Prepared by R.R. Donnelley Financial -- Form 10-Q for Period Ended 06/30/2002
UNITED STATES
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, 2002
|
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 (Address of
principal executive offices) |
|
(Zip Code) |
Registrants 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 registrants Common Stock, par value $0.0001, per share as of July 24, 2002 was 33,866,161.
PART IFINANCIAL INFORMATION
Item 1. Financial Statements
NUMERICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
(in thousands, except per share data)
(unaudited)
|
|
June 30, 2002
|
|
|
December 31, 2001
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
51,250 |
|
|
$ |
38,964 |
|
Short-term investments |
|
|
22,174 |
|
|
|
28,627 |
|
Accounts receivable, net of allowance of $50 and zero in 2002 and 2001, respectively |
|
|
7,372 |
|
|
|
7,125 |
|
Deferred tax asset |
|
|
3,517 |
|
|
|
4,110 |
|
Prepaid and other |
|
|
2,917 |
|
|
|
1,494 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
87,230 |
|
|
|
80,320 |
|
Property and equipment, net |
|
|
3,110 |
|
|
|
2,885 |
|
Goodwill and other intangible assets |
|
|
67,606 |
|
|
|
128,744 |
|
Other assets |
|
|
299 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
158,245 |
|
|
$ |
212,062 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
2,501 |
|
|
$ |
2,041 |
|
Accrued expenses and other liabilities |
|
|
4,127 |
|
|
|
4,446 |
|
Deferred revenue |
|
|
11,714 |
|
|
|
9,034 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
18,342 |
|
|
|
15,521 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liability |
|
|
4,403 |
|
|
|
7,354 |
|
|
|
|
|
|
|
|
|
|
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: 33,859 and 33,552 shares in 2002 and 2001, respectively |
|
|
3 |
|
|
|
3 |
|
Additional paid in capital |
|
|
321,611 |
|
|
|
319,544 |
|
Receivable from stockholders |
|
|
(3,563 |
) |
|
|
(4,163 |
) |
Deferred stock-based compensation |
|
|
(3,710 |
) |
|
|
(6,917 |
) |
Accumulated deficit |
|
|
(178,789 |
) |
|
|
(119,184 |
) |
Accumulated other comprehensive loss |
|
|
(52 |
) |
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
135,500 |
|
|
|
189,187 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
158,245 |
|
|
$ |
212,062 |
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to these condensed consolidated financial
statements.
2
NUMERICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per
share data)
(unaudited)
|
|
Three months ended June
30,
|
|
|
Six months ended June
30,
|
|
|
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
Revenue |
|
$ |
11,088 |
|
|
$ |
11,703 |
|
|
$ |
24,182 |
|
|
$ |
22,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
837 |
|
|
|
1,180 |
|
|
|
1,842 |
|
|
|
2,103 |
|
Research and development |
|
|
4,423 |
|
|
|
3,917 |
|
|
|
8,917 |
|
|
|
7,810 |
|
Sales and marketing |
|
|
3,803 |
|
|
|
3,809 |
|
|
|
7,518 |
|
|
|
7,431 |
|
General and administrative |
|
|
1,765 |
|
|
|
1,758 |
|
|
|
3,596 |
|
|
|
3,405 |
|
Depreciation and amortization |
|
|
2,129 |
|
|
|
12,191 |
|
|
|
4,262 |
|
|
|
24,561 |
|
Impairment of goodwill and other intangible assets |
|
|
57,312 |
|
|
|
|
|
|
|
57,312 |
|
|
|
|
|
Stock-based compensation(*) |
|
|
1,064 |
|
|
|
4,495 |
|
|
|
2,888 |
|
|
|
10,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
71,333 |
|
|
|
27,350 |
|
|
|
86,335 |
|
|
|
55,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(60,245 |
) |
|
|
(15,647 |
) |
|
|
(62,153 |
) |
|
|
(33,514 |
) |
Interest income and other |
|
|
438 |
|
|
|
679 |
|
|
|
839 |
|
|
|
1,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes |
|
|
(59,807 |
) |
|
|
(14,968 |
) |
|
|
(61,314 |
) |
|
|
(31,975 |
) |
Benefit from income taxes |
|
|
1,704 |
|
|
|
254 |
|
|
|
1,709 |
|
|
|
1,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(58,103 |
) |
|
$ |
(14,714 |
) |
|
$ |
(59,605 |
) |
|
$ |
(30,910 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted |
|
$ |
(1.80 |
) |
|
$ |
(0.49 |
) |
|
$ |
(1.86 |
) |
|
$ |
(1.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic and diluted |
|
|
32,226 |
|
|
|
30,238 |
|
|
|
32,050 |
|
|
|
29,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
$ |
24 |
|
|
$ |
266 |
|
|
$ |
182 |
|
|
$ |
496 |
|
Research and development |
|
|
328 |
|
|
|
2,250 |
|
|
|
1,351 |
|
|
|
5,467 |
|
Sales and marketing |
|
|
282 |
|
|
|
1,166 |
|
|
|
420 |
|
|
|
2,524 |
|
General and administrative |
|
|
430 |
|
|
|
813 |
|
|
|
935 |
|
|
|
1,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,064 |
|
|
$ |
4,495 |
|
|
$ |
2,888 |
|
|
$ |
10,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to these
condensed consolidated financial statements.
3
NUMERICAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
|
|
For the Six Months Ended June 30,
|
|
|
|
2002
|
|
|
2001
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(59,605 |
) |
|
$ |
(30,910 |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,037 |
|
|
|
931 |
|
Stock-based compensation |
|
|
2,888 |
|
|
|
10,227 |
|
Amortization of acquired intangibles |
|
|
3,225 |
|
|
|
23,630 |
|
Impairment of goodwill and other intangible assets |
|
|
57,312 |
|
|
|
|
|
Deferred tax |
|
|
(1,757 |
) |
|
|
(1,830 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(247 |
) |
|
|
(2,422 |
) |
Prepaid and other |
|
|
(1,423 |
) |
|
|
321 |
|
Other assets |
|
|
(186 |
) |
|
|
(172 |
) |
Accounts payable |
|
|
460 |
|
|
|
(299 |
) |
Accrued expenses and other liabilities |
|
|
(319 |
) |
|
|
(181 |
) |
Deferred revenue |
|
|
2,680 |
|
|
|
6,078 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
4,065 |
|
|
|
5,373 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sales of short-term investments |
|
|
38,626 |
|
|
|
35,977 |
|
Purchase of short-term investments |
|
|
(32,173 |
) |
|
|
(48,905 |
) |
Purchase of property and equipment |
|
|
(1,262 |
) |
|
|
(861 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
5,191 |
|
|
|
(13,789 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of common stock options |
|
|
1,253 |
|
|
|
848 |
|
Proceeds from employee stock purchase plan |
|
|
1,141 |
|
|
|
1,214 |
|
Repurchase of common stock |
|
|
(8 |
) |
|
|
(21 |
) |
Payments received on notes receivable from stockholders |
|
|
600 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,986 |
|
|
|
2,152 |
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation on cash flows |
|
|
44 |
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
12,286 |
|
|
|
(6,326 |
) |
Cash and cash equivalents at beginning of period |
|
|
38,964 |
|
|
|
30,607 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
51,250 |
|
|
$ |
24,281 |
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to these
condensed consolidated financial statements.
4
NUMERICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1GENERAL
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, 2001, 2000
and 1999, included in the Companys form 10-K/A filed with the SEC on March 11, 2002. 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, 2002.
NOTE 2NET LOSS PER SHARE
Basic net loss per share is calculated using the weighted average number of common shares outstanding during the period. Diluted net loss 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 stock options. 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 3IMPAIRMENT OF ACQUIRED INTANGIBLE ASSETS AND GOODWILL
In July 2001, Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which was effective for years beginning after December 15, 2001. SFAS No. 142
requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangible assets as goodwill, reassessment of the useful
lives of existing recognized intangible assets, reclassification of certain intangible assets out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. The Company adopted SFAS No. 142 effective
as of January 1, 2002 and upon adoption ceased to amortize goodwill. The Company recorded approximately $37,850,000 of goodwill amortization during 2001.
On adoption of SFAS No. 142 the Company determined that its operations represent a single reporting unit. The Company completed an impairment review of the goodwill associated with its reporting unit
during the three-month period ended March 31, 2002. The Company compared the fair value of its reporting unit at January 1, 2002 to the carrying value including goodwill for the unit at January 1, 2002, and determined that the carrying value,
including goodwill, did not exceed the units fair value. As a result no impairment charge was required on adoption.
During the second quarter of 2002, the Company experienced a decrease in the demand for its products and services and reduced its expectations for future growth in revenues and cash flows. Additionally the Companys stock price
declined significantly. Due to these significant changes, with the assistance from independent valuation experts management performed an evaluation of the recoverability of goodwill and other long-lived assets in accordance with SFAS No. 142
Goodwill and Other Intangible Assets and SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, respectively.
5
NUMERICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company assessed the carrying value of identified long-lived
assets relating to the Transcription and Cadabra acquisitions, respectively. Because the estimated future undiscounted cash flows relating to the Cadabra long-lived asset group was less than the carrying value of the related assets, an impairment
charge was required. The impairment charge of $2,619,000 represents the amount required to write-down Cadabras long-lived assets to managements estimate of fair value based on managements expectations for this asset groups
future discounted cash flows.
The change in the carrying amount of identified intangible assets are as follows
(in thousands):
|
|
As of June 30, 2002
|
|
|
As of December 31, 2001
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Developed technology |
|
$ |
7,878 |
|
$ |
(3,972 |
) |
|
$ |
8,060 |
|
$ |
(3,152 |
) |
Customer base |
|
|
17,952 |
|
|
(9,225 |
) |
|
|
19,340 |
|
|
(7,190 |
) |
Covenants not to compete |
|
|
3,941 |
|
|
(3,941 |
) |
|
|
4,990 |
|
|
(3,591 |
) |
Workforce |
|
|
|
|
|
|
|
|
|
3,300 |
|
|
(1,800 |
) |
Trade name |
|
|
200 |
|
|
(100 |
) |
|
|
200 |
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
29,971 |
|
$ |
(17,238 |
) |
|
$ |
35,890 |
|
$ |
(15,813 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon adoption of SFAS No. 142 on January 1, 2002 workforce was
reclassified to goodwill.
The aggregate amortization expense of identified intangible assets was $1,583,000 and
$2,299,000 in the three months ended June 30, 2002 and 2001, respectively and $3,225,000 and $4,597,000 in the six months ended June 30, 2002 and 2001, respectively.
Expected future amortization of identified intangible assets is as follows (in thousands):
Fiscal Year |
|
|
|
2002 |
|
$ |
2,572 |
2003 |
|
|
5,144 |
2004 |
|
|
5,017 |
|
|
|
|
|
|
$ |
12,733 |
|
|
|
|
The Company also performed an impairment review of its goodwill
during the second quarter of 2002 as a result of the announcement of the Companys revised expectations for its second quarter of 2002 financial performance and revised expectations for future growth of the Companys revenues and cash
flow. The Company operates as a single reporting unit. The Company compared its fair value to its carrying value including goodwill and determined that its carrying value, including goodwill, exceeded fair value. As a result the Company then
assessed the fair value of its assets, including identified intangible assets, and liabilities and derived an implied fair value for its goodwill. Since the carrying amount of goodwill was greater than its implied fair value, an impairment loss of
$54,694,000 was recognized.
The fair value of the Company was determined using the average market price of the
Companys common stock over a 10-day period following the triggering event and a control premium of 30%. The company determined the estimated fair value of identified intangible assets and non-goodwill intangible assets and liabilities using
discounted cash flows. The assumptions supporting the estimated cash flows for identified intangible assts and other non-goodwill assets and liabilities, including the discount rate and the estimated terminal value reflects managements
estimates.
The changes in the carrying amount of goodwill for the six months ended June 30, 2002 is as follows
(in thousands):
|
|
2002
|
|
Balance as of January 1, |
|
$ |
109,567 |
|
Impairment in the period |
|
|
(54,694 |
) |
|
|
|
|
|
Balance as of June 30, |
|
$ |
54,873 |
|
|
|
|
|
|
6
NUMERICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table presents net loss (in thousands) and basic and
diluted net loss per share as if the goodwill had not been amortized during the periods presented.
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six months
Ended June 30,
|
|
|
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
Reported net loss |
|
$ |
(58,103 |
) |
|
$ |
(14,714 |
) |
|
$ |
(59,605 |
) |
|
$ |
(30,910 |
) |
Add back: goodwill amortization |
|
|
|
|
|
|
9,405 |
|
|
|
|
|
|
|
19,033 |
|
Add back: workforce amortization, net of taxes |
|
|
|
|
|
|
191 |
|
|
|
|
|
|
|
382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net loss |
|
$ |
(58,103 |
) |
|
$ |
(5,118 |
) |
|
$ |
(59,605 |
) |
|
$ |
(11,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net loss per share |
|
$ |
(1.80 |
) |
|
$ |
(0.49 |
) |
|
$ |
(1.86 |
) |
|
$ |
(1.03 |
) |
Goodwill amortization |
|
|
|
|
|
|
0.31 |
|
|
|
|
|
|
|
0.64 |
|
Workforce amortization, net of taxes |
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net loss per share |
|
$ |
(1.80 |
) |
|
$ |
(0.17 |
) |
|
$ |
(1.86 |
) |
|
$ |
(0.38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4COMPREHENSIVE INCOME (LOSS)
Comprehensive income includes net earnings and other comprehensive income. Other comprehensive income includes accumulated translation
adjustments. For the three- and six-month periods ended June 30, 2002 and 2001, the components of comprehensive loss are as follows (in thousands):
|
|
Three Months Ended June
30,
|
|
|
Six months ended June
30,
|
|
|
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
Net loss |
|
$ |
(58,103 |
) |
|
$ |
(14,714 |
) |
|
$ |
(59,605 |
) |
|
$ |
(30,910 |
) |
Foreign currency translation adjustments |
|
|
57 |
|
|
|
(3 |
) |
|
|
44 |
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(58,046 |
) |
|
$ |
(14,717 |
) |
|
$ |
(59,561 |
) |
|
$ |
(30,972 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5RELATED PARTY TRANSACTIONS
In January 2002 a former officer of the Company repaid the original principal balance of $600,000 plus all accrued interest of an
outstanding note payable with a due date of February 1, 2002.
In March 2002 the Board of Directors extended the
due date on promissory notes to the President and to the Chief Technology Officer of the Company for an additional one year. These notes with principal amounts of $1,600,000 and $1,333,000 and accrued interest are now due February 10, 2003.
NOTE 6SUBSEQUENT EVENTS
Stock option plans
In July 2002, the Board of Directors
approved an increase to the common stock authorized for issuance under the 2001 Non-statutory Stock Option Plan (the 2001 Plan). The increase was 2,000,000 shares, bringing the total shares authorized under the 2001 Plan to 3,000,000. As
of July 19, 2002, no options had been issued under the 2001 Plan.
7
NUMERICAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Stock Repurchase Program
In July 2002, the Board of Directors approved a stock repurchase program (the Program). Under the Program, the Company is
authorized to repurchase up to $10,000,000 in shares of the outstanding common stock of the Company over the next 12 months. Share repurchases under this program may be made in the open market or in privately negotiated transactions. Depending on
market conditions and other factors, repurchases under this program may be commenced or suspended at any time, or from time-to-time during the next 12 months, without prior notice.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENTS 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. Our 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 or adopt alternative technologies. We must also expend significant sales, marketing and development resources on these manufacturers with no guarantee of success.
Results of Operations
Revenue. Revenues were $11.1 million and $24.2 million for the three months and six months ended June 30, 2002 compared to $11.7 million and $22.0 million for the same periods in 2001, representing a
decrease of 5% and an increase of 10% for the respective periods. The decrease in the three months ended June 30, 2002 from the same period in 2001 was primarily due to a decrease of approximately $1.6 million from our contract with Cadence,
partially offset by an increase of approximately $1.2 million from our Intel cross-license agreement. The additional decrease is primarily attributable to the overall weakness in the semiconductor industry. The increase in revenue for the six months
ended June 30, 2002 over the same period in 2001 is primarily due to an increase in revenue from the Intel cross-license agreement of approximately $4.7 million partially offset by decreased revenue of $2.1 million from our Cadence contracts and
reduced revenue due to the overall weakness in the semiconductor industry. For the three months ended June 30, 2002, two customers, Intel and Cadence, accounted for 39% and 13% of total revenue, respectively. For the three months ended June 30,
2001, Cadence and Intel accounted for 26% and 24% of total revenue, respectively. For the six months ended June 30, 2002, Intel and Cadence accounted for 35% and 14% of total revenue, respectively. For the six months ended June 30, 2001, Cadence and
Intel accounted for 25% and 14% of total revenue, respectively.
8
Costs and Expenses
Cost of revenue. Cost of revenue was $837,000 and $1.8 million for the three months and six months ended June 30, 2002 compared to $1.2
million and $2.1 million for the same periods in 2001. The decreases were primarily due to the lower costs associated with the Cadence contract, which is being recognized on a percentage of completion method. As a percentage of revenues, cost of
revenue decreased to 8% for both the three months and six months ended June 30, 2002 compared to 10% for both the three months and six months ended June 30, 2001. We anticipate that cost of revenue 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. To the extent our revenue increases or decreases due to, among other factors, those described above, our cost of
revenue may increase or decrease.
Research and development. Research and
development expenses were $4.4 million and $8.9 million for the three months and six months ended June 30, 2002 compared to $3.9 million and $7.8 million for the same periods in 2001. These increases were primarily due to increased costs associated
with additional personnel in our expanding research and development efforts in subwavelength technologies and products. As a percentage of revenue, research and development expenses were 40% and 37% for the three months and six months ended June 30,
2002 compared to 33% and 35% for the same periods in 2001. We anticipate that we will continue to commit substantial resources to research and development in the future and expect that research and development expenses will increase in dollar
amounts to support increased research and development efforts, but decline as a percentage of revenue in the long term. Our research and development expenses, as a percentage of revenue, are dependent in part on our revenue. To the extent our
revenue increases or decreases due to, among other factors, those described above, our research and development expenses as a percentage of revenue may increase or decrease.
Sales and marketing. Sales and marketing expenses were $3.8 million and $7.5 million for the three months and six months ended June 30, 2002
compared to $3.8 million and $7.4 million for the same periods in 2001. Sales and marketing expenses were similar for both of the comparable periods in 2002 over 2001 because we managed our sales and marketing expenses to keep such expenses in line
with revenue. As a percentage of revenue, sales and marketing expenses were 34% and 31% for the three months and six months ended June 30, 2002, respectively, compared to 33% and 34% for the same periods in 2001. We expect that sales and marketing
expenses will increase in dollar amounts to support increased sales efforts, but decline as a percentage of revenue in the long term. Our sales and marketing expenses, as a percentage of revenue, are dependent in part on our revenue. To the extent
our revenue increases or decreases due to, among other factors, those described above, our sales and marketing expenses as a percentage of revenue may increase or decrease.
General and administrative. General and administrative expenses were $1.8 million and $3.6 million for the three months and six months ended
June 30, 2002 compared to $1.8 million and $3.4 million for the same periods in 2001. General and administrative expenses were similar for both of the comparable periods in 2002 over 2001 because we managed our general and administrative expenses to
keep such expenses in line with revenue. As a percentage of revenue, general and administrative expenses were 16% and 15% for the three month and six months ended June 30, 2002, respectively, compared to 15% for both the three months and six months
ended June 30, 2001. 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. Our general and administrative expenses, as
a percentage of revenue, are dependent in part on our revenue. To the extent our revenue increases or decreases due to, among other factors, those described above, our general and administrative expenses as a percentage of revenue may increase or
decrease.
9
Depreciation and amortization. Depreciation and amortization expenses were $2.1 million and
$4.3 million for the three months and six months ended June 30, 2002 compared to $12.2 million and $24.6 million for the same periods in 2001. The decreases were primarily the result of the adoption of the Statement of Financial Accounting Standards
(SFAS) No. 142 Goodwill and Other Intangible Assets on January 1, 2002, the adoption of which requires us to cease amortizing goodwill and intangible assets with indefinite lives.
Impairment of goodwill and other intangibles. During the three months ended June 30, 2002, we experienced a
decrease in the demand for our products and services, reduced our expectations for future growth in revenue and cash flows and our stock price declined significantly. Due to these significant changes, with the assistance from independent valuation
experts we performed an evaluation of the recoverability of goodwill and other long-lived assets in accordance with SFAS No. 142 and SFAS No. 144 Accounting for the impairment or Disposal of Long-Lived Assets, respectively. As a result
of this evaluation we took a charge of $57.3 million for the impairment of goodwill and other intangible assets during the three months ended June 30, 2002. For further details of this charge see Note 3 of Notes to Condensed Consolidated Financial
Statements above.
Stock-based compensation. Stock-based compensation is comprised
of the amount of amortization related to: (i) 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, (ii) the fair value at the date of the
acquisition of employee escrow shares issued to executives of Cadabra in connection with the acquisition of Cadabra, (iii) compensation expense related to certain restricted stock deemed to be variable as prescribed by FASB interpretation No. 44
Accounting for Certain Transactions Involving Stock Compensation an Interpretation of APB Opinion No. 25 and (iv) stock-based compensation related to stock options granted to consultants. We recognized stock-based compensation of $1.1
million and $2.9 million for the three months and six months ended June 30, 2002 compared to $4.5 million and $10.2 million for the same periods in 2001. We are amortizing deferred stock-based compensation over the vesting periods of the applicable
options and restricted stock, using the multiple option method.
The stock-based compensation expense relating to
certain restricted stock and consultant options are remeasured by the Company until the shares or options are fully vested. As a result, the stock-based compensation expense will fluctuate as the fair market value of the Companys common stock
fluctuates. In addition, amortization of deferred stock-based compensation could increase or decrease in future periods as a result of future grants or cancellations of options whose exercise prices are less than the fair market value on the date of
grant, future grants or cancellation of restricted stock or future grants or cancellation of stock options to consultants.
Interest income and other. Interest and other income was $438,000 and $839,000 for the three months and six months ended June 30, 2002 compared to $679,000 and $1.5 million for the same periods in
2001. The decreases were due to lower interest rates in 2002 compared to the same periods in 2001, partially offset by higher average cash and short-term investment balances during 2002.
Benefit from income taxes. We recorded a benefit for income taxes of $1.7 million and $1.7 million for the three months and six months ended
June 30, 2002 compared to $254,000 and $1.1 million for the comparable periods in 2001. The increase in tax benefit is the result of greater losses in 2002 compared with the comparable periods in 2001. The effective tax rate for the three and six
months ended June 30, 2002 was less than the statutory rate primarily due to goodwill impairment and stock-base compensation charges which are not deductible for tax purposes. The effective tax rate for the comparable periods in 2001 was less than
the statutory rate primarily due to non-deductible charges for stock-based compensation and goodwill amortization.
Liquidity and Capital Resources
As of June 30, 2002, we had cash and cash equivalents and
short-term investments of $73.4 million. As of the same date, we had working capital of $68.9 million, including deferred revenue of $11.7 million.
Net cash provided by operating activities was $4.1 million during the six-month period ended June 30, 2002, compared with cash provided by operating activities of $5.4 million in the comparable period
in 2001. Net cash provided by operating activities in the six-month period ended June 30, 2002 primarily reflects a net loss of $59.6 million, decreases in deferred taxes of $1.8 million and increases in prepaid and other assets of $1.4 million
offset by non cash charges for impairment of goodwill and other intangible assets of $57.3 million, amortization of deferred stock compensation and intangibles of $6.1 million and depreciation of $1.0 million and an increase in deferred revenue of
$2.7 million.
10
Net cash provided by investing activities was $5.2 million during the six-month
period ended June 30, 2002, compared with cash used in investing activities of $13.8 million in the comparable period in 2001. Net cash provided by investing activities in the six-month period ended June 30, 2002 consisted of net proceeds of
short-term investments of $6.5 million offset by the purchases of computer hardware and software, office furniture and equipment and leasehold improvements of $1.3 million. We expect to invest approximately $1.0 million in capital expenditures over
the remainder of 2002 mainly for computer equipment, facilities and business systems upgrades.
Net cash provided
by financing activities was $3.0 million during the six- month period ended June 30, 2002, compared with cash provided by financing activities of $2.2 million in the comparable period in 2001. Net cash provided by financing activities in the
six-month period ended June 30, 2002 consisted of proceeds from employee stock purchase plan and exercise of stock options of $2.4 million and $600,000 from repayment of notes receivable from stockholders.
The Company leases its facilities, primarily in California and Canada, under noncancelable operating leases, which expire at various dates
through May 2007. In June 2001, the Company entered into an agreement to sublease offices in California to a third party. The sublease expires in December 2004 on the expiration date of the underlying facility lease. Minimum lease payments and
sublease income as of June 30, 2002 for noncancelable operating leases are as follows (in thousands):
Year
|
|
Lease Payments
|
|
Sublease rental income
|
2002 |
|
$ |
861 |
|
$ |
204 |
2003 |
|
|
1,645 |
|
|
415 |
2004 |
|
|
1,275 |
|
|
428 |
2005 |
|
|
435 |
|
|
|
2006 |
|
|
212 |
|
|
|
2007 |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,503 |
|
$ |
1,047 |
|
|
|
|
|
|
|
We anticipate that operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. Our expenses are dependent in part on our level of revenue. In addition, we may utilize cash resources to fund acquisitions of, or investments in, complementary businesses,
technologies or product lines. We believe that cash and short term investments together with funds generated from operations, will be sufficient to meet our working capital requirements for at least the next 12 months. Thereafter, we may find it
necessary to obtain additional equity or debt financing. In the event additional financing is required, we may not be able to raise it on acceptable terms or at all.
Significant Accounting Policies
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we
believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include revenue recognition, accounting for income taxes and valuation of
goodwill, intangibles and long-lived assets. These policies were disclosed in the Companys 10-Q for the quarterly period ended March 31, 2002 filed with the SEC on May 7, 2002. As of the date of this filing there have been no significant
changes to any of these policies. Other than the impairment of goodwill and other intangibles discussed above there have been no significant changes to the related estimates and judgement involved in applying these policies.
11
Factors Which May Affect Our 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. 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. Indeed, recently certain potential customers advised us that they were considering adopting an alternative technology to ours. 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. |
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. In addition, 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.
12
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, which litigation was settled in April 2002. However there can be no assurance that other parties will not assert other claims against us. The defense of these claims
could divert managements 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 product or features within a product.
In addition, third
parties have advised us of literature that 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.
Furthermore, 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.
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.
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.
13
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 43% of our revenue for 2001 was derived from two customers, Cadence and Intel. These same two customers generated approximately 49% of our revenue for
the six months ended June 30, 2002. Of the 43% and 49% respectively, 23% and 14% was derived from two agreements with Cadence and 18% and 29% was derived from the Intel cross-license agreement alone. If any of the contracts with these customers were
to be terminated or not extended or renewed, or if the revenue we expect to recognize is otherwise reduced, we could lose a material portion of our revenue. The Cadence contracts come up for renewal in January 2003 and March 2003 and revenue from
the Intel contract significantly decreases beginning in 2003 and ceases completely in 2008. As a result, in the event the Cadence contracts are not renewed and, as the Intel revenue decreases, we will need to replace such 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 diversion of management
efforts and possible increases to operating expenses, with no immediate increase in revenue. Additionally, the Intel cross-license agreement contains a change in control provision that would cause the revenue under such agreement to terminate in the
event we were to be acquired without Intels consent. Similarly, this change in control provision may serve as a disincentive for potential acquirers to pursue a take-over of our Company. The Cadence and Intel agreements may also be cancelled
under certain conditions specified in those agreements.
Our key target markets within the semiconductor
industry consist of a limited number of potential customers, which may reduce our bargaining power when negotiating contracts.
The four key markets within the semiconductor industry to which we currently target our proprietary technologies and software solutions consist of a limited number of customers, which tends to result in fewer numbers of
orders where the orders tend to be larger in size. We believe that this may reduce our bargaining power in negotiating contracts and may limit our revenue growth.
In addition, in recent years there has been consolidation in the semiconductor industry and we expect this trend to continue, which will further reduce our potential
customer base and, thus, could further reduce our bargaining power with these customers. Additionally, if existing customers who have adopted our technologies are acquired, the acquiring companies may not wish to incorporate our technologies and may
cancel or not renew our contracts, resulting in a loss of revenue.
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.
14
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 were $7.5 million for the six months ended June 30, 2002 compared with $7.4 million in the same period in 2001.
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 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 year ended December 31, 2001, revenue from
Cadabra Design Automation, Inc. a corporation that we recently acquired, were less than anticipated and, consequently, our earnings were less than would have been achieved if Cadabra revenue had met expectations. Also during quarter ended June 30,
2002, the Company experienced a decrease in the demand for its products and services, reduced its expectations for future growth in revenue and cash flows and consequently our revenue was less and our loss greater than originally forecasted for the
quarter ended June 30, 2002.
We have not been profitable in any quarter, and our accumulated deficit was
approximately $178.8 million as of June 30, 2002. 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-based 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.
Due to
the nature of our customer contracts, our revenue may fluctuate greatly in any given quarter or year, making predictions as to future revenue highly uncertain.
We generate revenue through a variety of types of customer contacts, including production licenses, software licenses and research and development agreements. The specific
terms of these customer contracts may permit great variation in the amount of revenue that is generated under any one contract. Accordingly, our revenues may increase or decrease significantly in any given quarter or year based on the terms of our
existing or future customer contracts. Thus, a contract may generate a material portion of our revenue in one quarter or year and not in the next. Factors that could affect the timing and amount of revenue recognized under our existing and future
customer contracts could include:
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the start date and volume of wafer production using our technology; |
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the timing and amount of purchases of initial and additional software by our customers; |
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scheduled increases or decreases in payment amounts over the life of a given contract; |
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the timing of customer roll-out of new fabrication facilities using our technology; |
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the completion date of research and/or development milestones; and |
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issues relating to renewal of the contracts including whether the contract is renewed, and changes to payment amounts at renewal of the contract.
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The market price of our common stock has been and may continue to be volatile and could decline further.
During the six months ended June 30, 2002 our stock price has varied from a high of $39.00 to a low of $2.69.
15
The market price of our common stock has fluctuated in response to factors, some
of which are beyond our control, including:
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changes in market valuations of other technology companies; |
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conditions or trends in the semiconductor industry; |
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actual or anticipated fluctuations in our operating results; |
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any deviations in net revenue or in losses from levels expected by securities analysts; |
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announcements by us or our competitors of significant technical innovations, contracts, acquisitions or partnerships; |
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volume fluctuations, which are particularly common among highly volatile securities of technology related companies; and |
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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 managements attention and resources. The share prices of technology companies stocks have been highly volatile and have
recently traded 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.
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 sales of our proprietary technologies and software products to decrease.
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 and
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.
16
Because of our limited operating history and our dependence on new
technologies, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer business history, and it is difficult to evaluate trends that may affect out business.
We were incorporated in October 1995, and in February 1997, we shipped our initial software product, IC Workbench. Our limited operating
history makes financial forecasting and evaluation of our business difficult. Since we have limited financial data, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer business history.
Because of our dependence on our development and industry acceptance of new technology, it is difficult to evaluate trends that may affect our business.
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 layout creation 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 and AMD. 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.
We
intend to pursue new, and maintain our current, industry partner relationships, which could result in substantial expenditures of management attention and resources, with no guarantee of success.
We expect to derive significant benefits, including increased revenue and customer awareness, from our current and potential industry
partner relationships. In our pursuit to maintain and establish partner relationships within each of the key markets in the semiconductor industry, we could expend significant management attention, resources and sales personnel efforts, with no
guarantee of success. To establish and maintain our partner relationships, we expend our limited financial resources on increasing our sales and business development personnel, trade shows and marketing within trade publications. If we did not have
to pursue potential industry partners, we could focus these resources exclusively on direct sales to our customers. In addition, through our partner relationships, our partners resell, market, either jointly with us or unilaterally, and promote our
technologies and products. If these relationships terminate, such as due to our material breach of the contracts or the partners election to cancel the contract, which generally is permissible with prior notice to us, we would have to increase
our own limited marketing and sales resources for these activities. Further, we may be unable to enter into new industry partner relationships if any of the following occur:
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current or potential industry partners develop their own solutions to the subwavelength gap problem; or |
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our current or potential competitors establish relationships with industry partners with which we seek to establish a relationship.
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17
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 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, in 2000 we 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. In addition, any amortization of other intangible assets or impairment of
goodwill or other assets or other charges resulting from the costs of acquisitions could harm our operating results.
We rely on the services of our founders and other key personnel, whose knowledge of our business and technical expertise would be difficult to replace.
Our future success depends to a significant extent on the skills, experience and efforts of our senior management. In particular, we depend upon the continued services of
our co-founders Y. C. (Buno) Pati, our President and Chief Executive Officer and Yao-Ting Wang, our Chief Technology Officer, whose vision of our company, knowledge of our business and technical expertise would be difficult to replace. We do not
have long-term employment agreements with our senior management and we do not maintain any key person life insurance policies on their lives. If any of our key employees left or was seriously injured and unable to work and we were unable to find a
qualified replacement, it could slow our product development processes or we could otherwise have difficulty executing our business strategy.
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:
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our acquisition of Transcription and Cadabra, as well as future potential acquisitions by us; |
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the timing and structure of our technology and/or product license agreements; and |
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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.
18
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, 2002, compared to the six months ended June 30, 2001, the breakdown of our revenue by geographic region, as a percentage of our total revenue, was North America, 73% and 64%, Asia, 20% and 27%, Europe, 4% and 6%, and other, 3% and 3%,
respectively. In addition, as a result of our acquisition of Cadabra, a Nova Scotia limited liability company, 47 of our 229 employees as of June 30, 2002 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:
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fluctuations in exchange rates which may negatively affect our operating results; |
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export controls which could prevent us from shipping our software products into and from some markets; |
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changes in import/export duties and quotas could affect the competitive pricing of our software products and reduce our market share in some countries;
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compliance with and unexpected changes in a wide variety of foreign laws and regulatory environments with which we are not familiar;
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greater difficulty in collecting accounts receivable resulting in longer collection periods; and |
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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:
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support more rapid expansion; |
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develop new or enhanced products; |
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respond to competitive pressures; or |
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acquire complementary businesses 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.
19
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 acquisitions, 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.
We have
anti-takeover defenses that could delay or prevent an acquisition of our company
Provisions of our
Certificate of Incorporation, Bylaws, and Delaware Law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. For example:
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Section 203 of the Delaware General Corporation Law generally prohibits a Delaware corporation from engaging in any business combination with a person owning
15% or more of its voting stock, or who is affiliated with the corporation and owned 15% or more of its voting stock at any time within three years prior to the proposed business combination, for a period of three years from the date the person
became a 15% owner, unless specified conditions are met. |
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Our Certificate of Incorporation allows our Board of Directors to issue, at any time and without stockholder approval, preferred stock with such terms as it may
determine. No shares of preferred stock are currently outstanding. However, the rights of holders of any Numerical preferred stock that may be issued in the future may be superior to the rights of holders of its common stock.
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All or any of these factors could limit the price certain investors would be willing to pay for our common stock and could delay,
prevent or allow our Board of Directors to resist an acquisition, even if the proposed transition was favored by a majority of our independent shareholders.
Online security breaches could result in harm to our business operations and expose us to risk of loss, litigation or liability.
The secure transmission of confidential information over computer networks is essential to the success of our business. Because the techniques used by computer hackers to
access or sabotage networks change frequently and generally are not recognized until launched against a target, we may not be able to anticipate attacks against us in advance. We incur substantial expense to protect against and remedy security
breaches and their consequences, but we may not be able to prevent all such security breaches. Moreover, our insurance policies may not be adequate to reimburse us for losses caused by such security breaches. Any misappropriation of confidential
information, whether during the transmission of data or while it is stored on our servers could harm us in the following ways:
we may have to indemnify clients for loss of their confidential
information; |
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because our software is distributed electronically, an attack could cause disruption in the distribution of our products, including maintenance upgrades that we
provide to our customers; |
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we may suffer theft of our intellectual property, including trade secrets and copyrighted code; and |
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we may suffer disruption in the areas of product development, research, and operations. |
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 effect
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 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. In the spring of 2001, California experienced 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.
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 IIOTHER
INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
21
There were no sales of unregistered securities during the quarter ended June 30,
2002. However, during the quarter ended June 30, 2002, 4,188 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.
Item 4. Submission of Matters to a Vote of Security Holders
The Companys annual meeting of Stockholders was held on May 15, 2002 in San Jose, California. At the meeting, the following matters were voted on by the Companys stockholders:
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For
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Against
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Witheld/ Abstentions/Broker Non-vote
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Election of Directors: |
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Thomas Kailath |
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27,548,092 |
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1,112,017 |
Roger Sturgeon |
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24,446,529 |
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778,700 |
In addition to the above directors, the following directors
term of office continued after the meeting:
William Davidow
Narendra K. Gupta
Abbas El Gamal
Harvey Jones
Yagyensh(Buno) Pati
Yao-Ting Wang
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Ratify the appointment of PricewaterhouseCoopers as independent accountants for the fiscal year ending December 31,
2002 |
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28,369,189 |
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282,874 |
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8,046 |
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, 2002.
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. |
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By: |
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/s/ RICHARD S.
MORA
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Richard S. Mora Chief
Operating Officer and Chief Financial Officer (duly authorized officer and principal financial accounting officer) |
Dated July 29, 2002
22
INDEX TO EXHIBITS
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K:
Exhibit Number
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Description
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2.1 |
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Agreement and Plan of Reorganization, dated as of December 21, 1999, between the registrant, Transcription
Enterprises Limited, Transcription Enterprises, Inc., Kevin MacLean and Roger Sturgeon.* |
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2.2 |
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Agreement and Plan of Merger between the registrant and Numerical Technologies, Inc., a Delaware
corporation.* |
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2.3 |
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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.*** |
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3.2 |
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Amended and Restated Certificate of Incorporation of registrant.* |
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3.3 |
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Bylaws of registrant.* |
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4.1 |
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Form of registrants common stock certificate.* |
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4.2 |
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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.* |
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10.1 |
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Form of Indemnification Agreement entered into by registrant with each of its directors and executive
officers.* |
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10.2 |
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2000 Stock Plan and related agreements.* |
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10.3 |
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1997 Stock Plan and related agreements.* |
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10.4 |
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2000 Employee Stock Purchase Plan and related agreements.* |
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10.5 |
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Lease Agreement, dated June 15, 1999, by and between the registrant and CarrAmerica Realty Corporation.*
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10.7 |
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Employment Agreement, dated January 1, 2000, by and between Transcription Enterprises, Inc. and Roger
Sturgeon.* |
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10.8 |
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Employment Agreement, dated January 1, 2000, by and between Transcription Enterprises, Inc. and Kevin
MacLean.* |
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10.9 |
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Non-Competition Agreement, dated January 1, 2000, by and between Numerical Technologies, Inc., Transcription
Enterprises, Inc., Transcription Enterprises Limited and Roger Sturgeon.* |
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10.10 |
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Non-Competition Agreement, dated January 1, 2000, by and between Numerical Technologies, Inc., Transcription
Enterprises, Inc., Transcription Enterprises Limited and Kevin MacLean.* |
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10.11 |
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Stock Option AgreementEarly Exercise, dated November 2, 1999, by and between the registrant and William
Davidow.* |
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10.12 |
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Stock Option AgreementEarly Exercise, dated May 26, 1999, by and between the registrant and Richard
Mora.* |
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10.13 |
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Stock Option AgreementEarly Exercise, dated December 27, 1999, by and between the registrant and Richard
Mora.* |
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10.14 |
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Stock Option AgreementEarly Exercise, dated March 31, 1999, by and between the registrant and Atul
Sharan.* |
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10.15 |
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Stock Option Agreement Early Exercise, dated December 27, 1999, by and between the registrant and
Atul Sharan.* |
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10.16 |
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Stock Option AgreementEarly Exercise, dated July 15, 1998, between the registrant and Harvey
Jones.* |
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10.17 |
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License Agreement, dated as of October 1, 1999, between registrant and Cadence Design Systems, Inc.*+
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10.18 |
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Software Production and Distribution Agreement, dated January 9, 1998, between registrant and KLA-Tencor
Corporation.*+ |
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10.19 |
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License Agreement, dated December 23, 1999, between registrant and Seiko Instruments, Inc.*+ |
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10.20 |
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Development and Distribution Agreement, dated October 1, 1991, between Transcription Enterprises Limited and KLA
Instruments Corporation.*+ |
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10.21 |
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Addendum Number One to Development and Distribution Agreement, dated December 27, 1999, between Transcription
Enterprises Limited and KLAInstruments Corporation.*+ |
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10.22 |
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Stock Option AgreementEarly Exercise, dated February 1, 2000, by and between the registrant and Roger
Sturgeon.* |
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10.23 |
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Stock Option AgreementEarly Exercise, dated February 1, 2000, by and between the registrant and Kevin
MacLean.* |
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10.24 |
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Stock Option AgreementEarly Exercise, dated February 10, 2000, by and between the registrant and Y.C. (Buno)
Pati.* |
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10.25 |
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Stock Option AgreementEarly Exercise, dated February 10, 2000, by and between the registrant and Yao-Ting
Wang.* |
23
Exhibit Number
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Description
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10.26 |
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Stock Option AgreementEarly Exercise, dated October 23, 1998, by and between the registrant and Atul
Sharan.* |
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10.27 |
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Amendment No. 1 to Atul Sharans 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.* |
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10.28 |
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Stock Option AgreementEarly Exercise, dated February 10, 2000, by and between the registrant and Naren
Gupta.* |
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10.29 |
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PSM Software Development and License Agreement, dated as of March 10, 2000, by and between registrant and Cadence
Design Systems, Inc.*+ |
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10.30 |
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License Agreement, dated March 1, 2000, between registrant and Motorola, Inc.**+ |
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10.31 |
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Production License Agreement, dated December 31, 2000, between registrant and United Microelectronics
Corporation.****+ |
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10.32 |
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Patent Cross License Agreement, dated April 17, 2001, between registrant and Intel Corporation.***** +
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10.33 |
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2001 Nonstatutory Stock Option Plan****** |
* |
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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. |
*** |
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Incorporated by reference to the current report on Form 8-K as filed with the Securities and Exchange Commission on September 15, 2000. |
**** |
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Incorporated by reference to the registrants 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/A as filed with the Securities and Exchange Commission on March 11, 2002. |
****** |
|
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. |
24