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, 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: 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 17, 2001 was 33,216,940.
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 6. Exhibits and Reports on 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)
September 30, December 31,
2001 2000
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 40,419 $ 30,607
Short-term investments 24,706 23,281
Accounts receivable 6,022 4,983
Prepaid and other 1,858 3,177
------------ -----------
Total current assets 73,005 62,048
Property and equipment, net 2,843 3,209
Goodwill and other intangible assets 140,369 175,402
Other assets 111 315
------------ -----------
$ 216,328 $ 240,974
============ ===========
LIABILITIES
Current liabilities:
Accounts payable $ 2,953 $ 3,208
Accrued expenses and other liabilities 5,308 4,608
Deferred revenue 10,054 6,320
------------ -----------
Total current liabilities 18,315 14,136
------------ -----------
Deferred tax liability 5,548 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: 33,211 and 32,834 shares in
2001 and 2000, respectively 3 3
Additional paid in capital 322,021 319,541
Receivable from stockholders (4,398) (4,050)
Deferred stock compensation (14,800) (30,572)
Accumulated deficit (110,301) (65,751)
Accumulated other comprehensive loss (60) (37)
------------ -----------
Total stockholders' equity 192,465 219,134
------------ -----------
$ 216,328 $ 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 Nine months ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Revenue $ 12,824 $ 6,636 $ 34,847 $ 14,834
-------- -------- -------- --------
Costs and expenses:
Cost of revenue 1,191 591 3,294 1,221
Research and development 3,970 3,386 11,780 9,235
Sales and marketing 3,385 2,432 10,816 6,364
General and administrative 1,674 1,277 5,079 3,366
Depreciation and amortization 12,193 4,811 36,754 14,571
Amortization of deferred
stock compensation(*) 4,525 4,865 14,752 15,606
-------- -------- -------- --------
Total costs and expenses 26,938 17,362 82,475 50,363
-------- -------- -------- --------
Loss from operations (14,114) (10,726) (47,628) (35,529)
Interest expense -- -- -- (893)
Interest income and other 699 942 2,238 1,960
-------- -------- -------- --------
Loss before benefit from (provision for)
income taxes (13,415) (9,784) (45,390) (34,462)
Benefit from (provision for) income taxes (225) (107) 840 (107)
-------- -------- -------- --------
Net Loss $(13,640) $ (9,891) $(44,550) $(34,569)
======== ======== ======== ========
Net loss per common share, basic and diluted $ (0.45) $ (0.37) $ (1.48) $ (1.80)
======== ======== ======== ========
Weighted average common shares outstanding,
basic and diluted 30,619 26,382 30,076 19,625
======== ======== ======== ========
(*)Amortization of deferred stock compensation
Cost of sales $ 208 $ 364 $ 704 $ 789
Research and development 2,533 2,094 8,000 7,098
Sales and marketing 1,059 1,172 3,583 3,758
General and administrative 725 1,235 2,465 3,961
-------- -------- -------- --------
$ 4,525 $ 4,865 $ 14,752 $ 15,606
======== ======== ======== ========
See the accompanying notes to these condensed consolidated financial statements.
4
NUMERICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the Nine Months Ended
September 30,
---------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net loss $(44,550) $(34,569)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation 1,421 767
Amortization of deferred stock compensation 14,752 15,606
Amortization of acquired intangibles 35,333 13,803
Issuance of common stock in exchange for services 146 -
Changes in assets and liabilities:
Accounts receivable (1,039) (518)
Prepaid and other 1,319 (919)
Other assets 204 46
Accounts payable (255) 1,254
Accrued expenses and other liabilities 400 1,730
Deferred revenue 3,734 1,925
Deferred tax (2,156) -
-------- --------
Net cash provided by (used in) operating activities 9,309 (875)
-------- --------
Cash flows from investing activities:
Proceeds from sales of short-term investments 55,978 -
Purchase of short-term investments (57,403) (28,376)
Purchase of property and equipment (1,055) (1,481)
-------- --------
Net cash used in investing activities (2,480) (29,857)
-------- --------
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 exercise of common stock options 1,531 1,144
Proceeds from employee stock purchase plan 1,214 -
Repurchase of common stock (21) (101)
Repayment of notes receivable for common stock 282 3
-------- --------
Net cash provided by financing activities 3,006 42,656
-------- --------
Effect of foreign currency translation on cash flows (23) -
-------- --------
Net increase in cash and cash equivalents 9,812 11,924
Cash and cash equivalents at beginning of period 30,607 13,486
-------- --------
Cash and cash equivalents at end of period $ 40,419 $ 25,410
======== ========
Supplemental disclosure of cash flow information:
Stockholder notes receivable exchanged for common stock $ 630 $ 3,771
Issuance of common stock in exchange for services 146 -
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.
Had the acquisition of Cadabra occurred on January 1, 2000, pro forma
combined revenues would have been $7,248,000 and $18,092,000 for the three
months and nine months ended September 30, 2000. Pro forma net loss allocable to
common stockholders would have been $21,244,000 or $(0.75) per share and
$65,840,000 or $(3.08) per share for the three months and nine months ended
September 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.
6
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 Nine months ended
September 30, September30,
(unaudited) (unaudited)
2001 2000 2001 2000
---- ---- ---- ----
Net loss $(13,640) $ (9,891) $(44,550) $(34,569)
Foreign currency translation adjustments 39 - (23) -
-------- -------- -------- --------
Total comprehensive loss $(13,601) $ (9,891) $(44,573) $(34,569)
======== ======== ======== ========
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. On April 28, 2001, ASML MaskTools,
Inc. filed an amended complaint in which it no longer asserts claims for unfair
or fraudulent business practice. The Company is currently investigating the
patents and allegations. This lawsuit is in the 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. In
August 2001 a payment of $1.1 million was made against the note.
In July 2001, a loan was granted to an employee and stockholder of the
Company for $630,000. The loan, which is secured by the assets of the employee
and stockholder, bears interest of 8% per annum and is payable in full in July
2003.
NOTE 8 - CERTAIN RISK AND CONCENTRATIONS
For the three months and nine months ended September 30, 2001, two
customers accounted for 26% and 25%, and 25% and 18% of total revenue,
respectively. For the three months and nine months ended September 30, 2000, one
customer accounted for 22% and 23% of total revenue, respectively.
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
and 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 $12.8 million and $34.8 million for the three months
and nine months ended September 30, 2001 compared to $6.6 million and $14.8
million for the same periods in 2000, representing increases of 93% and 135% 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 $3.3 million for
the three months and nine months ended September 30, 2001 compared to $591,000
and $1.2 million for the same periods in 2000. The increase was primarily due to
increased costs for engineers associated with maintenance and technical
services, which resulted from an increased customer base. As a percent of
revenues, cost of revenue was 9% for both the three months and nine months ended
September 30, 2001 compared to 9% 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 $4.0
million and $11.8 million for the three months and nine months ended September
30, 2001 compared to $3.4 million and $9.2 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 31% and 34% for the three months and nine months ended September
30, 2001 compared to 51% and 62% for the same periods in 2000. We anticipate
that we will continue to commit substantial
8
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.
Sales and marketing. Sales and marketing expenses were $3.4 million and
$10.8 million for the three months and nine months ended September 30, 2001
compared to $2.4 million and $6.4 million for the same periods in 2000. These
increases were primarily due to additional sales and marketing personnel,
increased personnel-related costs, 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 26% and 31% for
the three months and nine months ended September 30, 2001 compared to 37% and
43% 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 $1.7
million and $5.1 million for the three months and nine months ended September
30, 2001 compared to $1.3 million and $3.4 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 13% and 15% for the
three months and nine months ended September 30, 2001 compared to 19% and 23%
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 the long term.
Depreciation and amortization. Depreciation and amortization expenses were
$12.2 million and $36.8 million for the three months and nine months ended
September 30, 2001 compared to $4.8 million and $14.6 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 $14.8 million for the three months
and nine months ended September 30, 2001 compared to $4.9 million and $15.6
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
nine months ended September 30, 2001 compared to $0 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 $699,000 and $2.2
million for the three months and nine months ended September 30, 2001 compared
to $942,000 and $2.0 million for the same periods in 2000. The decrease in the
three month period is the result of lower interest rates in 2001. The increase
in the nine month period is attributable to having higher cash balances invested
for the entire nine months in 2001 that more than offset the decreases in
interest rates in 2001 compared to 2000. The cash balances invested for the nine
month period ended September 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 nine months in
2001.
Benefit from (provision for) income taxes. We recorded a provision for
income taxes of $225,000 and a benefit for income taxes of $840,000 for the
three months and nine months ended September 30, 2001 compared to a provision
for income taxes of $107,000 for both of 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 September 30, 2001, we had cash and cash equivalents and short-term
investments of $65.1 million. As of the same date, we had working capital of
$54.7 million, including deferred revenue of $10.1 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 $9.3 million during the nine
month period ended September 30, 2001, compared with cash used of $875,000 in
the comparable period in 2000. Net cash provided in the nine month period ended
September 30, 2001 primarily reflects a net loss of $44.6 million, increases in
accounts receivable of $1.0 million and decreases in deferred taxes
9
of $2.2 million, offset by amortization of intangibles and depreciation expenses
of $36.8 million, amortization of deferred stock compensation of $14.8 million,
increases in deferred revenue of $3.7 million and decreases in prepaid and other
assets of $1.3 million.
Net cash used in investing activities was $2.5 million during the nine
month period ended September 30, 2001, compared with $29.9 million used in the
comparable period in 2000. Net cash used in the nine month period ended
September 30, 2001 consisted of net purchases of short-term investments of $1.4
million and purchases of computer hardware and software, office furniture and
equipment of $1.1 million. We expect capital spending of less than $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 $3.0 million during the nine
month period ended September 30, 2001, compared with $42.7 million in the
comparable period in 2000. Net cash provided in the nine month period ended
September 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. On April 28, 2001, ASML MaskTools,
Inc. filed an amended complaint in which it no longer asserts claims for unfair
or fraudulent business practice. We are currently investigating the patents and
allegations. This lawsuit is in the 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 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 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 that 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.
10
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 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 $10.8 million in the nine months ended
September 30, 2001 from $6.4 million in the nine months ended September 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 have 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 123 employees as of September 30, 2000 to 215 employees as of
September 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 nine months ended September
30, 2001, revenues from Cadabra Design Automation, Inc, a corporation that we
recently acquired, were less than anticipated.
11
We have not been profitable in any quarter, and our accumulated deficit was
approximately $110.3 million as of September 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 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. On April 28, 2001, ASML MaskTools,
Inc. filed an amended complaint in which it no longer asserts claims for unfair
or fraudulent business practice. 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
12
business of our licensees, which in turn could hurt our relations with our
customers and cause the sale of our proprietary technologies and software
products to decrease.
Defects in our proprietary technologies and software products could decrease our
revenue and our competitive market share.
If our industry partners and customers discover any defects after they
implement our proprietary technologies and software products, these defects
could significantly decrease the market acceptance and sales of our software
products, which could decrease our competitive market share. Any actual or
perceived defects with our proprietary technologies and software products may
also hinder our ability to attract or retain industry partners or customers,
leading to a decrease in our revenue. These defects are frequently found during
the period following introduction of new products or enhancements to existing
products. Despite testing prior to introduction, our software products may
contain software errors not discovered until after customer implementation. If
our software products contain errors or defects, it could require us to expend
significant resources to alleviate these problems, which could result in the
diversion of technical and other resources from our other development efforts.
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 September 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 officer 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; 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. In October
2001, Faysal Sohail, former Senior Vice President of Worldwide Field Operations
and a key employee of Cadabra, left the Company.
13
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 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
14
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 charges to write-off acquired
intangible assets, which could seriously harm our financial condition and
operating results. In this regard, for the nine months ended September 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.
15
We face operational and financial risks associated with international
operations.
We derive a significant portion of our revenue from international sales.
For the nine months ended September 30, 2001, compared to nine months ended
September 30, 2000, the breakdown of our revenue by geographic region, as a
percentage of our total revenue, was North America, 68% and 57%, Asia, 24% and
34%, Europe, 5% and 8%, and other, 3% and 1%, respectively. In addition, as a
result of our acquisition of Cadabra, a Nova Scotia limited liability company,
44 of our 215 employees as of September 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;
16
. 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.
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.
Terrorist attacks, such as the attacks that occurred in New York and Washington,
D.C. on September 11, 2001, and other acts of violence or war may affect the
markets in which we operate, our operations and our profitability.
Terrorist attacks may negatively affect our operations. These attacks or
armed conflicts may directly impact our physical facilities or those of our
suppliers or customers, which could result in higher expenses and/or lower
revenue. Furthermore, these attacks may make travel of our sales and support
staff more difficult and more expensive and ultimately affect the sales of our
products.
Also as a result of terrorism, the United States has entered into an armed
conflict, which could have a further impact on our domestic and international
sales. Political and economic instability in some regions of the world may also
result and could negatively impact our business.
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
17
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
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
---------------------------------------
On September 27, 2001, we issued 10,000 shares of our common stock to
Ultratech Stepper, Inc. as consideration for our assuming from Ultratech the
leadership role and decision-making authority of the Advanced Reticle Symposium.
We relied upon Section 4(2) of the Securities Act of 1933 in connection with the
sale and issuance of these securities.
In addition to the above transaction, during the quarter ended September
30, 2001, 1,082,110 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 of the Securities
Act of 1933.
(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 the net proceeds from the Company's initial
public offering to purchase and install $2.5 million of machinery and equipment,
to pay the balance $30.2 million of principal and accrued interest under the
notes payable issued in connection with the acquisition of Transcription and to
fund $48.5 million of operating expenses and increased working capital.
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.
18
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
September 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 October 25, 2001 By: /s/ Richard S. Mora
Richard S. Mora
Chief Operating Officer and 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 July 15, 1998, between the
registrant and Harvey Jones.*
10.17 License Agreement, dated as of October 1, 1999, between registrant and
Cadence Design Systems, Inc.*+
10.18 OEM Software License Agreement, dated December 31, 1997, between
registrant and Zygo Corporation (fka Technical Instrument Company).*+
10.19 Addendum to OEM Software License Agreement, dated March 25, 1999,
between registrant and Zygo Corporation.*
10.20 Software Production and Distribution Agreement, dated January 9, 1998,
between registrant and KLA-Tencor Corporation.*+
10.21 License Agreement, dated December 23, 1999, between registrant and Seiko
20
Instruments, Inc.*#
10.22 Development and Distribution Agreement, dated October 1, 1991, between
Transcription Enterprises Limited and KLA Instruments Corporation.*+
10.23 Addendum Number One to Development and Distribution Agreement, dated
December 27, 1999, between Transcription Enterprises Limited and KLA
Instruments Corporation.*+
10.24 Stock Option Agreement--Early Exercise, dated February 1, 2000, by and
between the registrant and Roger Sturgeon.*
10.25 Stock Option Agreement--Early Exercise, dated February 1, 2000, by and
between the registrant and Kevin MacLean.*
10.26 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
between the registrant and Y.C. (Buno) Pati.*
10.27 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
between the registrant and Yao-Ting Wang.*
10.28 Stock Option Agreement--Early Exercise, dated October 23, 1998, by and
between the registrant and Atul Sharan.*
10.29 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.*
10.30 Stock Option Agreement--Early Exercise, dated February 10, 2000, by and
between the registrant and Naren Gupta.*
10.31 PSM Software Development and License Agreement, dated as of March 10,
2000, by and between registrant and Cadence Design Systems, Inc.*+
10.32 License Agreement, dated March 1, 2000, between registrant and Motorola,
Inc.**+
10.33 Production License Agreement, dated December 31, 2000, between
registrant and United Microelectronics Corporation.****+
10.34 Patent Cross License Agreement, dated April 17, 2001, between
registrant and Intel Corporation. ***** +
10.35 2001 Nonstatutory Stock Option Plan. ******
* 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.
***** Incorporated by reference to registration statement on Form 10-Q as filed
with the Securities and Exchange Commission on August 2, 2001.
****** Incorporated by reference to registration statement on Form S-8
(333-71816) as filed with the Securities and Exchange Commission on October 18,
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.
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