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 JUNE 30, 2001
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: 333-95695
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 July 25, 2001 was 33,125,667
INDEX
NUMERICAL TECHNOLOGIES, INC.
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets ....................... 3
Condensed Consolidated Statements of Operations ............. 4
Condensed Consolidated Statements of Cash Flows ............. 5
Notes To Condensed Consolidated Financial Statements ........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
Item 3. Quantitative and Qualitative Disclosure about Market Risk.... 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................... 18
Item 4. Submission of Matters to a Vote of Security Holders ......... 19
Item 6. Exhibits and Reports an Form 8-K............................. 19
SIGNATURES............................................................... 19
2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
NUMERICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
June 30, December 31,
2001 2000
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 24,281 $ 30,607
Short-term investments 36,209 23,281
Accounts receivable 7,405 4,983
Prepaid and other 2,856 3,177
-------- --------
Total current assets 70,751 62,048
Property and equipment, net 3,139 3,209
Goodwill and other intangible assets 152,072 175,402
Other assets 487 315
-------- --------
$226,449 $240,974
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 2,909 $ 3,208
Accrued expenses and other liabilities 4,727 4,608
Deferred revenue 12,398 6,320
-------- --------
Total current liabilities 20,034 14,136
-------- --------
Deferred tax liability 5,874 7,704
-------- --------
Stockholders' equity:
Convertible preferred stock, $0.0001 par value:
Authorized: 5,000 shares;
Issued and outstanding: none - -
Common stock, $0.0001 par value:
Authorized: 100,000 shares;
Issued and outstanding: 33,069 and 32,834 shares
in 2001 and 2000, respectively 3 3
Additional paid in capital 320,562 319,541
Receivable from stockholders (3,939) (4,050)
Deferred stock compensation (19,325) (30,572)
Accumulated deficit (96,661) (65,751)
Accumulated other comprehensive loss (99) (37)
-------- --------
Total stockholders' equity 200,541 219,134
-------- --------
$226,449 $240,974
======== ========
See the accompanying notes to these condensed consolidated financial statements.
3
NUMERICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Revenue $ 11,703 $ 4,742 $ 22,023 $ 8,198
-------- -------- -------- --------
Costs and expenses:
Cost of revenue 1,180 296 2,103 630
Research and development 3,917 3,257 7,810 5,849
Sales and marketing 3,809 2,134 7,431 3,932
General and administrative 1,758 1,204 3,405 2,089
Depreciation and amortization 12,191 4,748 24,561 9,760
Amortization of deferred
stock compensation(*) 4,495 5,524 10,227 10,741
-------- -------- -------- --------
Total costs and expenses 27,350 17,163 55,537 33,001
-------- -------- -------- --------
Loss from operations (15,647) (12,421) (33,514) (24,803)
Interest expense - (193) - (893)
Interest income and other 679 875 1,539 1,018
-------- -------- -------- --------
Loss before benefit from income taxes (14,968) (11,739) (31,975) (24,678)
Benefit from income taxes 249 - 1,065 -
-------- -------- -------- --------
Net Loss $(14,719) $(11,739) $(30,910) $(24,678)
======== ======== ======== ========
Net loss per common share, basic and diluted $ (0.49) $ (0.50) $ (1.03) $ (1.57)
======== ======== ======== ========
Weighted average common shares outstanding,
basic and diluted 30,238 24,850 29,886 16,209
======== ======== ======== ========
(*)Amortization of deferred stock compensation
Cost of sales $ 266 $ 230 $ 496 $ 425
Research and development 2,250 2,562 5,467 5,004
Sales and marketing 1,166 1,330 2,524 2,586
General and administrative 813 1,402 1,740 2,726
-------- -------- -------- --------
$ 4,495 $ 5,524 $ 10,227 $ 10,741
======== ======== ======== ========
See the accompanying notes to these condensed consolidated financial statements.
4
NUMERICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
(unaudited)
For the Six Months Ended
June 30,
--------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net loss $(30,910) $(24,678)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation 931 474
Amortization of deferred stock compensation 10,227 10,741
Amortization of acquired intangibles 23,630 9,286
Changes in assets and liabilities:
Accounts receivable (2,422) (872)
Prepaid and other 321 (415)
Other assets (172) 64
Accounts payable (299) 1,044
Accrued expenses and other liabilities (181) 505
Deferred revenue 6,078 2,518
Deferred tax (1,830) -
-------- --------
Net cash provided by (used in) operating activities 5,373 (1,333)
-------- --------
Cash flows from investing activities:
Proceeds from sales of short-term investments 35,977 -
Purchase of short-term investments (48,905) (15,655)
Purchase of property and equipment (861) (1,055)
-------- --------
Net cash used in investing activities (13,789) (16,710)
-------- --------
Cash flows from financing activities:
Proceeds from Initial public offering - 81,161
Repayment on notes payable - (40,000)
Proceeds from exercise of common stock options 848 1,139
Proceeds from employee stock purchase plan 1,214 -
Repurchase of common stock (21) (75)
Repayment of notes receivable for common stock 111 -
-------- --------
Net cash provided by financing activities 2,152 42,225
-------- --------
Effect of foreign currency translation on cash flows (62) -
-------- --------
Net increase (decrease) in cash and cash equivalents (6,326) 24,182
Cash and cash equivalents at beginning of period 30,607 13,486
-------- --------
Cash and cash equivalents at end of period $ 24,281 $ 37,668
======== ========
Supplemental disclosure of cash flow information:
Stockholder notes receivable exchanged for common stock - 3,771
======== ========
Interest paid - 893
======== ========
See the accompanying notes to these condensed consolidated financial statements.
5
NUMERICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - GENERAL
The unaudited condensed consolidated financial statements have been prepared
by Numerical Technologies, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in consolidated 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 condensed consolidated 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 condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto for the years ended December 31, 2000, 1999 and 1998, included in
the Company's form 10-K filed with the SEC on March 27, 2001. The results of
operations for the interim periods are not necessarily indicative of the results
that may be expected for any other period or for the fiscal year, which ends
December 31, 2001.
NOTE 2 - ACQUISITION
On October 27, 2000, the Company acquired Cadabra Design Automation Inc.
(Cadabra), a limited liability company incorporated in Nova Scotia, Canada.
Under the terms of the acquisition, the Company issued approximately 2,671,000
shares and 528,000 options to purchase the Company's common stock in exchange
for all of the outstanding stock and the assumption of all the outstanding
options of Cadabra. The total purchase price was approximately $110.6 million,
including acquisition costs of approximately $3.0 million. The acquisition was
accounted for using the purchase method of accounting.
The allocation of the purchase price is as follows (in thousands):
Net tangible assets................................................ $ 1,964
In process research and development................................ 1,630
Developed technology............................................... 660
Customer base...................................................... 5,040
Covenants not to compete........................................... 2,290
Work force......................................................... 1,800
Goodwill........................................................... 97,244
-------
Total consideration............................................... 110,628
Deferred Stock Compensation........................................ 12,594
-------
Total............................................................. $123,222
=======
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 four years. The amounts allocated to
covenants not to compete and work force are being amortized over the estimated
useful lives of two and three 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 four years. The valuation for the intangible assets has been determined using
management's assumptions and the report from an independent appraiser.
6
Had the acquisition of Cadabra occurred on January 1, 2000, pro forma combined
revenues would have been $6,194,000 and $10,844,000 for the three months and six
months ended June 30, 2000. Pro forma net loss would have been $22,257,000 or
$(0.84) per share and $44,596,000 or $(2.52) per share for the three months and
six months ended June 30, 2000. Pro forma adjustments have been added to record
the amortization of identifiable intangible assets and goodwill and amortization
of deferred stock compensation related to the acquisition of Cadabra as if the
transaction occurred on January 1, 2000.
NOTE 3 - NET LOSS PER SHARE
Basic net income per share is calculated using the weighted average number of
common shares outstanding during the period. Diluted net income per share is
calculated using the weighted average number of common shares and common stock
equivalents, if dilutive, outstanding during the period. Common stock
equivalents includes common shares issuable upon exercise of common stock,
conversion of preferred stock and warrants. For the periods presented the
Company had losses and therefore all common stock equivalents are excluded from
the computation of diluted net loss per share because their effect is
antidilutive.
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
A summary of comprehensive income for the periods presented is as follows (in
thousands):
Three Months Ended Six months ended
June 30, June 30,
(unaudited) (unaudited)
2001 2000 2001 2000
---- ---- ---- ----
Net loss $(14,719) $(11,739) $(30,910) $(24,678)
Foreign currency translation
adjustments (3) - (62) -
-------- -------- -------- --------
Total comprehensive loss $(14,722) $(11,739) $(30,972) $(24,678)
======== ======== ======== ========
NOTE 5 - LITIGATION
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, that arise in the ordinary course of business. On March
14, 2000, ASML MaskTools, Inc. filed a complaint alleging that we infringe two
U.S. patents and have committed unfair or fraudulent business practice under the
California Business and Professions Code. The Company is currently investigating
the patents and allegations. This lawsuit is in early stages of discovery and no
trial date has been set. Although the outcome of these claims cannot be
predicted with certainty, management does not believe that any of these legal
matters will have a material adverse effect on the Company's financial
condition. 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.
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets". Under SFAS No. 141, all business combinations initiated after June 30,
2001 must be accounted for using the purchase method. Under SFAS No. 142,
goodwill and intangible assets with indefinite lives are no longer amortized but
are reviewed annually (or more frequently if there are indicators such assets
may be impaired) for impairment. Separable intangible assets that are not deemed
to have indefinite lives will continue to be amortized over their useful lives
(but with no maximum life). The amortization provisions of SFAS No. 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the Company is
required to adopt SFAS No. 142 effective January 1, 2002. The Company is
currently evaluating the effect that adoption of the provisions of SFAS No. 142
will have on the Company's results of operations and financial position.
NOTE 7 - RELATED PARTY TRANSACTIONS
In November 2000, a loan was granted to an officer and stockholder of the
Company for $1.1 million. The loan, which is secured by the assets of the
officer and stockholder, is non-interest bearing and was payable in full in May
2001. In May 2001, the Company extended the payment date to August 15, 2001.
7
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
Certain information contained or incorporated by reference in this Quarterly
Report on Form 10-Q is forward-looking in nature. All statements included or
incorporated by reference in this Quarterly Report on Form 10-Q or made by our
management, other than statements of historical fact, are forward-looking
statements. Examples of forward-looking statements include statements regarding
our future financial results, operating results, business strategies, projected
costs, products, competitive positions and plans and objectives of management
for future operations. In some cases, forward-looking statements can be
identified by terminology such as "may," "will," "should," "would," "expects,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential,"
"continue," or the negative of these terms or other comparable terminology. Any
expectations based on these forward-looking statements are subject to risks and
uncertainties and other important factors, including without limitation those
discussed in the section entitled "Factors That May Affect Our Future Results".
These and many other factors could affect our future financial and operating
results, and could cause actual results to differ materially from current
expectations.
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. To date
we have entered into production licenses with five semiconductor manufacturers.
We expect to enter into additional production licenses as semiconductor
manufacturers adopt our proprietary technologies for production. Production
licenses grant licensees the right to use our phase shifting intellectual
property and software to design and manufacture subwavelength integrated
circuits, or ICs. In order for semiconductor manufacturers to enter into
production licenses with us, these manufacturers must continue to embrace our
proprietary technologies and software products and not enter into agreements
with our competitors in this regard. We must also expend significant sales and
marketing resources on these manufacturers with no guarantee of success.
Results of Operations
Revenue. Revenues were $11.7 million and $22.0 million for the three months
and six months ended June 30, 2001 compared to $4.7 million and $8.2 million for
the same periods in 2000, representing increases of 147% and 169% for the
respective periods. These increases, which were aided by our acquisition of
Cadabra in October 2000, were primarily attributable to the continued adoption
of our software and proprietary technology solution by companies throughout the
design-to-silicon flow.
Costs and Expenses
Cost of revenue. Cost of revenues were $1.2 million and $2.1 million for
the three months and six months ended June 30, 2001 compared to $296,000 and
$630,000 for the same periods in 2000. The increase was primarily due to
increased cost for engineers associated with maintenance and technical services,
which resulted from an increased customer base. As a percent of revenues, cost
of revenue increased to 10% for both the three months and six months ended June
30, 2001 compared to 6% and 8% for the same periods in 2000. 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.
Research and development. Research and development expenses were $3.9 million
and $7.8 million for the three months and six months ended June 30, 2001
compared to $3.3 million and $5.8 million for the same periods in 2000. These
increases were primarily due to increased costs associated with additional
personnel acquired in the acquisition of Cadabra in October 2000 and, to a
lesser degree, our expanding research and development efforts in subwavelength
technologies and products. As a percent of revenues, research and development
expenses were 33% and 35% for the three months and six months ended June 30,
2001 compared to 69% and 71% for the same periods in 2000. We anticipate that we
will continue to commit substantial resources to research and
8
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.
Sales and marketing. Sales and marketing expenses were $3.8 million and $7.4
million for the three months and six months ended June 30, 2001 compared to $2.1
million and $3.9 million for the same periods in 2000. These increases were
primarily due to additional sales and marketing personnel, increased sales
commissions and higher tradeshow expenses, and to a lesser degree as a result of
additional personnel acquired in the Cadabra acquisition in October 2000. As a
percent of revenues, sales and marketing expenses decreased to 33% and 34% for
the three months and six months ended June 30, 2001 compared to 45% and 48% for
the same periods in 2000. 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 were $1.8
million and $3.4 million for the three months and six months ended June 30, 2001
compared to $1.2 million and $2.1 million for the same periods in 2000. These
increases were primarily the result of increased spending in personnel,
personnel-related costs and professional fees and to a lesser degree as a result
of additional personnel acquired in the Cadabra acquisition. As a percent of
revenues, general and administrative expenses decreased to 15% for both the
three months and six months ended June 30, 2001 compared to 25% for the same
periods in 2000. 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.
Depreciation and amortization. Depreciation and amortization expenses were $12.2
million and $24.6 million for the three months and six months ended June 30,
2001 compared to $4.7 million and $9.8 million for the same periods in 2000.
These increases were primarily the result of amortization of acquired
intangibles associated with the acquisition of Cadabra in October 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 $4.5 million and $10.2 million for the three months
and six months ended June 30, 2001 compared to $5.5 million and $10.7 million
for the same periods in 2000. We are amortizing these amounts over the vesting
periods of the individual options, using the multiple option method.
Interest expense. Interest expense was $0 for both the three months and six
months ended June 30, 2001 compared to $193,000 and $893,000 for the same
periods in 2000. Interest expense related 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 and other. Interest income and other was $679,000 and $1.5
million for the three months and six months ended June 30, 2001 compared to
$875,000 and $1.0 million for the same periods in 2000. The decrease in the
three months period is the result of lower interest rates in 2001. The increase
in the six month period is attributable to having higher cash balances invested
for the entire 6 months in 2001 which more than offset the decreases in interest
rates in 2001 compared to 2000. The cash balances invested for the 6 months
period ended June 30, 2000 was increased significantly during the period as a
result of proceeds from our initial public offering in April 2000, whereas the
monies were available for investment for the entire 6 months in 2001.
Benefit from income taxes. We recorded a benefit for income taxes of $249,000
and $1.1 million for the three months and six months ended June 30, 2001
compared to $0 for the comparable periods in 2000. The tax benefit in 2001 is
the result of the utilization of deferred tax liabilities associated with the
amortization of intangible assets established as of result of acquisitions in
2000.
Liquidity and Capital Resources
As of June 30, 2001, we had cash and cash equivalents and short-term investments
of $60.5 million. As of the same date, we had working capital of $50.7 million,
including deferred revenue of $12.4 million. Deferred revenue represents the
excess of amount billed to licensees over revenue recognized on license and
maintenance contracts.
Net cash provided by operating activities was $5.4 million during the six month
period ended June 30, 2001, compared with cash used of $1.3 million in the
comparable period in 2000. Net cash provided in the six month period ended June
30, 2001 primarily reflects a net loss of $30.9 million, increases in accounts
receivable of $2.4 million and decreases in deferred taxes of $1.8 million,
offset by amortization of intangibles and depreciation expenses of $23.6
million,
9
amortization of deferred stock compensation of $10.2 million and increases in
deferred revenue of $6.1 million.
Net cash used in investing activities was $13.8 million during the six month
period ended June 30, 2001, compared with $16.7 million used in the comparable
period in 2000. Net cash used in the six month period ended June 30, 2001
consisted of net purchases of short-term investments of $12.9 million and
purchases of computer hardware and software, office furniture and equipment of
$861,000. We expect capital spending of approximately $2.0 million in fiscal
year 2001 mainly for computer hardware and software, office furniture and
equipment, and business systems upgrades.
Net cash provided by financing activities was $2.2 million during the six month
period ended June 30, 2001, compared with $42.2 million in the comparable period
in 2000. Net cash provided in the six month period ended June 30, 2001
principally related to net proceeds from the exercise of stock options and from
the employees stock purchase plan.
We are subject to various legal proceedings and claims, either asserted or
unasserted, that arise in the ordinary course of business. In addition, on March
14, 2000, ASML MaskTools, Inc. filed a complaint alleging that 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. This lawsuit is in early stages of discovery and no
trial date has been set. Although the outcome of these claims cannot be
predicted with certainty, management does not believe that any of these legal
matters will have a material adverse effect on the Company's financial
condition. Were an unfavorable ruling to occur it could limit our ability to
offer some features of our OPC product and there exists the possibility of a
material impact on the net income of the period in which the ruling occurs and
thereafter.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business strategy. As a result, we
anticipate that such operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In addition,
we may utilize cash resources to fund acquisitions of, or investments in,
complementary businesses, technologies or product lines. We believe that the net
proceeds from the sale of the common stock in our initial public offering
completed in April 2000, together with existing cash, will be sufficient to meet
our working capital and capital expenditure requirements for at least the next
12 months. Thereafter, we may find it necessary to obtain additional equity or
debt financing. In the event additional financing is required, we may not be
able to raise it on acceptable terms or at all.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets". Under SFAS No. 141, all business combinations initiated after June 30,
2001 must be accounted for using the purchase method. Under SFAS No. 142,
goodwill and intangible assets with indefinite lives are no longer amortized but
are reviewed annually (or more frequently if there are indicators such assets
may be impaired) for impairment. Separable intangible assets that are not deemed
to have indefinite lives will continue to be amortized over their useful lives
(but with no maximum life). The amortization provisions of SFAS No. 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the Company is
required to adopt SFAS No. 142 effective January 1, 2002. The Company is
currently evaluating the effect that adoption of the provisions of SFAS No. 142
will have on the Company's results of operations and financial position.
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.
If the four key markets within the semiconductor industry, which we believe
are semiconductor manufacturing, semiconductor equipment manufacturing,
photomask manufacturers and design, do not adopt our proprietary technologies
and software products, our revenue could decline. We believe 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, we believe the
10
efficiency of the manufacturing process with respect to such designers, mask
manufacturers and equipment manufacturers is 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 $7.4 million in the six months ended
June 30, 2001 from $3.9 million in the six months ended June 30, 2000. 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.
We depend on the growth of the semiconductor industry and the current economic
slowdown in this industry may cause a decrease in the demand for our proprietary
technologies and software products and revenue.
We are dependent upon the general economic cycles of the semiconductor
industry. Our ability to increase or even maintain our current revenue is
largely dependent upon the continued demand by semiconductor manufacturers and
each other key market within the semiconductor industry for integrated circuits,
or ICs, and IC-related technologies. The semiconductor industry has from time to
time experienced economic downturns characterized by decreased product demand,
production over-capacity, price erosion, work slowdowns and layoffs. We believe
the semiconductor industry is currently experiencing such an economic downturn
and, as a result, the sales of some of our proprietary technologies and software
products has decreased and may continue to decrease.
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 valuation
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 120 employees as of June 30, 2000 to 213 employees as of June 30,
2001.
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. For example, for the six months ended June 30,
2001, revenues from Cadabra Design Automation, Inc, a corporation that we
recently acquired, were less than anticipated.
We have not been profitable in any quarter, and our accumulated deficit was
approximately $96.7 million as of June 30, 2001. We expect to continue to incur
significant operating expenses in connection with increased funding for research
and development and expansion of our sales and
11
marketing efforts. In addition, we expect to incur additional non-cash 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.
If we fail to protect our intellectual property rights, competitors may be able
to use our technologies which could weaken our competitive position, reduce our
revenue or increase our costs.
Our success depends heavily upon proprietary technologies, specifically our
patent portfolio. The rights granted under our patents and patent applications
may not provide competitive advantages to us. In addition, litigation may be
necessary to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. As a result of any such
litigation, we could lose our proprietary rights and incur substantial
unexpected operating costs. Litigation could also divert our resources,
including our managerial and engineering resources. We rely primarily on a
combination of patents, copyrights, trademarks and trade secrets to protect our
proprietary rights and prevent competitors from using our proprietary
technologies in their products. These laws and procedures provide only limited
protection. 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. In
addition, 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.
12
If our industry partners and customers discover any defects after they
implement our proprietary technologies and software products, these defects
could significantly decrease the market acceptance and sales of our software
products, which could decrease our competitive market share. Any actual or
perceived defects with our proprietary technologies and software products may
also hinder our ability to attract or retain industry partners or customers,
leading to a decrease in our revenue. These defects are frequently found during
the period following introduction of new products or enhancements to existing
products. Despite testing prior to introduction, our software products may
contain software errors not discovered until after customer implementation. If
our software products contain errors or defects, it could require us to expend
significant resources to alleviate these problems, which could result in the
diversion of technical and other resources from our other development efforts.
If we do not continue to introduce new technologies and software products or
product enhancements ahead of rapid technological change in the market for
subwavelength solutions, our operating results could decline and we could lose
our competitive position.
We must continually devote significant engineering resources to enable us to
introduce new technologies and software products or product enhancements to
address the evolving needs of key markets within the semiconductor industry in
solving the subwavelength gap problem. We must introduce these innovations and
the key markets within the semiconductor industry must adopt them before changes
in the semiconductor industry, such as the introduction by our current and
potential competitors of more advanced products or the emergence of alternative
technologies, render the innovations obsolete, which could cause us to lose our
competitive position. These innovations are inherently complex, require long
development cycles and a substantial investment before we can determine their
commercial viability. Moreover, designers, mask manufacturers and equipment
manufacturers must each respond to the demand of the market to design and
manufacture masks and equipment for increasingly smaller and complex
semiconductors. Our innovations must be viable and meet the needs of these key
markets within the semiconductor industry before the consumer market demands
even smaller semiconductors, rendering the innovations obsolete. We may not have
the financial resources necessary to fund any future innovations. In addition,
any revenue that we receive from enhancements or new generations of our
proprietary technologies and software products may be less than the costs of
development.
We rely on a small number of customers for a substantial amount of our revenue,
and if our contracts with such customers were terminated, or if the revenues we
expect to receive are otherwise reduced, we would need to replace this revenue
through other sources.
Approximately 50% of our revenue for the three months ended June 30, 2001 is
derived from two customers. If any of the contracts with these customers were to
be terminated or not extended or renewed, or if the revenues we expect to
receive are otherwise reduced, we could lose a material portion of our revenue.
We would need to replace this revenue with revenue from other customers by
increasing the sale of our proprietary technologies and software products to our
current customers and industry partners, or by entering into new contracts with
new customers either of which would result in an unexpected diversion of
management efforts and possible increases to operating expenses, with no
immediate increase in revenue.
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 and Senior Vice President of
Engineering; Roger Sturgeon, one of our directors and a senior executive of
Transcription; Kevin MacLean, Senior Vice President and General Manager of
Transcription; Faysal Sohail, Senior Vice President of Worldwide Field
Operations and Martin Lefebrve, a member of our Office of Technology 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.
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, optical proximity correction, or OPC, manufacturing
13
data and automated cell generation technologies. These competitors include such
companies as Avant!, Mentor Graphics and Prolific, Inc. We also compete with
companies that have developed or have the ability to develop their own
proprietary phase shifting and OPC solutions, such as IBM. These companies may
wish to promote their internally developed products and may be reluctant to
purchase products from us or other independent vendors. Our competitors may
offer a wider range of products than we do and thus may be able to respond more
quickly to new or changing opportunities, technologies and customer
requirements. These competitors may also be able to undertake more extensive
promotional activities, offer more attractive terms to customers than we do and
adopt more aggressive pricing policies. Moreover, our competitors may establish
relationships among themselves or with industry partners to enhance their
services, including industry partners with which we may desire to establish a
relationship.
The market for software solutions that address the subwavelength gap problem is
new and rapidly evolving. We expect competition to intensify in the future,
which could slow our ability to grow or execute our strategy.
We believe that the demand for solutions to the subwavelength gap problem may
encourage many competitors to enter into our market. As the market for software
solutions to the subwavelength gap problem proliferates, if our competitors are
able to attract industry partners or customers on a more accelerated pace than
we can and retain them more effectively, we would not be able to grow and
execute our strategy as quickly. In addition, if customer preferences shift away
from our technologies and software products as a result of the increase in
competition, we must develop new proprietary technologies and software products
to address these new customer demands. This could result in the diversion of
management attention or our development of new technologies and products may be
blocked by other companies' patents. We must offer better products, customer
support, prices and response time, or a combination of these factors, than those
of our potential competitors.
We 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
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.
We recently acquired Cadabra Design Automation Inc. If we are not successful in
integrating Cadabra's products and operations with ours, our revenue and
operating results could decline.
Our acquisition of Cadabra 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. We must
successfully integrate Cadabra's products with ours. One of the elements of our
strategy is to integrate our subwavelength solution with the Cadabra solution in
order to offer design teams fast access to the processes that incorporate our
subwavelength technologies. We must also focus our research and development and
sales and marketing efforts to realize the technological benefits of this
combination. If we encounter any difficulties in the transition process, we may
not be able to successfully integrate Cadabra's business or technologies and may
not achieve anticipated revenue and cost benefits. We also cannot guarantee that
the acquisition will result in sufficient revenues or earnings to justify our
investment in, or expenses related to, the acquisition or that any synergies
will develop. If we are not successful in integrating Cadabra's businesses or
if expected earnings or synergies do not materialize, we would likely incur
significant expenses as well as non-cash
14
charges to write-off acquired intangible assets, which could seriously harm our
financial condition and operating results. In this regard, for the six months
ended June 30, 2001, revenues from Cadabra were less than anticipated.
In addition, the process of combining our company with Cadabra could interrupt
the activities of any or all of the companies' businesses. It is possible that
we will not be able to retain Cadabra's key management, technical and sales
personnel. The acquisition of Cadabra could also cause our industry partners and
customers to be uncertain about our ability to support the combined companies'
products and technologies and the direction of the combined companies'
development efforts. In particular, semiconductor manufacturers, which have
previously relied on and endorsed the Cadabra solution, must continue to rely on
and endorse this solution under our combined company. As a result, these
semiconductor manufacturers, as well as our other industry partners and
customers, may delay or cancel these orders, which could significantly decrease
our revenue and limit our ability to implement our combined business strategy.
Moreover, the economic downturn in the semiconductor industry could compound the
difficulties inherent in our integration of the Cadabra business by causing
decreased revenues for the combined company and further uncertainty regarding
the success of the integration.
Our acquisition of Transcription Enterprises Limited 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.
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:
. our recent acquisition of Transcription and Cadabra, as well as future
potential acquisitions by us;
. the timing and structure of our product license agreements; 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 position.
The accounting rules we are required to follow require us to recognize revenue
only when certain criteria are met. As a result, for a given quarter it is
possible for us to fall short in our revenue and/or earnings estimates even
though total orders are according to our plan or, conversely, to meet our
revenue and/or earnings estimates even though total orders fall short of our
plan, due to revenue produced by deferred revenue. 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.
We face operational and financial risks associated with international
operations.
We derive a significant portion of our revenue from international sales. For
the six months ended June 30, 2001, compared to six months ended June 30, 2000,
the breakdown of our revenue by geographic region, as a percentage of our total
revenue, was North America, 64% and 62%, Asia, 27% and 28%, Europe, 6% and 9%,
and other, 3% and 1%, respectively. In addition, as a result of our acquisition
of Cadabra, a Nova Scotia limited liability company, 51 of our 213 employees as
15
of June 30, 2001 were 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;
. 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;
. compliance with and unexpected changes in a wide variety of foreign laws
and regulatory environments with which we are not familiar;
. greater difficulty in collecting accounts receivable resulting in longer
collection periods; 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 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.
The market price of our common stock has been and may continue to be volatile
and could decline.
The market price of our common stock has fluctuated in response to factors, some
of which are beyond our control, including:
. changes in market valuations of other technology companies;
. conditions or trends in the semiconductor industry;
. actual or anticipated fluctuations in our operating results;
. any deviations in net revenue or in losses from levels expected by
securities analysts;
. announcements by us or our competitors of significant technical
innovations, contracts, acquisitions or partnerships;
. volume fluctuations, which are particularly common among highly volatile
securities of technology related companies; and
. departures of key personnel.
16
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.
The fluctuations in our stock price could result in securities class action
litigation, which could result in substantial costs and diversion of our
resources.
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. The share prices of
technology 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 high prices only to see the price drop a short time
later, resulting in a drop in value in the stock holdings of these investors.
Our stock may not trade at the same levels as other technology stocks, or at its
historical prices.
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 Cadabra, into our operations, we may be unable to implement our
business strategy in the time frame we anticipate, or at all. 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 our headquarters are located.
Our operations are primarily located in California and, as a result, are subject
to power loss and other natural disasters.
Our business operations depend on our ability to maintain and protect our
facilities, computer systems and personnel, which are primarily located in or
near our principal headquarters in San Jose, California. California is currently
experiencing power outages due to a shortage in the supply of power within the
state. In the event of an acute power shortage, California has on some occasions
implemented, and may in the future continue to implement, rolling blackouts
throughout California. We currently do not have backup generators or alternate
sources of power in the event of a blackout, and our current insurance does not
provide coverage for any damages we or our customers or industry partners may
suffer as a result of any interruption in our power supply. If blackouts
interrupt our power supply, we would be temporarily unable to continue
operations at our facilities. Any such interruption in our ability to continue
operations at our facilities could damage our reputation, harm our ability to
retain existing customers and industry partners, or obtain new customers or
industry partners, and could result in loss of revenue. Furthermore, the
deregulation of the energy industry in California has caused power prices to
increase. If wholesale prices continue to increase, our operating expenses will
likely increase. In addition, San Jose exists on or near a known earthquake
fault zone. Our facilities are susceptible to damage from earthquakes and other
natural disasters, such as fires, floods and similar events. Although we
maintain general business insurance against fires and some general business
interruptions, there can be no assurance that the amount of coverage will be
adequate in any particular case.
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
recently acquired Transcription and Cadabra, and we may acquire or make
investments in additional
17
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.
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.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
---------------------------------------
There were no sales of unregistered securities during the quarter ended
June 30, 2001. However, during the quarter ended June 30, 2001, 308,929
exchangeable shares of Cadabra Design Automation Inc. ("Cadabra"), which were
issued in connection with our October 2000 acquisition of Cadabra, were
exchanged for an equal number of shares of our common stock. We did not receive
any consideration in connection with such exchanges. These shares were exchanged
pursuant to regulation D or Regulation S.
(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 $46.5 million of the net proceeds
from the Company's initial public offering to fund operating expenses and
increase working capital, $2.5 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, which were issued in connection with the
acquisition of Transcription. The Company has placed approximately $2.0 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 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of Stockholders was held on June 13, 2001 in
San Jose, California. At the meeting, the following matters were voted on by the
Company's stockholders:
Witheld/
Abstentions/
Broker
For Against Non-vote
--- ------- --------
Election of Directors:
Abbas El Gamal 24,085,443 393,292 -
Harvey Jones 24,446,529 32,206 -
Yao-Ting Wang 21,898,155 2,580,580 -
In addition to the above directors, the following directors' term of office
continued after the meeting:
William Davidow
18
Narendra K. Gupta
Thomas Kailath
Yagyensh(Buno) Pati
Roger Sturgeon
Ratify the appointment of PricewaterhouseCoopers
As independent accounts for the fiscal year ending
December 31, 2001 24,458,864 - 2,265
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The exhibits listed in the accompanying Index to Exhibits are incorporated
by reference as part of this Form 10-Q.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ending
June 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NUMERICAL TECHNOLOGIES, INC.
Dated August 2, 2001 By: /s/ Richard S. Mora
Richard S. Mora
Chief Financial Officer
(duly authorized officer and principal financial accounting
officer)
19
INDEX TO EXHIBITS
These Exhibits are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
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.*
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.*#
20
10.26 Development and Distribution Agreement, dated October 1, 1991, between
Transcription Enterprises Limited and KLA Instruments Corporation.*+
10.27 Addendum Number One to Development and Distribution Agreement, dated
December 27, 1999, between Transcription Enterprises Limited and KLA
Instruments Corporation.*+
10.28 Stock Option Agreement--Early Exercise, dated February 1, 2000, by and
between the registrant and Roger Sturgeon.*
10.29 Stock Option Agreement--Early Exercise, dated February 1, 2000, by and
between the registrant and Kevin MacLean.*
10.30 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
between the registrant and Y.C. (Buno) Pati.*
10.31 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
between the registrant and Yao-Ting Wang.*
10.32 Stock Option Agreement--Early Exercise, dated October 23, 1998, by and
between the registrant and Atul Sharan.*
10.33 Amendment No. 1 to Lars Herlitz' Stock Option Agreements dated February
3, 1999 and December 27, 1999, dated as of January 24, 2000, by and
between the registrant and Lars Herlitz.*
10.34 Amendment No. 1 to Atul Sharan's Stock Option Agreements dated October
23, 1998, March 31, 1999 and December 27, 1999, dated as of January 24,
2000, by and between the registrant and Atul Sharan.*
10.35 Amendment No. 1 to John Traub's Stock Option Agreements dated November
17, 1999 and December 27, 1999, dated as of January 24, 2000, by and
between the registrant and John Traub.*
10.36 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
between the registrant and Naren Gupta.*
10.37 PSM Software Development and License Agreement, dated as of March 10,
2000, by and between registrant and Cadence Design Systems, Inc.*+
10.38 License Agreement, dated March 1, 2000, between registrant and Motorola,
Inc.**+
10.39 Production License Agreement, dated December 31, 2000, between
registrant and United Microelectronics Corporation.****+
10.40 Patent Cross License Agreement, dated April 17, 2001, between registrant
and Intel Corporation. +
* 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.
**** Incorporated by reference to the registrant's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on March 27, 2001.
+ 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.
21