compared with $3.8 million used in the comparable
period in 1999. Net cash used in the
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nine month period ended September 30, 2000 primarily reflects a net loss of
$34.6 million, offset by amortization and depreciation expenses of $30.2 million
and increases in deferred revenue of $1.9 million, accrued expenses of $1.7
million and accounts payable of $1.3 million.
Net cash used in investing activities was $29.9 million during the nine month
period ended September 30, 2000, compared with $920,000 used in the comparable
period in 1999. Net cash used in the nine month period ended September 30, 2000
consisted of net purchases of $28.4 million in short-term investments and
purchases of computer hardware and software, office furniture and equipment and
leasehold improvements. We expect to invest an additional amount of
approximately $1.0 million in 2000 primarily for computer hardware and software,
office furniture and equipment, and business systems upgrades. Our expectation
regarding the amount of such investments in fiscal year 2000 is a forward-
looking statement.
Net cash provided by financing activities was $42.7 million during the nine
month period ended September 30, 2000, compared with $13.7 million in the
comparable period in 1999. Net cash provided in the nine month period ended
September 30, 2000 primarily consisted of a $81.2 net proceeds from our initial
public offering and $1.1 million of net proceeds from common stock option
activity, partly offset by the payment of the $40.0 million principal
outstanding under the notes issued in connection with the acquisition of
Transcription described below.
On January 1, 2000, we acquired Transcription. In connection with the
acquisition, we issued $40.0 million in promissory notes. Shortly after issuance
of the notes, we repaid $5.0 million of the principal, leaving a balance of
$35.0 million outstanding under the notes. The remaining principal amount, plus
interest at 8.0% per annum, was payable in 16 equal quarterly payments of $2.2
million, plus interest commencing on April 1, 2000. In April 2000, we paid these
notes in full with a portion for the net proceeds from our initial public
offering completed in April 2000.
We are subject to various legal proceedings and claims, asserted and
unasserted, that arise in the ordinary course of business. In addition, on March
14, 2000, ASML MaskTools, Inc. filed a complaint alleging we infringe two U.S.
patents and have committed unfair or fraudulent business practice under the
California Business and Professions Code. We are currently investigating the
patents and allegations. Litigation is inherently uncertain, and an adverse
decision could limit our ability to offer some features of our OPC product. Were
an unfavorable ruling to occur, there exists the possibility of a material
impact on the net income of the period in which the ruling occurs and
thereafter. The parties have stipulated to a number of delays to the litigation
and no trial date has been set.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business strategy. As a result, we
anticipate that such operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In addition,
we may utilize cash resources to fund acquisitions of, or investments in,
complementary businesses, technologies or product lines. We believe that the net
proceeds from the sale of the common stock in our initial public offering
completed in April 2000, together with existing cash, will be sufficient to meet
our working capital and capital expenditure requirements for at least the next
12 months. Thereafter, we may find it necessary to obtain additional equity or
debt financing. In the event additional financing is required, we may not be
able to raise it on acceptable terms or at all. Our expectation regarding the
growth of our operating expenses, the materiality of such expenses to our cash
resources, the use of our cash resources to fund acquisitions or investments,
the sufficiency of our existing cash resources to meet our working capital and
capital expenditure requirements and our ability to raise additional financing
are forward-looking statements.
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. We do not currently hold derivative instruments or engage
in hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin: No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB
101 summarizes certain of the Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. We have
until the fourth quarter of 2000 to comply with the guidelines in SAB 101. The
impact of SAB 101 on our consolidated financial statements has not yet been
determined.
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In March 2000, the Financial Accounting Statements Board issued Interpretation
No. 44 (FIN 44) Accounting for Certain Transactions involving Stock Compensation
an interpretation of APB Opinion No. 25. FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of various modifications
to terms of a previously fixed stock or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions cover specific events that occur
after either December 15, 1998, or January 12, 2000. The impact of FIN 44 did
not have a material effect on our financial positions or results of operations.
Factors Which May Affect Future Results
If the key markets within the semiconductor industry, especially semiconductor
manufacturers, do not adopt our proprietary technologies and software products,
we may be unable to generate sales of our products.
The four key markets within the semiconductor industry are semiconductor
manufacturing, semiconductor equipment, photomask and design. If these key
markets do not adopt our proprietary technologies and software products, our
product sales could decline. We design our technologies and products so that
each key market within the semiconductor industry can work efficiently with the
other markets. For example, if designers do not adopt our technologies and
products, it will be more difficult for them to design semiconductors which are
understood and processed efficiently by mask manufacturers that do adopt our
technologies and products. In addition, we believe semiconductor manufacturers
need to adopt our proprietary technologies and software products first in order
to drive adoption by the other three markets. Semiconductor manufacturers define
and develop the manufacturing process. While designers, mask manufacturers and
equipment manufacturers are not required to adopt our technologies and products
in order to work with semiconductor manufacturers that do adopt them, the
efficiency of the entire manufacturing process is greatly diminished if they do
not. If each key market of the semiconductor industry does not perceive our
proprietary technologies and software products as the industry standard, our
technologies and products could become less valuable and more difficult to
license. Factors that may limit adoption of our subwavelength solution within
the markets include:
. our current and potential industry partners and customers may fail to
adopt our technologies and products;
. the semiconductor industry may not need subwavelength processes if
there is a slowdown in semiconductor manufacturing or a decrease in the demand
for smaller semiconductor feature sizes; and
. the industry may develop alternative methods to produce subwavelength
features with existing capital equipment due to a rapidly evolving market and
the likely emergence of new technologies.
In order for potential industry partners and customers to adopt, and expend
their own resources to implement, our technologies and products, we must expend
significant marketing resources, with no guarantee of success.
Our proprietary technologies and software products involve a new approach
to the subwavelength gap problem. As a result, we must employ intensive and
sophisticated marketing and sales efforts to educate prospective industry
partners and customers about the benefits of our technologies and products. Our
sales and marketing expenses increased to $6.4 million in the nine months ended
September 30, 2000 from $2.8 in the nine months ended September 30, 1999, but we
can give no assurance that our marketing efforts will succeed. 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 semiconductor industry may
fail to adopt our proprietary technologies and software products, or we may not
be able to establish distribution channels. Our company incorporated in October
1995. In February 1997, we shipped our initial software product, IC Workbench.
We have only recently begun to expand our operations significantly. For example,
we grew from 56 employees as of September 30, 1999 to 123 employees as of
September 30, 2000.
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We have a history of losses, we expect to incur losses in the future and we may
be unable to achieve profitability.
We may not achieve profitability if our revenue increases more slowly than
we expect or not at all. In addition, our operating expenses are largely fixed,
and any shortfall in anticipated revenue in any given period could cause our
operating results to decrease. We have not been profitable in any quarter, and
our accumulated deficit was approximately $50.7 million as of September 30,
2000. We expect to continue to incur significant operating expenses in
connection with increased funding for research and development and expansion of
our sales and marketing efforts. In addition, we expect to incur additional
noncash charges relating to amortization of intangibles and deferred stock
compensation. For example, as a result of our acquisition of Cadabra design
Automation in October 2000 we will incur additional non cash charges relating to
amortization of intangibles and deferred stock compensation beginning in the
fourth quarter of 2000 and a one time non cash charge in the forth quarter of
2000 relating to in process research and development. As a result, we will need
to generate significant revenue to achieve and maintain profitability. If we do
achieve profitability, we may be unable to sustain or increase profitability on
a quarterly or annual basis.
We acquired Transcription Enterprises Limited and Cadabra Design Automation Inc.
If we are not successful in integrating Transcription's and Cadabra's products
and operations with ours, our revenue and operating results could decline.
Our acquisitions of Transcription Enterprises Limited and Cadabra Design
Automation Inc. will only be successful if we are able to integrate their
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
and Cadabra's products with ours. We must also coordinate our research and
development and sales and marketing efforts to realize the technological
benefits of these combinations.
We may find it difficult to integrate personnel with disparate business
backgrounds and combine different corporate cultures. In addition, the process
of combining our company with Transcription and Cadabra could interrupt the
activities of any or all of the companies' businesses. It is possible that we
will not be able to retain Transcription's and Cadabra's key management,
technical and sales personnel.
In addition, the acquisition of Transcription and Cadabra could cause our
industry partners and customers to be uncertain about our ability to support the
combined companies' products and the direction of the combined companies'
product development efforts. As a result, they may delay or cancel product
orders, which could significantly decrease our revenue and limit our ability to
implement our combined business strategy.
Our acquisition of Transcription may increase the focus of the semiconductor
industry on the manufacturing data preparation market, which could lead to a
rapid and substantial increase in competition.
Our acquisition of Transcription may increase the semiconductor industry's
awareness of the market for manufacturing data preparation software, which could
lead to a substantial increase in the number of start-up companies that focus on
software solutions for data preparation. Manufacturing data preparation software
translates semiconductor designs into instructions that control manufacturing
equipment. Potential competitors could pursue and execute partnership agreements
with key industry partners we intend to pursue, which could make it difficult or
impossible for us to develop relationships with these potential industry
partners. In addition, some of our current competitors may increase their own
research and development budgets relating to data preparation, or may more
aggressively market competing solutions.
If we do not continue to introduce new technologies and software products or
product enhancements ahead of rapid technological change in the market for
subwavelength solutions, our operating results could decline and we could lose
our competitive position.
We must continually devote significant engineering resources to enable us
to introduce new technologies and software products or product enhancements to
address the evolving needs of key markets within the semiconductor industry in
solving the subwavelength gap problem. We must introduce these innovations and
the key markets within the semiconductor industry must adopt them before changes
in the semiconductor industry, such as the introduction by our current and
potential competitors of more advanced products or the emergence of alternative
technologies, render the innovations obsolete, which could cause us to lose our
competitive position. These innovations are inherently complex, require long
development cycles and a substantial investment before we can determine their
commercial viability. Moreover, designers, mask manufacturers and equipment
manufacturers must each respond to the demand of the market to design and
manufacture masks and equipment for increasingly smaller and complex
semiconductors. Our innovations must be
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viable and meet the needs of these key markets within the semiconductor industry
before the consumer market demands even smaller semiconductors, rendering the
innovations obsolete. We may not have the financial resources necessary to fund
any future innovations. In addition, any revenue that we receive from
enhancements or new generations of our proprietary technologies and software
products may be less than the costs of development.
Fluctuations in our quarterly operating results may cause our stock price to
decline.
It is likely that our future quarterly operating results may fluctuate from
time to time and may not meet the expectations of securities analysts and
investors in some future period. As a result, the price of our common stock
could decline. Historically, our quarterly operating results have fluctuated. We
may experience significant fluctuations in future quarterly operating results.
The following factors may cause these fluctuations:
. the timing and structure of our product license agreements;
. changes in our pricing policies or those of our competitors; and
. changes in the level of our operating expenses to support our projected
growth.
The accounting rules regarding revenue recognition may cause fluctuations in our
revenue independent of our booking and backlog position.
The accounting rules we are required to follow require us to recognize
revenue only when certain criteria are met. Orders for software support and
professional services yield revenue over multiple quarters (often extending
beyond the current fiscal year) or upon completion of performance rather than at
the time of sale. The specific terms agreed to with a customer and or any
changes to the rules interpreting such terms may have the effect of requiring
deferral of product revenue in whole or in part or, alternatively, of requiring
us to accelerate the recognition of such revenue for products to be used over
multiple years. As a result, for a given quarter it is possible for us to fall
short in our revenue and/or earnings plan even whole orders and backlog remain
on plan or, conversely, to meet our revenue and/or earnings plan even though
orders are under plan, because of revenue produced by backlog and deferred
revenue.
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.
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 additional suitable industry partners.
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
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customers than we do and adopt more aggressive pricing policies. Moreover, our
competitors may establish relationships among themselves or with industry
partners to enhance their services, including industry partners with which we
may desire to establish a relationship.
The market for software solutions that address the subwavelength gap problem is
new and rapidly evolving. We expect competition to intensify in the future,
which could slow our ability to grow or execute our strategy.
We believe that the demand for solutions to the subwavelength gap problem
may encourage many competitors to enter into our market. As the market for
software solutions to the subwavelength gap problem proliferates, if our
competitors are able to attract industry partners or customers on a more
accelerated pace than we can and retain them more effectively, we would not be
able to grow and execute our strategy as quickly. In addition, if customer
preferences shift away from our technologies and software products as a result
of the increase in competition, we must develop new proprietary technologies and
software products to address these new customer demands. This could result in
the diversion of management attention or our development of new technologies and
products may be blocked by other companies' patents. We must offer better
products, customer support, prices and response time, or a combination of these
factors, than those of our potential competitors.
We are growing rapidly and must effectively manage and support our growth in
order for our business strategy to succeed.
We have grown rapidly and will need to continue to grow in all areas of
operation. If we are unable to successfully integrate and support our existing
and new employees, including those employees added as a result of our
acquisition of Transcription and Cadabra, 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 relocated to San Jose, California and
may need to relocate to a larger facility in the future, which could be
difficult in the very competitive Silicon Valley office leasing market. In
addition, building and managing the support necessary for our growth places
significant demands on our management as well as our limited revenue. These
demands have, and may continue to, divert these resources away from the
continued growth of our business and implementation of our business strategy.
Further, we must adequately train our new personnel, especially our technical
support personnel, to adequately, and accurately, respond to and support our
industry partners and customers. If we fail to do this, it could lead to
dissatisfaction among our partners or customers, which could slow our growth.
We must continually attract and retain engineering personnel or we will be
unable to execute our business strategy.
We have experienced, and we expect to continue to experience, difficulty in
hiring and retaining highly skilled engineers with appropriate qualifications to
support our rapid growth and expansion. We must continually enhance and
introduce new generations of our phase shifting and OPC technologies. As a
result, our future success depends in part on our ability to identify, attract,
retain and motivate qualified engineering personnel with the requisite
educational background and industry experience. If we lose the services of a
significant number of our engineers, it could disrupt our ability to implement
our business strategy. Competition for qualified engineers is intense,
especially in the Silicon Valley where we are located.
Our chief executive officer and chief technology officer, as well as the co-
founders of Transcription and the key executive officers of Cadabra, 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; Kevin MacLean, Vice President and General Manager of
Transcription; Faysal Sohail, a senior vice president of the Company and
President of Cadabra; and Martin Lefebrve a member of the Company's Office of
Chief Technology Officer and senior executive of Cadabra. If we lose the
services of any of these key executives, it could slow our product development
processes and searching for their replacements could divert our other senior
management's time and increase our operating expenses. In addition, our industry
partners and customers could become concerned about our future operations, which
could injure our reputation. We do not have long-term employment agreements with
these executives and we do not maintain any key person life insurance policies
on their lives.
If we fail to protect our intellectual property rights, competitors may be able
to use our technologies which could weaken our competitive position, reduce our
revenue or increase our costs.
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Our success depends heavily upon proprietary technologies, specifically our
patent portfolio. The rights granted under our patents and patent applications
may not provide competitive advantages to us. In addition, litigation may be
necessary to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. As a result of any such
litigation, we could lose our proprietary rights and incur substantial
unexpected operating costs. Litigation could also divert our resources,
including our managerial and engineering resources. We rely primarily on a
combination of patents, copyrights, trademarks and trade secrets to protect our
proprietary rights and prevent competitors from using our proprietary
technologies in their products. These laws and procedures provide only limited
protection. Our pending patent applications may not result in issued patents,
and our existing and future patents may not be sufficiently broad to protect our
proprietary technologies. Also, patent protection in foreign countries may be
limited or unavailable where we have filed for and need such protection.
Furthermore, if we fail to adequately protect our trademark rights, this could
impair our brand identity and ability to compete effectively. If we do not
successfully protect our trademark rights, this could force us to incur costs to
re-establish our name or our product names, including significant marketing
activities.
If third parties assert that our proprietary technologies and software products
infringe their intellectual property rights, this could injure our reputation
and limit our ability to license or sell our proprietary technologies or
software products.
Third parties, for competitive or other reasons, could assert that our
proprietary technologies and software products infringe their intellectual
property rights. These claims could injure our reputation and decrease or block
our ability to license or sell our software products. For example, on March 14,
2000, ASML MaskTools, Inc. filed a complaint alleging we infringe two U.S.
patents and have committed unfair or fraudulent business practice under the
California Business and Professions Code. We are currently investigating the
patents and allegations. The defense of these claims could divert management's
attention from the day to day operations of our company, as well as divert
resources from current planned uses, such as hiring and supporting additional
engineering personnel. Litigation is inherently uncertain, and an adverse
decision could limit our ability to offer some features in our OPC product.
Third parties have advised us of literature which they believe to be relevant to
our patents. It is possible that this literature or literature we may be advised
of in the future could negatively affect the scope or enforceability of our
present or future patents and/or result in costly litigation. In addition, we
are aware of and are evaluating certain patents with which our products, patents
or patent applications may conflict. If any of these patents are found to be
valid, and we are unable to license such patents on reasonable terms, or if our
products, patents, or patent applications are found to conflict with these
patents, we could be prevented from selling our products, our patents may be
declared invalid or our patent applications may not result in issued patents. In
addition, a company could invite us to take a patent license. If we do not take
the license, the requesting company could contact our industry partners or
customers and suggest that they not use our software products because we are not
licensed under their patents. This action by the requesting company could affect
our relationships with these industry partners and customers and may prevent
future industry partners and customers from licensing our software products. The
intensely competitive nature of our industry and the important nature of our
technologies to our competitors' businesses may contribute to the likelihood of
being subject to third party claims of this nature.
Any potential dispute involving our patents or other intellectual property could
include our industry partners and customers, which could trigger our
indemnification obligations with them and result in substantial expense to us.
In any potential dispute involving our patents or other intellectual
property, our licensees could also become the target of litigation. This could
trigger our technical support and indemnification obligations in some of our
license agreements which could result in substantial expense to us. In addition
to the time and expense required for us to supply such support or
indemnification to our licensees, any such litigation could severely disrupt or
shut down the business of our licensees, which in turn could hurt our relations
with our customers and cause the sale of our proprietary technologies and
software products to decrease.
Defects in our proprietary technologies and software products could decrease our
revenue and our competitive market share.
If our industry partners and customers discover any defects after they
implement our proprietary technologies and software products, these defects
could significantly decrease the market acceptance and sales of our software
products, which could decrease our competitive market share. Any actual or
perceived defects with our proprietary technologies and software products may
also hinder our ability to attract or retain industry partners or customers,
leading to a decrease in our revenue. These defects are frequently found during
the period following introduction of new products or enhancements to existing
products. Despite testing prior to introduction, our software products may
contain software errors not discovered until after customer implementation. If
our software products contain errors or defects, it could
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require us to expend significant resources to alleviate these problems, which
could result in the diversion of technical and other resources from our other
development efforts.
We face operational and financial risks associated with international
operations.
We derive a significant portion of our revenue from international sales. In
addition, as a result of our acquisition of Cadabra in October 2000, 46 of our
employee are located in Ontario, Canada. We have only limited experience in
developing, marketing, selling and supporting our proprietary technologies and
software products, and managing our employees and operations, internationally.
We may not succeed in maintaining or expanding our international operations,
which could slow our revenue growth. We are subject to risks inherent in doing
business in international markets. These risks include:
. fluctuations in exchange rates which may negatively affect our operating
results;
. greater difficulty in collecting accounts receivable resulting in longer
collection periods;
. compliance with and unexpected changes in a wide variety of foreign laws
and regulatory environments with which we are not familiar;
. export controls which could prevent us from shipping our software
products into and from some markets;
. changes in import/export duties and quotas could affect the competitive
pricing of our software products and reduce our market share in some countries;
and
. economic or political instability.
We may be unable to continue to market our proprietary technologies and
software products successfully in international markets.
We may need to raise additional funds to support our growth or execute our
strategy and if we are unable to do so, we may be unable to develop or enhance
our proprietary technologies and software products, respond to competitive
pressures or acquire desired businesses or technologies.
We currently anticipate that our available cash resources, combined with
the net proceeds from our initial public offering, will be sufficient to meet
our presently anticipated working capital and capital expenditure requirements
for at least the next 12 months. However, we may need to raise additional funds
in order to:
. support more rapid expansion;
. develop new or enhanced products;
. respond to competitive pressures; or
. acquire complementary businesses or technologies.
These factors will impact our future capital requirements and the adequacy
of our available funds. We may need to raise additional funds through public or
private financings, strategic relationships or other arrangements.
We may be unable to consummate other potential acquisitions or investments or
successfully integrate them with our business, which may slow our ability to
expand the range of our proprietary technologies and software products.
To expand the range of our proprietary technologies and software products,
we may acquire or make investments in additional complementary businesses,
technologies or products if appropriate opportunities arise. We may be unable to
identify suitable acquisition or investment candidates at reasonable prices or
on reasonable terms, or consummate future acquisitions or investments, each of
which could slow our growth strategy. If we do acquire additional companies or
make other types of acquisitions, we may have difficulty integrating the
acquired products, personnel or technologies. These difficulties could disrupt
our ongoing business, distract our management and employees and increase our
expenses.
Our capital stock ownership is concentrated with insiders and this may limit
your ability to influence corporate matters.
The concentration of ownership of our outstanding capital stock with our
directors and executive officers may limit your ability to influence corporate
matters. Our directors and executive officers, and their affiliates,
beneficially own a significant portion of our outstanding capital stock. As a
result, these stockholders, if acting together, will have the ability to control
all matters submitted to our stockholders for approval, including the election
and removal of directors and the approval of any corporate transactions.
We have anti-takeover defenses that could delay or prevent an acquisition of our
company.
Provisions of our certificate of incorporation and bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders.
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The market price of our common stock may be volatile and could decline.
The market price of our common stock may fluctuate significantly in
response to factors, some of which are beyond our control, including:
. actual or anticipated fluctuations in our operating results;
. changes in market valuations of other technology companies;
. conditions or trends in the semiconductor industry;
. announcements by us or our competitors of significant technical
innovations, contracts, acquisitions or partnerships;
. additions or departures of key personnel;
. any deviations in net revenue or in losses from levels expected by
securities analysts;
. volume fluctuations, which are particularly common among highly volatile
securities of technology related companies; and
. sales of substantial amounts of our common stock or other securities in
the open market.
General political or economic conditions, such as recession or interest
rate or currency rate fluctuations in the United States or abroad, also could
cause the market price of our common stock to decline.
Our stock price is likely to be extremely volatile as the market for technology
companies' stock has recently experienced extreme price and volume fluctuations.
Volatility in the market price of our common stock could result in
securities class action litigation. Any litigation would likely result in
substantial costs and a diversion of management's attention and resources.
Despite the strong pattern of operating losses of technology companies, the
market demand, valuation and trading prices of these companies have been high.
At the same time, the share prices of these companies' stocks have been highly
volatile and have recorded lows well below their historical highs. As a result,
investors in these companies often buy the stock at very high prices only to see
the price drop substantially a short time later, resulting in an extreme drop in
value in the stock holdings of these investors. Our stock may not trade at the
same levels as other technology stocks. In addition, technology stocks in
general may not sustain current market prices.
If we raise additional capital or make acquisitions through the issuance of new
securities, you will incur additional dilution.
If we raise additional capital or pay for acquisitions through the issuance
of new securities, our stockholders will be subject to additional dilution. If
we are unable to access the public markets in the future, or if our performance
or prospects decreases, we may need to consummate a private placement or public
offering of our capital stock. In addition, any new securities may have rights,
preferences or privileges senior to those securities currently held by our
stockholders.
Exercise of registration rights could adversely affect our stock price.
If holders of registration rights exercise those rights, a large number of
securities could be registered and sold in the public market, which could result
in a decline in the price of our common stock. If we were to include in a
company-initiated registration shares held by these holders pursuant to the
exercise of their registration rights, our ability to raise needed capital could
suffer. The holders of approximately 58.4% of our outstanding stock, are
entitled to rights with respect to registration under the Securities Act of
1933.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
Our exposure to market risk for changes in interest rates relate primarily
to our investment portfolio. We do not use derivative financial instruments for
speculative or trading purposes. We place our investments in instruments that
meet high credit quality standards, as specified in our investment policy. The
policy also limits the amount of credit exposure to any one issuer and type of
instrument. We do not expect any material loss with respect to our investment
portfolio. Our expectations regarding no material loses with respect to our
investment portfolio is a forward-looking statement.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
---------------------------------------
From July 1, 2000 to October 31, 2000, we issued and sold the securities
described below.
1. On August 16, 2000, we issued and sold an aggregate of 1,250 shares of
unregistered common stock to an employee at a price of $4.00 per share,
for aggregate cash consideration of $5,000. These shares were sold
pursuant to the exercise of options granted by the board. As to the
employee of the registrant who was issued such securities, we relied
upon Rule 701 of the Securities Act of 1933. Such person purchased
securities of ours pursuant to a written contract between such person
and us. In addition, we met the conditions imposed under Rule 701(b).
2. On October 27, 2000, pursuant to the Agreement and Plan of
Amalgamation, dated as of September 5, 2000 (the "Amalgamation
Agreement"), by and among the Company, Numerical Nova Scotia Company,
Numerical Acquisition Limited ("Amalgamation Sub"), Cadabra Design
Automation Inc. ("Cadabra"), 3047725 Nova Scotia Limited ("ML Holdco"),
Martin Lefebvre and Faysal Sohail, Amalgamation Sub, Cadabra and ML
Holdco were amalgamated (the "Amalgamation") to form a new Nova Scotia
limited liability company ("Amalco"). In connection with the
Amalgamation, Amalco issued 2,641,328 shares of capital stock (the
"Exchangeable Shares") that are exchangeable at the direction of the
holder on a one-for-one basis into shares of the Company's common
stock. If any holder of Exchangeable Shares has not exercised his or
her exchange rights by October 27, 2005, or on such date when there are
fewer than 396,199 Exchangeable Shares outstanding, all outstanding
Exchangeable Shares will automatically be converted into the Company's
common stock. We have reserved 2,641,328 shares of the Company's common
stock for exchange by the holders of the Exchangeable Shares.
3. On October 27, 2000, we also issued 30,000 shares of unregistered
common stock of the Company to Faysal Sohail, President of Cadabra and
a Senior Vice President of the Company, pursuant to the terms of the
Amalgamation. The Company is obligated to file a registration statement
on Form S-3 covering these shares as soon as is practicable after the
Company becomes eligible to use Form S-3.
Appropriate legends were affixed to the share certificates issued in
the transactions described above. All recipients had adequate access, through
their relationships with us, to information about us.
(d) Use of Proceeds from Registered Securities
------------------------------------------
In April 2000, we sold a total of 6,364,100 shares of common stock (the
total amount registered) at $14.00 per share through our initial public offering
pursuant to a registration statement on Form S-1 declared effective by the
Securities and Exchange Commission on April 6, 2000 (333-95695). The initial
public offering commenced on April 7, 2000 and the net proceeds, after
underwriters' commission and fees and other costs of an estimated $7.9 million
associated with the offering, totaled approximately $81.2 million.
Since April 12, 2000 (the closing date of the Company's initial public
offering), the Company has used an estimated $11.7 million of the net proceeds
from the Company's initial public offering to fund operating expenses and
increase working capital, $1.2 million to purchase and install machinery and
equipment, and $30.2 million to pay the balance of principal and accrued
interest under the notes payable issued in connection with the acquisition of
Transcription. The Company has placed approximately $38.1 million in short-term,
interest-bearing, investment grade securities pending future use.
No payments constituted direct or indirect payments to directors,
officers, general partners of the issuer or their associates, or to persons
owning ten percent or more of any class of equity securities of the issuer or to
affiliates of the issuer.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
2.1 Agreement and Plan of Reorganization, dated as of December 21, 1999,
between the registrant, Transcription Enterprises Limited,
Transcription Enterprises, Inc., Kevin MacLean and Roger Sturgeon.*
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2.2 Agreement and Plan of Merger between the registrant and Numerical
Technologies, Inc., a Delaware corporation.*
2.3 Agreement and Plan of Amalgamation, dated as of September 5, 2000, by
and among Numerical Technologies, Inc., Numerical Nova Scotia
Company, Numerical Acquisition Limited, 3047725 Nova Scotia Limited,
Cadabra Design Automation Inc., Martin Lefebvre, and Faysal Sohail.
***
3.2 Amended and Restated Certificate of Incorporation of registrant.*
3.3 Bylaws of registrant.*
4.1 Form of registrant's common stock certificate.*
4.2 1999 Second Amended and Restated Shareholders Rights Agreement, dated
January 1, 2000, between the registrant and the parties named
therein, as amended on January 14, 2000.*
10.1 Form of Indemnification Agreement entered into by registrant with
each of its directors and executive officers.*
10.2 2000 Stock Plan and related agreements.*
10.3 1997 Stock Plan and related agreements.*
10.4 2000 Employee Stock Purchase Plan and related agreements.*
10.5 Lease Agreement, dated June 15, 1999, by and between the registrant
and CarrAmerica Realty Corporation.*
10.6 Lease Agreement, dated May 10, 1990, between Transcription
Enterprises, Inc. and Los Gatos Business Park.*
10.7 Employment Agreement, dated January 1, 2000, by and between
Transcription Enterprises, Inc. and Roger Sturgeon.*
10.8 Employment Agreement, dated January 1, 2000, by and between
Transcription Enterprises, Inc. and Kevin MacLean.*
10.9 Non-Competition Agreement, dated January 1, 2000, by and between
Numerical Technologies, Inc., Transcription Enterprises, Inc.,
Transcription Enterprises Limited and Roger Sturgeon.*
10.10 Non-Competition Agreement, dated January 1, 2000, by and between
Numerical Technologies, Inc., Transcription Enterprises, Inc.,
Transcription Enterprises Limited and Kevin MacLean.*
10.11 Stock Option Agreement--Early Exercise, dated November 2, 1999, by
and between the registrant and William Davidow.*
10.12 Stock Option Agreement--Early Exercise, dated May 26, 1999, by and
between the registrant and Richard Mora.*
10.13 Stock Option Agreement--Early Exercise, dated December 27, 1999, by
and between the registrant and Richard Mora.*
10.14 Stock Option Agreement--Early Exercise, dated March 31, 1999, by and
between the registrant and Atul Sharan.*
10.15 Stock Option Agreement--Early Exercise, dated December 27, 1999, by
and between the registrant and Atul Sharan.*
10.16 Stock Option Agreement--Early Exercise, dated February 3, 1999, by
and between the registrant and Lars Herlitz.*
10.17 Stock Option Agreement--Early Exercise, dated December 27, 1999, by
and between the registrant and Lars Herlitz.*
10.18 Stock Option Agreement--Early Exercise, dated November 17, 1999, by
and between the registrant and John Traub.*
10.19 Stock Option Agreement--Early Exercise, dated December 27, 1999, by
and between the registrant and John Traub.*
10.20 Stock Option Agreement--Early Exercise, dated July 15, 1998, between
the registrant and Harvey Jones.*
10.21 License Agreement, dated as of October 1, 1999, between registrant
and Cadence Design Systems, Inc.*+
10.22 OEM Software License Agreement, dated December 31, 1997, between
registrant and Zygo Corporation (fka Technical Instrument Company).*+
10.23 Addendum to OEM Software License Agreement, dated March 25, 1999,
between registrant and Zygo Corporation.*
10.24 Software Production and Distribution Agreement, dated January 9,
1998, between registrant and KLA-Tencor Corporation.*+
10.25 License Agreement, dated December 23, 1999, between registrant and
Seiko Instruments, Inc.*#
10.26 Development and Distribution Agreement, dated October 1, 1991,
between Transcription Enterprises Limited and KLA Instruments
Corporation.*+
10.27 Addendum Number One to Development and Distribution Agreement, dated
December 27, 1999, between Transcription Enterprises Limited and KLA
Instruments Corporation.*+
10.28 Stock Option Agreement--Early Exercise, dated February 1, 2000, by
and between the registrant and Roger Sturgeon.*
10.29 Stock Option Agreement--Early Exercise, dated February 1, 2000, by
and between the registrant and Kevin MacLean.*
10.30 Stock Option Agreement--Early Exercise, dated February 10, 2000, by
and between the registrant and Y.C. (Buno) Pati.*
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10.31 Stock Option Agreement--Early Exercise, dated February 10, 2000, by
and between the registrant and Yao-Ting Wang.*
10.32 Stock Option Agreement--Early Exercise, dated October 23, 1998, by
and between the registrant and Atul Sharan.*
10.33 Amendment No. 1 to Lars Herlitz' Stock Option Agreements dated
February 3, 1999 and December 27, 1999, dated as of January 24, 2000,
by and between the registrant and Lars Herlitz.*
10.34 Amendment No. 1 to Atul Sharan's Stock Option Agreements dated
October 23, 1998, March 31, 1999 and December 27, 1999, dated as of
January 24, 2000, by and between the registrant and Atul Sharan.*
10.35 Amendment No. 1 to John Traub's Stock Option Agreements dated
November 17, 1999 and December 27, 1999, dated as of January 24,
2000, by and between the registrant and John Traub.*
10.36 Stock Option Agreement--Early Exercise, dated February 10, 2000, by
and between the registrant and Naren Gupta.*
10.37 PSM Software Development and License Agreement, dated as of March 10,
2000, by and between registrant and Cadence Design Systems, Inc.*+
10.38 License Agreement, dated March 1, 2000, between registrant and
Motorola, Inc.**+
27.1 Financial Data Schedule.
* Incorporated by reference to registration statement on Form S-1 (333-95695)
as declared effective by the Securities and Exchange Commission on April 6,
2000.
** Incorporated by reference to registration statement on Form 10-Q as filed
with the Securities and Exchange Commission on May 12, 2000.
*** Incorporated by reference to the current report on Form 8-K as filed with
the Securities and Exchange Commission on September 15, 2000.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
# While portions of this agreement were previously inadvertently filed,
management has deemed that this agreement is not material.
(b) Reports on Form 8-K
Current Report on Form 8-K filed by the Company on September 15, 2000,
relating to the Agreement and Plan of Amalgamation, dated as of September 5,
2000, by and among the Company, Numerical Nova Scotia Company, Numerical
Acquisition Limited, ("Amalgamation Sub"), 3047725 Nova Scotia Limited ("ML
Holdco"), Cadabra Design Automation Inc., ("Cadabra"), Martin Lefebvre, and
Faysal Sohail, which provides for the amalgamation of Amalgamation Sub, Cadabra
and ML Holdco to form a new Nova Scotia company that would be an indirect
subsidiary of the Company.
Items 1, 3, 4, and 5 are not applicable and have been omitted.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated November 13, 2000, NUMERICAL TECHNOLOGIES, INC.
By: /s/ Richard Mora
Richard Mora
Chief Financial Officer and
Vice President of Operations
(Principal Accounting Officer and Duly Authorized
Signatory)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27.1 Financial Data Schedule
21
